ALTERATION OF SHARE

CAPITAL
 ALTERATION OF SHARE CAPITAL
 Section 61 of the Companies Act, 2013 provides that a
company limited by shares or guarantee and having a share
capital may, if so authorised by its articles, alter, by an
ordinary resolution, its memorandum in the following ways:

• It may increase the authorised share capital;

• It may consolidate and divide, all and any of its existing

shares into a larger denomination;
ALTERATION OF SHARE CAPITAL
• It may convert all or any of its fully paid-up shares into stock
or reconvert that stock into fully paid-up shares of any
denomination.

• It may sub-divide its existing shares or any of them into

smaller denomination than fixed by its memorandum.

• It may cancel shares which have not been taken up or agreed

to be taken by any person and diminish the amount of the
share capital by the amount of the shares so cancelled.
 NATURE OF STOCK
 Section 2(84) of the Act states that “share means share in the
share capital of a company and includes stock.”
 Thus, by converting shares into stock, a shareholder is known
as a stockholder.
 A stockholder has the same rights as to dividend as a
shareholder.
 It should be noted that:
• Only fully paid-up shares can be converted into shares, and
• No direct issue of stock by a company is lawful.
COMPARISION B/W
SHARE AND STOCK
 SHARE v/s STOCK
SHARE STOCK
Shares in physical form bear Stocks are the consolidated
distinct numbers. value of share capital.
Shares may or may not be fully Stock is always fully paid-up.
paid-up.

Shares have a nominal value. Stock does not have any

nominal value.
All shares are of equal Denomination of stock varies.
denomination.
 SHARE v/s STOCK
SHARE STOCK
It is not possible to transfer Stock is divisible into any
shares into fraction. amount required. Thus, it is
possible to transfer even into
fractions.
Shares come into existence Stock comes into existence
before the stock and it is after conversion of shares into
issued initially stock.
REDUCTION OF SHARE CAPITAL
(SECTION 66) (SECTION 66 IS
YET TO BE NOTIFIED)
REDUCTION OF SHARE CAPITAL
 SECTION 66(1): Subject to confirmation by the Tribunal on an
application by the company, a company limited by shares or
limited by guarantee and having a share capital may, by a
special resolution, reduce the share capital in any manner and
in particular, may:
• extinguish or reduce the liability on any of its shares in
respect of the share capital not paid-up; or
• either with or without extinguishing or reducing the liability
on any of its shares:
REDUCTION OF SHARE CAPITAL
o cancel any paid-up share capital share capital which is lost
or is unrepresented by available assets;
o pay off any paid-up share capital which is in excess of the
wants of the company,
 alter its memorandum by reducing the amount of its share
capital and of its shares accordingly.

 No reduction of capital would be allowed in case of arrears

in the repayment of deposits and interest thereon.
 NOTICE BY TRIBUNAL
 SECTION 66(2): The Tribunal shall give notice of every
application made to it under section 66(1) to:
• the Central Government,
• Registrar,
• the Securities and Exchange Board, in the case of listed
companies, and
• the creditors of the company
 It shall take into consideration the representation, if any, made
to it by that Government, Registrar, SEBI and the creditors within
a period of three months from the date of receipt of the notice.
 CONFIRMATION OF REDUCTION OF
CAPITAL
 The Tribunal may, if it is satisfied that the debt or claim of
every creditor of the company has been discharged or
determined or has been secured or his consent is obtained,
make an order confirming the reduction of share capital on
such terms and conditions as it deems fit.
PUBLICATION OF THE ORDER OF THE
TRIBUNAL
 The order of confirmation of the reduction of share capital by
the Tribunal under Section 66(3) shall be published by the
company in such manner as the Tribunal may direct.
DELIVER A COPY OF ORDER OF TRIBUNAL
TO REGISTRAR
 SECTION 66(5): The company shall deliver a certified copy of
the order of the Tribunal under sub-section (3) and of a minute
approved by the Tribunal showing-
• the amount of share capital;
• the number of shares into which it is to be divided;
• the amount of each share; and
• the amount, if any, at the date of registration deemed to be
paid-up on each share,
 to the Registrar within thirty days of the receipt of the copy of
the order, who shall register the same and issue a certificate to
that effect.
 COMPARISION B/W
ALTERTION OF SHARE
CAPITAL AND REDUCTION
OF SHARE CAPITAL
ALTERTION OF SHARE CAPITAL v/s REDUCTION OF
SHARE CAPITAL
ALTERATION OF SHARE REDUCTION OF SHARE CAPITAL
CAPITAL
Alteration of share capital is Reduction of share capital is
governed by the provisions of governed by the provisions of
section 61 of the act. section 66 of the act.
Alteration of share capital is Reduction of share capital is
required to be done by required to be done by special
ordinary resolution. resolution.

