Reclassification of Authorised Share Capital

Authorised share capital is the maximum limit set by a company’s shareholders for issuing shares. It represents the cap on the number of shares that can be issued by the company, as outlined in its Memorandum of Association (MoA). Companies may issue two types of shares: Equity and Preference. When a company decides to issue a different type of share than initially planned—say, issuing preference shares instead of equity shares—it may need to reclassify its authorised share capital. This reclassification involves converting unissued equity authorised share capital into fresh preference authorised share capital.

Reclassification of Authorised Share Capital: Meaning

Reclassification of authorised share capital refers to the process by which a company changes the structure of its authorised share capital, typically by converting unissued shares of one class (e.g., equity shares) into another class (e.g., preference shares). This adjustment is necessary when a company decides to issue a different type of share than initially planned.

While the Companies Act, 2013 does not explicitly use the term “reclassification,” it allows companies to alter their authorised share capital under Section 61. This process involves passing resolutions at the Board and shareholders’ meetings, followed by filing the necessary forms with the Registrar of Companies to make the reclassification legally effective.

Purpose of Reclassification of Authorised Share Capital

The purpose of reclassification of authorised share capital is to provide a company with flexibility in its capital structure to meet changing business needs or strategic objectives.

When a company needs to issue a different type of share than what is currently authorised, such as converting unissued equity shares into preference shares, reclassification becomes necessary. This process allows the company to align its share capital with its financial strategies, such as raising funds under different terms or catering to specific investor preferences.

Reclassification is also used to optimise the company’s capital base without increasing the overall authorised capital, thus avoiding additional fees or regulatory requirements. It enables the company to adjust to market conditions, investor demands or specific financial strategies, ensuring that the capital structure remains efficient and conducive to the company’s long-term goals.

Regulatory Provisions for Reclassification of Share Capital

The Companies Act, 2013, the primary legislation governing corporate entities in India, provides the framework for managing share capital, including its alteration. Although the Act does not specifically mention “reclassification of share capital,” it provides the necessary powers to companies under Section 61.

Section 61 of the Companies Act, 2013

Section 61 of the Companies Act, 2013 empowers limited companies with share capital to alter their authorised share capital if authorised by their Articles of Association. The section lays down the following powers:

1. Increase in Authorised Share Capital: A company can increase its authorised share capital by an amount it deems appropriate.
2. Consolidation and Division: A company may consolidate and divide its share capital into shares of a larger denomination than its existing shares.
3. Conversion into Stock and Reconversion: Fully paid-up shares can be converted into stock, which can later be reconverted into fully paid-up shares.
4. Sub-division of Shares: Shares can be subdivided into smaller denominations, provided the proportion between the paid and unpaid amounts remains consistent.
5. Cancellation of Unissued Shares: Companies can cancel shares that have not been issued or agreed to be taken, thereby reducing the amount of its share capital.

The process of reclassification typically involves two actions: the cancellation of one class of shares (for instance, equity shares) under Section 61(1)(e) and the increase in another class (such as preference shares) under Section 61(1)(a).

Procedure for Reclassification of Authorised Share Capital

The reclassification of authorised share capital involves several procedural steps that a company must follow to comply with legal requirements.

Step 1: Board Meeting Preparation

The process begins with the preparation for a Board Meeting. The company’s management should draft a notice and agenda for the meeting. The agenda should cover the following key points:

• Cancellation of Unissued Shares: Proposal to cancel unissued shares of one class (e.g., equity shares) and increase the shares of another class (e.g., preference shares) in accordance with Section 61(1).
• Alteration of Memorandum of Association: Necessary changes to the company’s MoA to reflect the reclassified share capital.
• Extraordinary General Meeting (EGM) Scheduling: Deciding on the date, time and place for holding an EGM to seek shareholders’ approval for the proposed reclassification.

Step 2: Conducting the Board Meeting

At the scheduled Board Meeting, the following resolutions should be passed:

• Cancellation and Increase Resolution: The Board should pass a resolution to cancel unissued shares of one class and increase the number of shares of another class as per Section 61(1).
• Alteration of MoA Resolution: A resolution to alter the MoA to reflect the new structure of authorised share capital.
• EGM Scheduling Resolution: A resolution to fix the date, time and venue of the EGM and to authorise a director or company secretary to send out the necessary notice to shareholders.

Step 3: Extraordinary General Meeting (EGM)

The next step is to conduct an EGM where shareholders will vote on the proposed resolutions. The key resolutions to be passed as an ‘Ordinary Resolution’ include:

• Reclassification of Share Capital: Approval of the cancellation of unissued shares of one class and the increase of shares of another class.
• MoA Alteration: Approval of the alteration of the MoA to reflect the new authorised share capital structure.

Step 4: Filing with the Registrar of Companies (RoC)

Following the EGM, the company must file the requisite e-forms with the Registrar of Companies (RoC) to make the reclassification legally effective. The following forms are typically required:

• E-Form SH-7: This form is used for the alteration of share capital and must be filed with the RoC.
• E-Form INC-33: This form is for filing resolutions and alterations related to the Memorandum of Association.

The forms should be accompanied by the following documents:

• Certified Copy of the Ordinary Resolution: A copy of the resolution passed at the EGM, including an explanatory statement.
• Altered MoA: The updated MoA reflects the reclassified share capital.

The reclassification becomes effective upon approval of these forms by the RoC.

Draft Ordinary Resolutions

Below is a draft of ordinary resolutions that a company may use for the reclassification of its authorised share capital:

Resolution for Cancellation of Unissued Shares and Increase in Another Class

“RESOLVED THAT pursuant to the provisions of Section 61 and all other applicable provisions, if any, of the Companies Act, 2013, (including any amendment thereto or re-enactment thereof) and the Memorandum and Articles of Association of the Company, consent of the Members of the Company be and is hereby accorded to cancel 5,00,000 (Five Lacs) Unissued Equity Shares of the face value of Rs.10/- (Rupees Ten) each and issue new 5,00,000 (Five Lacs) Preference Shares of face value of Rs.10/- (Rupees Ten) each.”

Resolution for Alteration of Memorandum of Association

“RESOLVED THAT pursuant to the provisions of Section 13 and other applicable provisions, if any, of the Companies Act, 2013, the existing Clause – V of the Memorandum of Association of the Company, be and is hereby substituted by the following new Clause – V :

Clause V: The Authorised Share Capital of the Company is Rs.1,00,00,000/- (Rupees One Crore) comprising of Rs.50,00,000/- (Rupees Fifty Lacs) divided into 5,00,000 (Five Lacs) Equity Shares of Rs.10/- (Rupees Ten) each and Rs.50,00,000 (Rupees Fifty Lacs) divided into 5,00,000 (Five Lacs) Preference Shares of Rs.10/- (Rupees Ten) each.”

Resolution for Filing with RoC

“RESOLVED FURTHER THAT any one director of the Company be and is hereby authorised to file e-Form SH-7 with the Registrar of Companies, Mumbai, Maharashtra and to do all such acts, deeds and things as may be required to give effect to the aforesaid resolution.”

Conclusion

Reclassification of authorised share capital is an essential tool for companies looking to adapt their capital structure to changing business needs. This process allows a company to convert one class of share into another, providing flexibility without incurring additional fees such as RoC fees or stamp duty.

The procedure, although straightforward, requires careful adherence to the Companies Act, 2013 and the company’s internal governance documents. By following the outlined steps and obtaining the necessary approvals, companies can efficiently manage their share capital in alignment with their strategic objectives.