Authorised Capital

Authorised Capital, also known as Nominal Capital or Registered Capital, represents the maximum amount of share capital that a company is legally authorized to issue to its shareholders. This is the ceiling on the amount of capital a company can raise through the issuance of shares.

As per Section 2(8) of the Companies Act, 2013, authorised capital is defined as "such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company."

This amount is specified in the Capital Clause of the company's Memorandum of Association (MOA). It serves as a public declaration of the company's potential financial size. If a company wishes to raise more capital than its authorised limit, it must first alter its MOA by passing a resolution and paying additional fees to the Registrar of Companies (RoC). This process increases the authorised capital, allowing for a larger issue of shares.

Issued Capital

Issued Capital is that part of the authorised capital which the company offers to the public, or any group of persons, for subscription. It represents the face value of the shares that the company has actually "issued" or put on the market.

As per Section 2(50) of the Companies Act, 2013, issued capital means "such capital as the company issues from time to time for subscription."

The issued capital can be equal to or less than the authorised capital, but it can never exceed the authorised capital. The portion of the authorised capital that has not been offered to the public is known as Unissued Capital. A company may choose to keep a portion of its capital unissued to be offered at a later date for future expansion or financial needs.

Subscribed Capital

Subscribed Capital is that portion of the issued capital that has been actually taken up or "subscribed" to by the investors. It represents the nominal value of the shares that the public has agreed to buy.

As per Section 2(86) of the Companies Act, 2013, subscribed capital means "such part of the capital which is for the time being subscribed by the members of a company."

The subscribed capital can be equal to or less than the issued capital. If the number of shares applied for by the public is less than the number of shares issued, it is a case of under-subscription. If the number of shares applied for is more than the shares issued, it is a case of over-subscription, and the company will allot shares on a pro-rata basis or through another fair method, making the subscribed capital equal to the issued capital.

Called-up Capital and Paid-up Capital

Called-up Capital

Called-up Capital is that part of the subscribed capital which the company has "called up" or demanded from the shareholders to pay. A company may decide not to ask for the full face value of the share at once and may instead ask for it in installments (e.g., application money, allotment money, first call, final call).

As per Section 2(15) of the Companies Act, 2013, called-up capital means "such part of the capital, which has been called for payment." The portion of the subscribed capital that has not yet been called by the company is known as Uncalled Capital.

Paid-up Capital

Paid-up Capital is the total amount of money that the shareholders have actually paid to the company against the shares allotted to them. It is the part of the called-up capital that has been received by the company.

As per Section 2(64) of the Companies Act, 2013, paid-up share capital means "such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called."

The difference between the called-up capital and the paid-up capital arises when some shareholders fail to pay the call money. This unpaid amount is known as Calls in Arrears.

$ \text{Paid-up Capital} = \text{Called-up Capital} - \text{Calls in Arrears} $

Equity Shares and Preference Shares

The share capital of a company can be broadly divided into two main types: Equity Share Capital and Preference Share Capital, as defined under Section 43 of the Companies Act, 2013.

1. Equity Shares (Ordinary Shares)

Equity share capital is all share capital that is not preference share capital. Equity shareholders are the real owners of the company. They bear the highest risk and, in return, enjoy the ultimate rewards of the company's success. Their dividend is not fixed and depends on the profits earned by the company. They have voting rights in the company's meetings, which allows them to participate in its management.

2. Preference Shares

Preference shares, as the name suggests, are shares that carry certain preferential rights over equity shares.

Rights of Preference Shareholders

According to Section 43(b), preference shareholders have two primary preferential rights:

1. Preferential Right to Dividend: They have a right to receive a dividend at a fixed rate (e.g., 8% Preference Shares) before any dividend is paid to the equity shareholders.
2. Preferential Right to Repayment of Capital: In the event of the winding up of the company, they have the right to be repaid their capital before anything is paid to the equity shareholders.

Preference shareholders generally do not have voting rights, except in matters that directly affect their own rights.

Comparison of Equity and Preference Shares

Power to alter capital

A company's capital structure is not rigid; it can be altered to meet the changing financial needs and strategic goals of the business. Section 61 of the Companies Act, 2013, grants a limited company having a share capital the power to alter the capital clause of its Memorandum of Association (MOA). This power, however, can only be exercised if the company is first authorised by its Articles of Association (AOA).