Alteration of share capital is Reduction of share capital is to

not required to be confirmed be confirmed by the Tribunal.
by the Tribunal.
ALTERTION OF SHARE CAPITAL v/s REDUCTION OF
SHARE CAPITAL
ALTERATION OF SHARE CAPITAL REDUCTION OF SHARE CAPITAL

Alteration of share capital may be Reduction of share capital may

done in the following manner: be done in the following
a. Increasing its nominal capital manner:
by issuing new shares a. Extinguishing or reducing
b. Consolidating and dividing all the liability of members in
or any of its share capital into respect of the capital not
shares of large denomination. paid-up.
c. Sub dividing its shares or any b. Writing off or cancelling any
of them into shares paid up capital which is in
d. Cancelling shares which have excess of the needs of the
not been taken up. company.
c. Paying off any paid up share
DIMINUTION OF SHARE
CAPITAL
 DIMINUTION OF SHARE CAPITAL
 Diminution of share capital is not a reduction of capital

 Diminution of capital: As per section 61(1)(e) of the Companies Act, 2013,

diminution of capital is the cancellation of the unsubscribed part of the

issued capital.

 It can be effected by an ordinary resolution provided articles of the

company authorises to do so.

 According to section 61(2) cancellation of shares under section 61(1) shall

not be deemed to be reduction of share capital.

 It does not need any confirmation of the Tribunal under section 66.
 DIMINUTION OF SHARE CAPITAL
 In the following cases, the diminution of share capital is not
to be treated as reduction of the capital:
• Where the company cancels shares which have not be taken
or agreed to be taken by any person.
• Where redeemable preference shares are redeemed.
• Where the company buys-back its own shares under section
68 of the Act.
• Where the reduction of share capital is effected in pursuance
of the order of the Tribunal sanctioning any compromise or
arrangement under section 230.
 REDUCTION OF SHARE
CAPITAL WITHOUT SACTION
OF THE COURT
 REDUCTION OF SHARE CAPITAL WITHOUT
SACTION OF THE COURT
 The following are cases which amount to reduction of share
capital and where no confirmation by the Tribunal is
necessary:
• SURRENDER OF SHARES:
o Surrender of shares means the surrender to the company
on the part of the registered holder of shares already
issued.
o Where shares are surrendered to the company, it will have
the same effect as a transfer in favor of the company.
 REDUCTION OF SHARE CAPITAL
WITHOUT SACTION OF THE COURT
o Surrender may be accepted by the company under the same
circumstances where forfeiture is justified.
o It has the effect of releasing the shareholder whose
surrender is accepted from further liability on shares.
o The Companies Act contains no provisions for surrender of
shares. Thus, surrender of shares is valid only when
Articles of Association provide for the same and:
i. Where forfeiture of such shares is justified; or

ii. When shares are surrendered in exchange for new shares.

 REDUCTION OF SHARE CAPITAL
WITHOUT SACTION OF THE COURT
• FORFEITURE OF SHARES: A company may if authorised by its
articles, forfeit shares for non-payment of calls and the
same will not require confirmation of Tribunal.

• Both forfeiture and surrender lead to termination of

membership. But in the former case, it is at the initiative of
company and in the latter case at the initiative of member or
shareholder.
 REDUCTION OF SHARE
CAPITAL UNDER COMPANIES
ACT, 1956
 REDUCTION OF SHARE CAPITAL
UNDER COMPANIES ACT, 1956
 Reduction of capital means reduction of issued, subscribed
and paid-up capital of the company.

 The share capital of a company may be reduced u/s 100 only

if the articles of the company authorize so.

 If there is no such clause in the articles, the articles must be

amended by a special resolution for giving the power of
reducing the share capital.
 REDUCTION OF SHARE CAPITAL
UNDER COMPANIES ACT, 1956
 SECTION 100: Subject to the confirmation by the court, a
company limited by shares or a company limited by guarantee
and having a share capital may, if authorised by its articles, by
special resolution, reduce its share capital in any of the following
ways:
• Reduce or extinguish the liability on any of its shares in respect of
share capital not paid-up.
• Either with or without extinguishing or reducing liability on any of
its shares, cancels any paid-up share capital which is lost or is
unrepresented by available assets or
 REDUCTION OF SHARE CAPITAL
UNDER COMPANIES ACT, 1956
• Either with or without extinguishing or reducing liability on
any of its shares, pay of any paid-up share capital which is in
excess of the wants of the company.
• By following a combination of any of the preceding methods.
 CREDITORS’ RIGHT TO OBJECT TO
REDUCTION
 After passing the special resolution for the reduction , the
company is required to apply to the court for the confirmation of
the resolution under Section 101.
 The creditors having a debt or claim admissible in winding up are
entitled to object.
 To enable them to do so, the Court will settle a list of creditors
entitled to object.
 If any creditor objects, then either his consent to the proposed
reduction should be obtained or he should be paid off or his
payment be secured.
CONFIRMATION AND REGISTRATION
OF REDUCTION
 Section 102 of the Act states that if the Court is satisfied that
either the creditors entitled to object have consented to the
reduction, or that their debts have been discharged, it may
confirm the reduction.
 The Court may also direct the words “and reduced” be added to
the company’s name for a specified period.
 The Court’s order confirming the reduction together with the
minutes giving the details of the company’s share capital, as
altered, should be delivered to the Registrar who will register
them.
CONFIRMATION AND REGISTRATION
OF REDUCTION
 The reduction takes effect only on registration of the order
and minutes, and not before.

