Change in Capital Clause
As a company grows and evolves, there may come a time when it needs to change its Memorandum of Association (MOA) to reflect its new goals and objectives. One of the most frequently changed clauses in the MOA is the Capital Clause, which outlines the authorized share capital of the company. In India, changing the Capital Clause of the MOA is a complex and regulated process that requires careful attention and professional guidance. In this blog post, we will explore the procedure for changing the Capital Clause of the MOA in India and provide some key insights into why companies may need to do so.
Importance of capital clause in Memorandum of Association (MOA) for a company
The Capital Clause is a key component of the Memorandum of Association (MOA) of a company in India. It plays a vital role in defining the company’s relationship with its shareholders and with the general public. The Capital Clause specifies the authorized capital of the company and the maximum capital that it can raise. It also outlines the types of shares the company will have, how many of each type of shares it will have, and the face value of each share. The Capital Clause serves various functions that are critical for the smooth operation of a company.
The MOA is a legal document that is of utmost importance for companies. Any act by a company that is beyond the scope of the MOA is void. The MOA is, in fact, the foundation of any company and is second only to The Companies Act 2014. The Capital Clause forms an essential element of the MOA, and its importance cannot be overstated.
According to Registration Expert, “The Capital Clause is the fifth clause of the MOA; it serves the following functions: it specifies the share capital with which the company is being registered. It also states the maximum capital that the company is permitted to raise; this is often also referred to as authorised or nominal capital of the company. No company can raise capital that is higher than the amount specified in the Capital Clause or issue shares that are more than the number specified in the Capital Clause. In case a company intends to do so; first, they need to amend the MOA to allow for the increased number of shares or capital value as the case may be.”
Therefore, it is evident that the Capital Clause is an indispensable component of the MOA, and companies must pay great attention to its details. “The MOA combined with the AOA form the constitution of a company”. Hence it is imperative that companies use the appropriate format provided in Table A to E depending on the business type. Allowing the shareholders to know about the company’s financial standing before buying its shares and determine the capital they can invest in the company. Moreover, the MOA helps provide all company information to stakeholders willing to associate with it.
Overview of the process of altering the capital clause in India
The process of altering the capital clause in the Memorandum of Association (MOA) of a company in India is a complex and extensive procedure. The MOA is a legal document that lays down the fundamental principles and objectives of a company and describes its relationship with its shareholders. Any changes made to the capital clause of the MOA must be done in accordance with the Companies Act, 2013. The procedure for altering the MOA involves several steps that must be followed with utmost care and attention.
According to Registration Expert, changes to the MOA of a company can be effected through a special resolution at a shareholder’s meeting. The first step is to convene a board meeting to get approval for the alteration in authorized capital. Following this, a notice must be issued for a general meeting of the shareholders, and an ordinary resolution must be passed stating the increase in the authorized capital. The altered MOA must then be filed with the Registrar of Companies within 30 days of passing the ordinary resolution.
If there is a requirement for alteration in Article of Association, the proposal must be passed using a special resolution as well. “The notice shall specify the place, date, day, and time of the meeting and contain a statement on the business to be transacted at the EGM,” says Corporate Legal Guru. The altered MOA and AOA must be filed with the Registrar of Companies within 30 days of passing the special resolution.
It is important to note that altering the capital clause of the MOA of a company that has raised money from the public will require a special resolution, and all dissenting shareholders should be given an opportunity to exit. This opportunity must be given in accordance with regulation specified by the Securities and Exchange Board of India (SEBI).
II. Capital Clause in MOA
Share capital of a company
Share capital is an important aspect of any company as it provides the base finance for its operations. According to the Companies Act of 2013, a company limited by shares is required to have a share capital, which is divided into a certain number of shares with a fixed face value. The share capital of a company can be increased by issuing new shares to investors, which allows the company to raise additional capital for its operations.
There are different types of shares that a company can issue, including ordinary shares, preference shares, and equity shares. Ordinary shares are the most common type of shares and provide voting rights to the shareholders. On the other hand, preference shares provide preferential rights to the shareholders in terms of dividends and repayment of capital. Equity shares are a type of ordinary shares that provide the shareholders with additional benefits such as rights to bonus shares, right shares, and so on.
The maximum capital that a company can raise is dependent on its authorized share capital, which is the maximum amount of share capital that a company is authorized to issue to its shareholders. The capital clause in the Memorandum of Association (MOA) specifies the authorized share capital of a company.
The capital clause can be altered in certain ways, such as increasing the authorized share capital, consolidating and dividing shares, converting fully paid-up shares into stock, and canceling shares. The process of altering the capital clause in the MOA involves passing an Ordinary Resolution, filing Form SH-7 with the Registrar, and notifying the Registrar of the alteration to the share capital.
In summary, the share capital of a company is an important aspect that determines the maximum amount of capital that a company can raise for its operations. It is important for companies to understand the different types of shares and the process of altering the capital clause in the MOA to ensure compliance with the Companies Act of 2013. As noted by Business Standard, “Share capital is the core of any corporate and it is important to ensure that it is structured correctly to avoid legal disputes and maximise growth potential.”
