1 5 DEPARTMENT OF MANAGEMENT STUDIES UNIT II

1/5 DEPARTMENT OF MANAGEMENT STUDIES UNIT – II ALTERATION OF SHARE CAPITAL 3/18/2018 Dr. G. MAHESWARAN/AP 1/16

CONDITIONS FOR • Company ALTERATIO N limited by shares • Company limited by guarantee having share capital • A/A must permit • Ordinary resolution 3/18/2018 Dr. G. MAHESWARAN/AP 2/16

TYPES OF ALTERATION • Increase the share capital by issuing new shares • Consolidation of shares • Conversion and reconversion of fully paid up shares into stock and vice versa • Sub division shares of unissued share capital 3/18/2018 3/16

PROVISIONS RELATING TO ALTERATION • Capital clause to be altered; A/A should contain provision for such alteration; otherwise first alter A/A by passing a special resolution • Alteration – Bona fide and in the interest of the company • Ordinary resolution is enough to alter capital clause • Notice of alteration to be given to the ROC (Eform – 5) within 30 days – Penalty – Rs. 500/day of default 3/18/2018 Dr. G. MAHESWARAN/AP 4/16

WHEN SHARE CAPITAL AUTOMATICALLY STANDS INCREASED? • Central Government Order: 1. Loan taken from central government converted into shares in the company 2. Loan taken from PFI converted into shares in the company 3/18/2018 Dr. G. MAHESWARAN/AP 5/16

STOCK VS SHARES • Only fully paid shares are converted in stock • Cannot be directly issued to the public • Only through conversion • No nominal value of shares • No change in value for the investor • Vice versa is possible 3/18/2018 Dr. G. MAHESWARAN/AP 6/16

REDUCTION OF SHARE CAPITAL WITH THE ORDER OF THE COURT • Reduction of issued, subscribed and paid up capital • A/A must permit • Otherwise, first A/A must be amended • Confirmation by the court 1. Convert Rs. 100 paid up into Rs. 75 paid up by not calling the un called amount 2. Cancel any paid up share capital of the company 3. Reduce existing Rs. 100 to Rs. 75 by refunding Rs. 25 per share to the shareholder 3/18/2018 Dr. G. MAHESWARAN/AP 7/16

REDUCTION OF SHARE CAPITAL WITH OUT THE ORDER OF THE COURT • (a) Surrender of shares (A/A must permit – Dispute) • (b) Forfeiture of shares (A/A must permit and Board resolution and in the bona fide interest of the company) • © Diminution of capital: Cancellation of the unsubscribed part of the capital – ordinary resolution – A/A must permit • 1. Redemption of redeemable preference shares • 2. Purchase of shares of a member by the company • 3. Buy back of shares – Sec. 77 A 3/18/2018 Dr. G. MAHESWARAN/AP 8/16

CREDITORS RIGHT TO OBJECT REDUCTION • Has a right to object. . • Declaration of solvency • File with the ROC • File with the SEBI (Listed companies only 3/18/2018 Dr. G. MAHESWARAN/AP 9/16

CONFIRMATION AND REGISTRATION OF REDUCTION OF CAPITAL • The court – after satisfying creditors – confirm reduction – “and reduced” – specified period - company must publish causes for reduction – to the public • Court order to the ROC • ROC will give a confirmation – Registration takes effect. Dr. G. MAHESWARAN/AP 3/18/2018 10/16

COMPANY PROHIBITED TO SHARES– SEC. 77 OWN BUY ITS • Till 1999 3/18/2018 Dr. G. MAHESWARAN/AP 11/16

POWER OF COMPANY TO PURCHASE ITS OWN SHARES – SEC. 77 A, 77 AA & 77 B [1999] • • • The company can purchase its own shares out of: A. free reserves B. The securities premium account C. The proceeds of any shares (not from the earlier issue of same kind of shares) The buy back can be in any one of the ways: 1. Purchasing from the existing share holder (Tender) • 2. Purchasing from the open market (SE) • 3. Purchasing from the odd-lots, even lots • 4. Purchasing shares from employees (ESOP) • • NEGOTIATED BUY BACK TRANSACTION ARE BANNED 3/18/2018 Dr. G. MAHESWARAN/AP 12/16

CONDITONS FOR BUY BACK 1. A/A must authorize 2. Spl. Resolution must be passed; not required in the following cases: • A. Less than 10% of paid up capital & reserves and • B. Board resolution to that effect • * provided no buy back in the next 12 months 3. Not more than 25% of paid up capital & reserves 4. Debt equity ratio: Not more than 2 : 1 (C. G. may prescribe a higher ratio in specific cases) 5. Only fully paid shares can be bought back 6. Listed shares only according to SEBI regulations 3/18/2018 Dr. G. MAHESWARAN/AP 13/16

OTHER PROVISIONS REG. B B • AGM Notice should contain all particulars relating to B B • B B operations should be completed within 12 months from • the date of Spl. Resolution / Bd. Resolution Declaration of solvency (Form No; 4 A) – Affidavit – two directors sign one of whom MD to be filed with the ROC & SEBI B securities must be physically destroyed within 7 • After Bin case of listed company otherwise only ROC days from the last date of completion of buy back • After B B, no further issue of shares for the next 6 months except bonus shares • E-Form 4 C – ROC and SEBI – filed after completion of the B B, unlisted company only ROC • Separate Register to be maintained by the company relating to B B 3/18/2018 Dr. G. MAHESWARAN/AP 14/16

CONTD. . . • Contravention of any of the provisions – Fine – Rs. 50, 000 and/or 2 years imprisonment • Shares includes ESOP • Shares bought back out of free reserves, an equal amount must be transferred to the capital redemption reserve and disclosed in the balance sheet. • For listed companies, SEBI has framed SEBI (Buy-back of Securities) Regulations, 1998 3/18/2018 Dr. G. MAHESWARAN/AP 15/16

PROHIBITON OF B B IN CERTAIN CASES • SEC. 77 B PREVENTS COMPANIES PURCHASING THEIR OWN SHARES: • (a) Through subsidiary company including its own subsidiary companies or • (b) Through any investment company or group of investment companies or • © Default – Dividend, interest, redemption, repayment of loan, etc. 3/18/2018 Dr. G. MAHESWARAN/AP 16/16