 The Registrar will then issue a certificate of registration which

will be conclusive evidence that the requirements of the Act
have been complied with and that the share capital is now as
set out in the minutes.

 The memorandum has to be altered accordingly.

 CONCLUSIVENESS OF CERTIFICATE
FOR REDUCTION OF CAPITAL
 Where the Registrar had issued his certificate confirming the
reduction, the same was held conclusive although it was
discovered later that the company had no authority under its
articles to reduce capital [Re Walkar & Smith Ltd. (1903)].

 Similarly, in a case the special resolution was an invalid one,

but the company had gone through with the reduction. It was
held that the reduction was not allowed to be upset [Ladies’s
Dress Assn. v. Pulbrook, (1900)].
BUY BACK OF SECURITIES
(SECTION 68)
 SOURCES OF BUY BACK OF
SECURITIES
 According to Section 68(1) of the Companies Act, 2013, a
company may purchase its own shares or other specified
securities out of:
i. its free reserves; or

ii. the securities premium account; or

iii. the proceeds of any shares or other specified securities.
 Thus, the company must have at the time of buy-back,
sufficient balance in any one or more of these accounts to
accommodate the total value of the buy-back.
 AUTHORISATION OF BUY BACK OF
SECURITIES [SECTION 68(2)]
 The primary requirement is that the articles of association of
the company should authorise buyback.
 In case, such a provision is not available, it would be
necessary to alter the articles of association to authorise buy-
back.
 Buy-back can be made with the approval of the Board of
directors at a board meeting and/or by a special resolution
passed by shareholders in a general meeting, depending on
the quantum of buy-back.
 QUANTUM OF BUY BACK OF
SECURITIES [SECTION 68(2)]
 Board of directors can approve buy-back up to 10% of the
total paid-up equity capital and free reserves of the company.

 Shareholders by a special resolution can approve buy-back

up to 25% of the total paid-up capital and free reserves of the
company. In respect of any financial year, the shareholders
can approve by special resolution upto 25% of total equity
capital in that year.
 QUANTUM OF BUY BACK OF
SECURITIES [SECTION 68(2)]
 Board of directors can approve buy-back up to 10% of the
total paid-up equity capital and free reserves of the company.

 Shareholders by a special resolution can approve buy-back

up to 25% of the total paid-up capital and free reserves of the
company. In respect of any financial year, the shareholders
can approve by special resolution upto 25% of total equity
capital in that year.
 EXPLANATORY STATEMENT
 SECTION 68(3):
• The notice of the meeting at which the special resolution is
proposed to be passed shall be accompanied by an
explanatory statement stating:

i. a full and complete disclosure of all material facts;

ii. the necessity for the buy-back;

iii. the class of shares or securities intended to be purchased

under the buy-back;
 EXPLANATORY STATEMENT
iv. the amount to be invested under the buy-back;

v. the time limit for completion of buy-back.

 LETTER OF OFFER TO BE FILED WITH
ROC BEFORE BUY-BACK
 Rule 17(2) Companies (Share Capital and Debentures) Rules,
2014:
• The company which has been authorised by a special
resolution shall, before the buy-back of shares, file with the
Registrar of Companies a letter of offer in Form SH-8.
• Such letter of offer shall be dated and signed on behalf of the
Board of directors of the company by not less than two
directors of the company, one of whom shall be the
managing director, where there is one.
 DISPATCH OF LETTER OF OFFER TO
SHAREHOLDERS
 Rule 17(4) Companies (Share Capital and Debentures) Rules,
2014:
• The letter of offer shall be dispatched to the shareholders or
security holders immediately after filing the same with the
Registrar of Companies but not later than 21 days from its
filing with the Registrar of Companies
 OFFER FOR BUY BACK OPEN FOR
 Rule 17(5) Companies (Share Capital and Debentures) Rules,
2014:
• The offer for buy-back shall remain open for a period of not
less than 15 days and not exceeding 30 days from the date of
dispatch of the letter of offer.
POST BUY-BACK DEBT-EQUITY RATIO
 SECTION 68(2)(d):
• The ratio of the aggregate of secured and unsecured debts
owned by the company after buy-back is not more than twice
the paid-up capital and its free reserves.

