Change in Capital of a Limited Company
The capital structure of a company determines its ability to grow, attract investors, and remain compliant. Business expansion, fundraising, or restructuring may require a change in its capital. Change in Capital is governed by the provisions of the Companies Act, 2013, MCA Regulations and involve several procedural and legal steps.
1. Meaning of Capital of a Company
Capital refers to the funds invested in a company for conducting its business operations. Any change in these components requires compliance with applicable provisions under the Companies Act, 2013 and relevant rules. The capital is broadly categorized into:
- Authorized Capital – Maximum amount of share capital a company is authorized to issue.
- Issued Capital – Portion of authorized capital that is offered to investors.
- Subscribed Capital – Part of issued capital that investors agree to take.
- Paid-up Capital – Actual capital received by the company from shareholders.
2. Types of Change in Capital of a Company
Following are the major types of changes in capital:
2.1 Increase in Authorized Share Capital
- Company can raise maximum Capital up to Its Authorized Capital
- Change in Authorized Capital requires Shareholder Approval (Special Resolution).
2.2 Increase in Paid-up Share Capital
- Issuance of New Shares (Further Issue of Capital)
- When new shares are issued to existing or new shareholders.
Fresh allotment of shares (via Preferential Allotment, Rights Issue, or ESOPs).
2.3 Reduction of Share Capital
- A company may reduce its share capital to write off losses or,
- Buyback of Shares – Company repurchases its own shares from shareholders
- Decrease in Share capital requires NCLT Approval.
2.4 Reclassification or Consolidation of Share Capital
Changing the structure without changing the amount, e.g., subdividing shares or consolidating the shares
2.5 Conversion of Debentures into Shares
- Debenture holders may convert their instruments into equity as per the terms, or
Preference Shares may get converted to Equity.
3. Legal Provisions & Compliance Requirements
| Relevant Section / Rule | Nature of Change | Approval Required |
|---|---|---|
| Section 61 | Increase in Capital | Special Resolution of Shareholders |
| Section 62 | Further Issue of Shares | Board Resolution and Shareholder Approval (where applicable) |
| Section 66 | Reduction of Capital | Approval of NCLT and Consent of Creditors |
| Section 68 | Buyback of Shares | Board Resolution and Shareholder Approval (if buyback exceeds 10% of paid-up capital and free reserves) |
| Sections 13 & 14 | Alteration of Memorandum and Articles (if required) | Special Resolution of Shareholders |
Rule 15 of Companies (Share Capital and Debentures) Rules, 2014
4. Step-by-Step Process for Altering Capital
4.1 Case 1 : Increase in Authorised Capital
📌Check Articles of Association (AOA): Ensure that AOA authorizes increase; amend otherwise
📌 Convene Board Meeting to propose the change
📌 Hold Board Meeting
- Pass resolution to increase capital.
- Fix date for Extra-ordinary General Meeting (EGM)
📌Issue Notice of EGM: Send to all shareholders at least 21 clear days before the meeting.
📌Hold EGM: Pass Special Resolution
📌File Form SH-7: File with ROC within 30 days of resolution along with:
- Certified copy of resolution
- Amended MOA
- Fees as per Companies (Registration Offices and Fees) Rules, 2014
📌Update MCA Records & Issue Revised MOA
4.2 Case 2 : Increase in Paid-up Capital (Issue of New Shares)
📌 Hold Board Meeting
- Approve issue of shares.
- Offer to existing shareholders (Rights Issue) or new investors (Private Placement / Preferential Allotment)
📌File PAS-3: Return of allotment to be filed within 15 days of allotment with ROC (If Allotment of Shares via Private Placement).
📌File PAS-3: Return of allotment to be filed within 30 days of allotment with ROC (If Allotment of Shares through Rights Issue / Bonus Issue / Other than Private Placement).
📌Update Register of Members: Ensure compliance under Section 88
4.3 Case 3 : Reduction of Share Capital
📌Check Articles of Association (AOA) : Ensure that AOA authorizes increase; amend otherwise
📌 Convene Board Meeting to propose the change
📌 Hold Board Meeting
- Pass resolution to decrease capital.
- Fix date for Extra-ordinary General Meeting (EGM)
📌Issue Notice of EGM: Send to all shareholders at least 21 clear days before the meeting.
📌Hold EGM: Pass Special Resolution
📌Application to NCLT:
- File petition in Form RSC-1 (Submit Scheme of Reduction)
- Intimation to Regulatory Authorities: Send notices to ROC, SEBI, creditors, etc.
📌Tribunal Order: Upon satisfaction, NCLT will approve reduction and order publication.
📌File Order with ROC: File Form INC-28 with ROC and update capital structure.
4.4 Case 4 : Consolidation / Subdivision of Shares
📌Check Articles of Association (AOA) : Ensure that AOA authorizes increase; amend otherwise
📌 Convene Board Meeting to propose the change
📌 Hold Board Meeting
- Pass resolution to Consolidate / Subdivide the Shares increase capital.
- Fix date for Extra-ordinary General Meeting (EGM)
📌Issue Notice of EGM: Send to all shareholders at least 21 clear days before the meeting.
📌Hold EGM: Pass Special Resolution
📌File Form SH-7 within 30 days.
📌Update share certificates and records.
4.5 Case 5 : Buyback of Shares
- Board Resolution (if <10% of capital).
- Special Resolution (if >10%).
- Maximum number of Shares that can be brought back in a financial year is 25% of its paid up share capital.
- Post buy-back Debt-Equity ratio cannot exceed 2:1.
- Only fully paid up shares can be brought back in a financial year
- Buy-back should be completed within a period of one year from the date of passing of Resolution.
- File Form SH-11 (Return of Buyback) , annexed with Compliance Certificate in Form SH-15, Signed by 2 Directors
- Maintain a Register of buy-back in Form SH-10
5. ROC Forms & Timeline Summary
| Form | Purpose | Time Limit |
|---|---|---|
| SH-7 | Filing for increase in authorized share capital | Within 30 days of passing the resolution |
| PAS-3 | Return of allotment of shares | Within 15 days of allotment (private placement) / Within 30 days (other cases) |
| MGT-14 | Filing of special resolutions with ROC | Within 30 days of passing the resolution |
| INC-28 | Filing of NCLT order (for reduction of capital) | Within 30 days of receipt of order |
| SH-11 | Filing of buyback of shares | Within 30 days of completion of buyback |
6. Tax & Accounting Implications
📌 Capital Gains Tax (If shares are sold at a premium)
📌 Buyback Tax (20% + Surcharge under Section 115QA)
📌 Stamp Duty (On share issuance)
7. Key Compliances and Cautions
- Ensure resolutions are valid and filed within due time.
- Adequate disclosures in Board Reports and Registers.
- Check SEBI and FEMA guidelines for listed/foreign companies.
Pay applicable stamp duty on increased authorized capital (as per State Laws).
8. Conclusion
Changes in the capital structure of a company are crucial strategic business decisions and needs to be carried out in strict compliance with the law. Whether it’s an increase, reduction, or restructuring of capital, professional handling ensures not only legal compliance but also enhances investor confidence. Chartered Accountants play a crucial role in advising and assisting companies in drafting resolutions, ensuring legal compliance, and timely filing of forms with ROC.