The alteration can take one or more of the following forms:

1. Increase of Share Capital

This is the most common form of capital alteration. A company may increase its authorised share capital by such amount as it thinks expedient. This is typically done when the company plans to issue more shares to the public or private investors to raise funds for expansion, diversification, or new projects, and its existing authorised capital limit has been exhausted or is insufficient.

2. Consolidation into Shares of Larger Amount

This involves consolidating and dividing all or any of its share capital into shares of a larger face value than its existing shares. The total amount of share capital remains the same, but the number of shares decreases, and the face value of each share increases.

3. Conversion into Stock

A company can convert all or any of its fully paid-up shares into stock. It can also reconvert that stock back into fully paid-up shares of any denomination.

• Shares are individual units of capital with a distinct number. They can be partly or fully paid-up.
• Stock is the consolidated fund of fully paid-up shares. It is not numbered and can be divided into fractional amounts. For instance, one can hold ₹55.50 worth of stock, but not 5.55 shares.

This practice is now rare in India, but the legal provision still exists.

4. Sub-division of Shares

This is the opposite of consolidation. A company can sub-divide its shares, or any of them, into shares of a smaller face value. This is often done to make the shares more affordable for retail investors and to increase their liquidity in the market.

A key condition for sub-division is that the proportion between the amount paid and the amount, if any, unpaid on each reduced share must be the same as it was for the original share from which it is derived.

5. Cancellation of Unissued Shares

A company can cancel shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person. By doing this, it diminishes the amount of its authorised share capital by the amount of the shares so cancelled.

It is crucial to understand that this cancellation of unissued capital is not considered a "Reduction of Share Capital" under Section 66 of the Act. A reduction of share capital is a much more complex process involving a Special Resolution and approval from the National Company Law Tribunal (NCLT) because it affects the subscribed or paid-up capital and thereby the creditors' interests. Cancelling unissued shares only affects the authorised capital and has no impact on creditors.

Procedure for Alteration

The procedure for altering share capital under Section 61 is relatively straightforward compared to other major corporate actions like a reduction of capital. The steps are as follows:

1. Check Authorisation in Articles of Association (AOA): The very first step is to verify that the AOA of the company contains a provision authorising it to alter its share capital. If no such provision exists, the company must first alter its AOA by passing a Special Resolution as per Section 14 of the Act.

2. Convene a Board Meeting: The Board of Directors must hold a meeting to pass a resolution that:

   • Approves the proposed alteration of capital.
   • Fixes the date, time, and venue for holding a General Meeting of the members to get their approval.
   • Approves the draft notice for the General Meeting.

3. Hold a General Meeting and Pass an Ordinary Resolution: The company must convene a General Meeting of its members and pass an Ordinary Resolution to approve the alteration. An ordinary resolution requires a simple majority of votes (i.e., votes in favour exceed votes against).

   Note: This is a significant point. While most alterations to the MOA require a Special Resolution, an alteration of the Capital Clause under Section 61 only requires an Ordinary Resolution.

4. Filing with the Registrar of Companies (RoC): As per Section 64, after the company has altered its share capital, it must file a notice with the RoC. The notice must be filed in Form SH-7 within 30 days of passing the ordinary resolution. This notice should be accompanied by a copy of the resolution and the altered Memorandum of Association.

5. Effect of Alteration: The alteration to the capital clause of the MOA becomes effective only after the RoC takes the notice on record and updates the company's master data.

If the company fails to file the notice with the RoC within the prescribed time, the company and every officer who is in default shall be liable to a penalty which may extend to one thousand rupees for each day during which the default continues, or five lakh rupees, whichever is less.

Power to reduce capital

A Reduction of Share Capital is a corporate action where a company reduces its issued, subscribed, or paid-up share capital. This is a far more complex and regulated process than the mere alteration (diminution) of authorised capital under Section 61, because it directly affects the capital available to the company and, consequently, the financial cushion available to its creditors.

A company may choose to reduce its share capital for several reasons, such as:

• To write off capital that has been lost due to accumulated business losses, making the balance sheet reflect a more realistic financial position.
• To return surplus capital to shareholders when the company is over-capitalised and has cash in excess of its business needs.
• To extinguish the liability of shareholders for uncalled amounts on their shares.