• However, the Central Government may, by order, notify a

higher ratio of the debt to capital and free reserves for a class
or classes of companies.
SHARES TO BE FULLY PAID-UP & TIME
GAP BETWEENW TWO BUYBACKS

 SECTION 68(2):
• All the shares or other specified securities for buy-back are
to be fully paid-up.

 PROVISO TO SECTION 68(2):

• No offer of buy-back under section 68(2) shall be made
within a period of one year reckoned from the date of the
closure of the preceding offer of buy-back, if any.
 TIME LIMIT FOR COMPLETION OF
BUYBACK
 SECTION 68(4):
• Every buy-back shall be completed within a period of one
year from the date of passing of the special resolution, or as
the case may be, the resolution passed by the board.
 METHODS OF BUY-BACK
 SECTION 68(5):
• The buy-back under section 68(1)may be:

i. from the existing shareholders or security holders on a

proportionate basis;

ii. from the open market;

iii. by purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.
 FILING OF DECLARATION OF
SOLVENCY
 SECTION 68(6) read with Rule 17(3) of Companies (Share
Capital and Debentures) Rules, 2014:
• When a company proposes to buy-back its own shares, it
shall, before making such buy-back, file with the Registrar
and SEBI (in case of listed companies), a declaration of
solvency.
• It shall be signed by at least two directors, one of whom shall
be the managing director, if any, in Form No. SH-9 verified by
an affidavit.
 EXTINQUISHMENT OF SECURITIES
BOUGHT BACK
 SECTION 68(7) :
• When a company buy-back its own shares or other specified
securities, it shall extinguish and physically destroy the
shares or securities so bought back within seven days of the
last date of completion of buy-back.
 PROHIBITION OF FURTHER ISSUE OF
SHARES OR SECURITIES
 SECTION 68(8) :
• When a company completes a buy-back of its shares or other
specified securities, it shall not make a further issue of the
same kind of shares or other securities including allotment of
new shares or other securities within a period of six months
except by way of a bonus issue.
 REGISTER OF BUY-BACK
 SECTION 68(9) :
• When a company buy-back its shares or other specified
securities, it shall maintain a register of:
o the shares or securities so bought;
o the consideration paid for the shares or securities bought
back;
o the date of cancellation of shares or securities;
o the date of physically destroying the shares or securities;
o such other particulars as may be prescribed.
 RETURN OF BUY-BACK
 SECTION 68(10) :
• A company shall, after completion of the buy-back, file with the
Registrar and the SEBI (in case of listed companies) a return
containing such particulars relating to the buy-back within thirty
days of such completion.
 Rule 17(14) of Companies (Share Capital and Debentures) Rules,
2014:
• There shall be annexed to the return filed with the Registrar in
Form No. SH-11, a certificate in Form No. SH-15 signed by two
directors of the company including the managing director, if any.
 PUNISHMENTS
 SECTION 68(11) :
• If a company makes any default in complying with the
provisions of this section, the company shall be punishable:
o with fine which shall not be less than one lakh rupees but
which may extend to three lakh rupees and
o every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend
to three years or with fine which shall not be less than one
lakh rupees but which may extend to three lakh rupees, or
with both.
 CAPITAL REDEMPTION RESERVE
ACCOUNT
 SECTION 69:
• When a company purchases its own shares out of free
reserves or securities premium account, a sum equal to the
nominal value of the shares so purchased shall be transferred
to the capital redemption reserve account.

• The capital redemption reserve account may be applied by

the company, in paying up unissued shares of the company
to be issued to members of the company as fully paid.
 PROHIBITION OF BUY-BACK
 SECTION 70(1):
• No company shall directly or indirectly purchase its own
shares or other specified securities:
o through any subsidiary company including its own
subsidiary companies;
o through any investment company or group of investment
companies; or
o if a default is made by the company, in:
i. the repayment of deposits accepted; or
 PROHIBITION OF BUY-BACK
ii. interest payment on deposits; or
iii. redemption of debentures or preference shares; or

iv. payment of dividend to any shareholder; or

v. repayment of any term loan or interest payable thereon to

any financial institution or banking company.
o However, the buy-back is not prohibited, if the default is
remedied and a period of three years has lapsed after such
default ceased to subsist.
 PROHIBITION OF BUY-BACK
 No company shall, directly or indirectly, purchase its own
shares or other specified securities in case such company has
not complied with the provisions of:
• Section 92- Annual Return
• Section 123- Declaration of dividend
• Section 127- Punishment for failure to distribute dividend
• Section 129- Financial statement