Types of shares and their face value
The Capital Clause in a company’s Memorandum of Association specifies the share capital, its maximum value, and the types of shares the company can have. Shares are an essential aspect of a company, and they determine the ownership and control of a business. There are different types of shares, and each type has its face value.
Common shares are the most common type of shares issued by companies. They represent the ownership in a company and offer voting rights in shareholders’ meetings. The face value of common shares can vary and depends on the company’s discretion.
Preference shares are another type of shares issued by companies. Unlike common shares, preference shares do not offer voting rights. However, they have a priority claim on dividends and asset distribution in case of liquidation. The face value of preference shares is also predetermined by the company.
In addition, shares can also be classified based on their attributes, such as equity shares, cumulative preference shares, non-cumulative preference shares, and redeemable preference shares. Each type has unique features and benefits for investors.
According to Registration Expert, “While private companies and unlisted public companies are permitted to assume any face value for their shares, all listed public companies that need to have a prescribed face value for their shares.” This means that listed public companies need to follow a specific face value, while private and unlisted public companies have the freedom to set their face value.
In conclusion, understanding the types of shares and their face value is crucial for investors interested in a company. Shares determine ownership, control, and potential dividends, making them a critical part of a company’s capital structure. As per Corpbiz, “For the increase/Change in share capital, it is required to acquire the approval of the registrar of companies by filing the required forms.” Companies need to follow the necessary legal procedures to alter the capital clause and issue shares.
III. Alteration of Capital Clause
Types of alterations in the capital clause
The alteration of the capital clause in the Memorandum of Association (MOA) of a company depends on the nature of the change desired by the company’s management. The MOA of a company is a crucial document that governs the company’s business operations, and hence, any alteration in the capital clause can have significant implications. The different types of alterations in the capital clause that a company can opt for are as follows:
1. Increase in authorized share capital: A company may decide to increase the authorized share capital to meet its future funding requirements. This alteration can be done by passing an ordinary resolution at a General Meeting.
2. Consolidation of shares: A company can consolidate its shares by dividing them into shares of a larger amount than its existing shares. However, such consolidation that results in changes in the voting percentage of shareholders needs to be approved by the Tribunal.
3. Sub-division of shares: A company can sub-divide its shares into smaller denominations to make them affordable for small investors. The proportion between the amount paid and the unpaid amount on each reduced share remains the same as it was in the case of the original share.
4. Conversion of shares into stock: A company can convert its fully paid-up shares into stock and reconvert that stock into fully paid-up shares of any denomination.
5. Cancelation of shares: A company can cancel shares that have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares canceled.
It’s important to note that only consolidation and division resulting in changes in the voting percentage of shareholders require the approval of the Tribunal. For other alterations, a company needs to pass an ordinary resolution at a General Meeting and file the necessary forms with the Registrar of Companies. The alteration of the capital clause in the MOA is a crucial decision that a company needs to take carefully, keeping in mind the possible implications on its shareholders and business operations.
III. Change in Capital Clause of Memorandum of Association of Company
The capital clause in the Memorandum of Association (MOA) plays a crucial role in the formation and functioning of a company. It states the authorized and subscribed capital of the company, which defines the maximum limit of the funds that the company can raise through the issuance of shares. However, as the business evolves, the company may need to increase or decrease its capital to meet its funding requirements.
To make any change to the capital clause of the MOA, the company must undergo a process known as an amendment. Here is a step-by-step guide to the process of amending the capital clause of the MOA:
Step 1: Board Meeting
The first step is to hold a board meeting to discuss and approve the proposed changes to the capital clause. The board of directors must pass a resolution in favor of the amendment.
Step 2: Shareholder Meeting
After the board approves the changes, the company needs to call for an Extraordinary General Meeting (EGM) of the shareholders to get their approval. The notice of the meeting must be given to all the shareholders according to the provisions of the Companies Act.
Step 3: Special Resolution
At the EGM, a special resolution must be passed by not less than three-fourths of the shareholders present to approve the proposed change to the capital clause. The special resolution must be recorded and filed with the Registrar of Companies (ROC).
Step 4: Filing with ROC
Once the special resolution is passed, the company must file the necessary forms and documents with the ROC to effect the change. These documents may include a copy of the amended MOA, Board Resolution, Special Resolution, and other forms required by the Companies Act.
Step 5: Issuance of new shares
If the amendment involves an increase in the authorized capital, the company must issue new shares to raise the additional capital. The new shares must be issued in compliance with the provisions of the Companies Act, and the shareholders must be given the opportunity to subscribe to the new shares.
In conclusion, amending the capital clause of the MOA is a crucial process that requires compliance with the provisions of the Companies Act. The above steps provide a general guide, and companies should consult legal professionals to ensure compliance with all applicable laws and regulations.