Companies Act Section 61

Companies Act Section 61: Authority of a Limited Company to Alter its Share Capital

1. Scope of Authority to Alter Share Capital

Section 61 of the Companies Act grants a limited company the authority to alter its share capital, provided that the company has share capital and is authorized by its articles of association. 

This alteration must be conducted through a resolution passed at the company’s general meeting. 

Once approved, the company has several options to modify its capital structure to better align with its strategic goals or respond to shareholder needs.

2. Methods of Altering Share Capital Authorized Under Section 61

The Act outlines specific methods through which a company may alter its share capital. 

These are intended to allow flexibility and efficiency in managing the company’s financial structure.

Each method has particular requirements and potential consequences for shareholders.

a. Increasing Authorized Share Capital

The company may decide to increase its authorized share capital by a specified amount, which allows it to issue more shares than originally authorized. 

This may be advantageous for raising additional funds or attracting new investors by creating more shares available for issuance.

b. Consolidating and Dividing Shares

The company can choose to consolidate and divide all or part of its share capital into shares of a larger denomination than its existing shares. 

For instance, if a company currently has shares with a face value of INR 10, it may consolidate shares to create new shares with a face value of INR 100. 

Tribunal Approval: 

Any consolidation that changes the voting percentages of shareholders must be approved by the Tribunal. This safeguard ensures that the consolidation does not unfairly affect the voting power of existing shareholders without proper oversight and consent.

c. Converting Fully Paid-Up Shares into Stock

The company has the flexibility to convert fully paid-up shares into stock and can subsequently reconvert the stock back into fully paid-up shares of any denomination. 

This process provides flexibility in managing shares and can simplify the capital structure, especially if the company seeks a more fluid ownership structure or an alternative means of recognizing shareholder equity.

d. Subdividing Shares into Smaller Denominations

A company may subdivide its shares into shares of smaller denominations than those initially specified in the memorandum of association. 

However, it must ensure that the proportion of paid and unpaid amounts on each subdivided share remains consistent with the original share from which it was derived. 

Subdivision is particularly useful when a company wishes to make its shares more accessible to smaller investors by lowering the individual share price.

e. Cancelling Unissued Shares

The company can also cancel any shares that have not been taken or agreed to be taken by any person as of the date of the passing of the resolution to do so. 

By cancelling these shares, the company effectively diminishes its share capital by the amount of shares cancelled, helping to maintain an efficient capital structure without excess shares. 

3. Impact of Cancellation of Shares

It is important to note that, under Section 61(2), the cancellation of shares in this context is not considered a reduction of share capital in the legal sense. 

This distinction matters because it separates the cancellation process from the more regulated and formal procedures required for an official reduction of capital, allowing companies to make quick and efficient adjustments to their unissued shares without invoking more complex regulatory processes.

4. Compliance and Approvals in Share Capital Alteration

The flexibility provided by Section 61 allows companies to adapt their share capital in response to market conditions or organizational changes. 

However, companies must ensure compliance with both internal governance standards and regulatory approvals, especially when alterations affect voting rights. 

Tribunal approval is specifically required if any consolidation alters shareholder voting percentages, ensuring that shareholder equity and rights are protected during capital restructuring.