According to Section 66(1) of the Companies Act, 2013, a company limited by shares or limited by guarantee and having a share capital can reduce its share capital in any of the following ways:

1. Extinguishing or Reducing Liability

A company can extinguish or reduce the liability on any of its shares in respect of the share capital not yet paid-up. This means the company relieves the shareholders of their obligation to pay the remaining uncalled amount on their shares.

2. Cancelling Lost Capital

A company can cancel any paid-up share capital which is lost or is unrepresented by available assets. This is essentially a book-keeping entry to restructure the balance sheet. When a company incurs heavy losses, its assets are depleted, but its paid-up capital on the liability side remains unchanged. This creates a fictitious picture. By cancelling this "lost" capital, the company's balance sheet presents a truer and fairer view of its financial health.

3. Paying Off Excess Capital

A company can pay off any paid-up share capital which is in excess of the wants of the company. This happens when a company has more capital than it can profitably employ in its business. Instead of letting the cash sit idle, it can be returned to the shareholders.

Special Resolution and Tribunal Approval

The power to reduce share capital is subject to very strict conditions because it can adversely affect the interests of creditors and minority shareholders. Therefore, a company cannot reduce its capital on its own. It must fulfill two mandatory conditions:

1. Pass a Special Resolution: The reduction must be approved by the members of the company by passing a Special Resolution. This requires a three-fourths majority, indicating strong support from the shareholders for such a significant move.
2. Obtain Tribunal Approval: After passing the special resolution, the company must apply to the National Company Law Tribunal (NCLT) for an order confirming the reduction. The NCLT's approval is the most critical step and is granted only after ensuring that all legal requirements have been met and the interests of creditors and dissenting shareholders are protected.

A company cannot reduce its share capital if it is in arrears in the repayment of any deposits accepted by it or the interest payable thereon.

Procedure for Reduction

The procedure for capital reduction is elaborate and primarily designed to safeguard the interests of creditors. The key steps involved are:

1. Authorisation by Articles (AOA): Ensure the AOA of the company permits a reduction of capital. If not, the AOA must first be altered by passing a special resolution.
2. Board Meeting: Convene a Board meeting to approve the scheme of capital reduction and to fix the date for a General Meeting to pass the necessary special resolution.
3. Special Resolution: Hold the General Meeting and pass the special resolution for reducing the share capital.
4. Application to NCLT: File a petition with the NCLT in Form RSC-1 for an order confirming the reduction.
5. Notice from NCLT: The NCLT will give notice of the petition to the Central Government, the Registrar of Companies (RoC), SEBI (if listed), and all the creditors of the company.
6. Representations and Objections: The authorities and creditors are given a period of three months to make any representations or raise objections to the proposed reduction.
7. Confirmation Order by NCLT: The NCLT will hear any objections and, if satisfied that the interests of creditors have been secured, it will pass an order confirming the reduction on such terms and conditions as it deems fit. The NCLT will issue the order in Form RSC-6.
8. Filing with RoC: The company must file a certified copy of the NCLT's order and the minutes of the meeting (as approved by the NCLT) with the RoC within 30 days. The RoC will register the same and issue a certificate. The reduction becomes effective only upon the issuance of this certificate.

Protection of Creditors

The entire process of capital reduction under Section 66 revolves around the principle of protecting the interests of the company's creditors. The company's capital is often seen as a "buffer" or guarantee fund for the creditors. Reducing this buffer can increase their risk. Therefore, the law ensures that their consent is obtained or their debt is secured.

The NCLT provides this protection by ensuring the following:

• List of Creditors: The company must provide the NCLT with a list of all its creditors.
• Notice and Right to Object: The NCLT ensures that every creditor is given notice of the proposed reduction and has the right to object.
• Securing Creditors' Interests: The NCLT shall not confirm the reduction unless it is satisfied that with respect to every creditor of the company who objects to the reduction, either:
  1. His consent to the reduction has been obtained; or
  2. His debt or claim has been discharged or has determined; or
  3. His debt or claim has been secured to the satisfaction of the Tribunal.

This means no creditor can be put in a worse position due to the capital reduction. Their claims must either be paid off, secured by a bank guarantee or charge on assets, or they must explicitly agree to the reduction. This robust mechanism ensures that shareholder interests do not override the legitimate claims of the company's creditors.