Section 61: Power of Limited Company to Alter its Share Capital

Introduction

Section 61 of Companies Act, 2013, is a part of chapter IV and primarily lays down and discusses the power of limited company to alter its share capital. This section came into force on 1st April 2014 except the proviso of sub-section 1. The proviso was enforced on 1st June 2016. A limited company is one in which the liability of the members of the company is limited to their stake in the company. Share capital of a company in layman’s term is the capital of the company raised by issuance of shares. Companies Act, 2013 by way of section 61 gives power to limited companies to change its share capital, that is increase, consolidate and divide, convert into stock or vice versa, cancel, and sub divide its shares. The scope of the power provided by section 61 is wide and helps make the business world more flexible. This analysis will provide an in-depth knowledge on this section along with judicial pronouncements if any, for better understanding this dynamic power under the act, 2013.

Purpose of Section 61

This section lay down the power of a limited company to alter its share capital. The section is brief is as following:

A company limited by shares may subject to article of association alter its memorandum of association in general meeting to:
Increase authorized share capital
Consolidate and divide all or any share capital into shares of larger amounts than its existing shares. Provided that an approval of the Tribunal shall be required for consolidation and division of share capital only if the voting percentage of shareholders changes consequent on such consolidation.
Convert the fully paid-up shares, in entirety or partly, into stock and reconvert that stock into fully paid-up shares.
Convert into a smaller number of shares by subdividing the shares.
The shares, which are not taken by anybody, the company, can cancel them and diminish its share capital accordingly. Such cancellation of shares must not be deemed to be a reduction of share capital under the act, 2013.

The alteration requires an ordinary resolution to be passed at a general meeting and not a special resolution [1]. Before embarking upon passing a resolution to alter the capital, it should be ensured that there is an express provision in the articles authorizing the company to alter its articles.

This section has to be read with section 64 of the act, 2013 which mandates that any company making any changes in its share capital under section 61 have to file a notice in the prescribed form with the registrar within thirty days of such alteration in the share capital, along with altered memorandum.

This section has to be further read with National Company Law Tribunal rules, 2016[2]. These rules constitute a single window mechanism, which deals with company law related matters is a remarkable move as it’s aimed at providing speedy disposal of matters in an efficient manner. These rules lay down the necessities for an application to Tribunal for consolidation and division of share capital as follow [3]:

An application to the tribunal for the consolidation and division can be made for the obtaining the approval of the tribunal, for consolidating or dividing all or any of the share capital into shares of a larger amount than the existing shares, if any changes are made in the voting percentage of shareholders, the same have to be filed in form no. NCLT.1 and must be accompanied by such documents as are mentioned in rules (annexure B).
The application shall, inter alia, set forth the following: (a) provision of articles authorizing such consolidation or division (b) existing capital structure of the company (c) new capital structure of the company after the consolidation or division (d) class of shares being consolidated or divided (e) face value of shares pre and post consolidation or division (f) justification for such consolidation or division.
At least fourteen days before the hearing before the tribunal the company has to do the following: (a) advertise the petition, by registered post, in accordance with rule 35 (b) and serve a notice along with copy of the application to the central government, registrar and to the SEBI in the case of listed companies and to any other necessary regulatory body, regulating the company.
Where any objections are raised by any person having interest in the proposed proposal, it shall serve a copy of the objection to the central government, registrar and the SEBI, in the case of listed companies and to any regulator, if the company is regulated by any other necessary regulatory authority.
After hearing the application, the tribunal may pass such an order, subject to such terms and conditions, as it thinks fit.

Situation Before Enactment of Section 61

The old act of 1956 also had a section like section 61 of the act, 2013 in form of section 94. One of the main differences is that under the old act, there was no requirement to get the confirmation of any other authority for the alteration of capital covered by Section 94. However, under the act, 2013 for consolidation and division of shares into shares of larger amounts, which result in change in the voting percentage of shareholders, approval of the Tribunal is required.

This safeguards the interest of shareholders and makes sure they are not taken advantage off for the needs of the company. Apart from this other clause of section 94 of the act, 1956 is similar to section 61 of the act, 2013.

Application of Section 61

This section basically comes into application when a limited company changes in any manner as per different clauses of section 61 of the act, 2013, its share capital. Many times, a company feels the need to change its share capital structure so maximize the efficiency and the profit of the company, and this is when this section comes into play.

Cases At A Glance

Re North Cheshire Brewery Co. [4]: In this case, powers are given to the members to alter its share capital only if its article of association authorizes it. This is something, which is even followed by the act, 2013 and was also followed by the previous act of 1956 in India.
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [5]: the power to alter share capital by a limited company cannot be exercised without caution and on whims and fancies of the company. It is a special power which is to be utilized after due consideration. In this case the court held that the Powers to alteration must be exercised in the interest of the company and not for the welfare of some particular members.
Pixel Mercantiles Pvt. Ltd. & Ors [6]: In this case the petitioner company has filed an application before the board for sanction of scheme of amalgamation. Petitioners issued shares at a premium based on the underlying value of the net assets of the companies at the time of issuance of the shares. The share premium is preserved by the companies, as there has been no utilization of securities premium in any form including capital reduction or bonus shares. Such premium was arrived at taking into consideration the future projects of the earnings of the companies and shareholders have not objected to the said premium. The central government had various objections to this scheme of the petitioner company. One being with respect to adherence to procedure under section 61 and section 64 of the act, 2013. The board ordered the company to comply with the above-mentioned sections, as their amalgamation has led to alteration in their share capital and it would be only valid when the company follows provision of section 61 and section 64.
H. Fillunger Pvt. Ltd. v. Arjit Arvinf Marathe [7]: This is another interesting case in this section. Here the appellant is a shareholder in the company in question who has increased its share capital. The appellant argued that the provisions of section 61 were not complied with and thus the action of the company is invalid. Here what is interesting to note is that the court held that section 61 also empowers a company to alter its memorandum but the procedure that has to be followed has to be according to section 13 of the act.

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Concluding Summary

A limited company can follow the procedure as laid down under this section, to alter its share capital, to increase its overall benefits. This section provides for a way to make the business world flexible and at the same time the procedural aspect of this section along with supplementary rules, provide security to shareholders and members of the company. This helps companies grow and avoid unnecessary implications and pave the way to help do what’s best for its business.

References:

[1] Janaki Printing Pvt. Ltd. v. Nadar Press Ltd. (2001) 103 CompCas 546

[2] National Company Law Tribunal Rules, 2016 (MCA).

[3] National Company Law Tribunal Rules, 2016 r. 71 (MCA).

[4] Re North Cheshire Brewery Co. 1920 WN 149. Also see Metropolitan Cemetery Co. (1934) SC 65.

[5] Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 1 Com Cases 743 (SC).

[6] Pixel Mercantiles Pvt. Ltd. & Ors 2016 SCC OnLine Cal 3262.

[7] H. Fillunger Pvt. Ltd. v. Arjit Arvinf Marathe 1st August 2017 (BHC).