HOW TO RECLASSIFY THE AUTHORISED SHARE CAPITAL OF A COMPANY

AUTHOR :CS ASHUTOSH SHUKLA

Introduction:

For several reasons, a company may need to reclassify its authorized share capital into one or more classes. For instance, if a company was established with only one class of share capital, i.e., equity shares, it would have to create a class of preference shares should it want to issue such shares. In this article, I’ll discuss the process of reclassifying authorized share capital consisting solely of equity shares into both equity and preference shares. We will examine whether the Companies Act 2013 allows for the reclassification of authorized share capital, and we’ll also look at the applicable legal framework. Finally, I’ll outline the steps necessary for reclassification.

Meaning of Reclassification:

Under Section 43 of the Companies Act 2013, a company’s share capital is divided into two kinds: equity share capital and preference share capital. According to the Protrans Supply Chain Management Private Limited case (C.P. (CAA) 996/MB-II/2020), a company’s total share capital is represented by equity, preference, or a combination of the two. The case also notes that when shares of one class are converted into another class (like equity shares into preference or the other way round), the subscribed and paid-up share capital remains unchanged. Only the nomenclature of shares changes. Consequently, reclassifying authorized share capital simply involves changing the nomenclature, so that a company with one class of shares, e.g., equity shares, would end up with two classes of shares, i.e., equity and preference shares.

Permissibility:

In the Protrans Supply Chain case, the Hon’ble NCLT, Mumbai Bench, acknowledged the Petitioner Companies’ argument that converting shares from one type to another (like equity shares to preference shares) is not forbidden by any law. In fact, such a conversion is just a reorganization of the company’s share capital, permissible under section 61 of the Companies Act 2013. Therefore, the reclassification of share capital from equity to preference and vice versa is permitted under the Companies Act 2013.

Legal Framework:

Though the Companies Act 2013 does not directly address the reclassification of a company’s authorized share capital, the Protrans Supply Chain case allows it under Section 61(1) of the Act. Therefore, Section 61(1)(a) of the Companies Act 2013 stipulates that “a company may alter its memorandum in its general meeting to increase its authorized share capital by such amount as it deems expedient.”

Furthermore, Section 61(1)(e) of the Companies Act 2013 states that a company can “cancel shares which, at the date of the resolution’s passing, have not been taken or agreed to be taken by any person, and reduce its share capital by the amount of the shares so cancelled.” Section 61(1) of the Companies Act 2013 provides for the alteration of the share capital in the company’s general meeting.

Section 64(1)(a) of the Companies Act 2013 requires that if “a company alters its share capital in any way specified in sub-section (1) of section 61, the company shall file a notice in the prescribed form with the Registrar within thirty days of such alteration along with an altered memorandum.” Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014 requires that the company file a notice of such alteration with the Registrar using Form No. SH-7, accompanied by the fee. Provisions related to board meetings, EGMs, and Secretarial Standards also apply.

Steps Involved:

Based on the above legal provisions, the following steps are required to be followed for the reclassification of the authorised share capital of a company:

1. Check the Articles of Association of the Company to ensure that the articles contain the necessary provisions in this regard. In the event the articles do not contain the necessary provisions, the company would be required to alter its article of association first.

2. Draft the notice and agenda for the board meeting and the resolutions to be passed. These resolutions shall seek approval: a) of the members through ordinary resolution under Section 61(1) of the Companies Act 2013 for the reclassification of the authorised share capital by way of cancellation of unissued shares of one class and increase in shares of another class; b) for alteration of the Memorandum of Association;

c) for fixing the place, date, day, and the hour of the meeting of the EGM and authorising a director or the company secretary for sending the notice; and d) for the issuance of the notice of EGM; and authorising a director and company secretary to do all the acts necessary in relation to giving effect to the resolutions including the filing of the necessary forms (among others).

3. Issue a minimum 7 days’ notice of the Board Meeting along with an agenda mentioning therein the business to be transacted and the resolutions to be passed.

4. Call and hold the Board Meeting and pass the resolutions. Ensure compliance with the provisions of the Companies Act 2013 and the Secretarial Standard 1.