Reclassification of share capital by Private companies

1.Introduction:

Authorized/nominal share capital is the maximum amount of the capital that a company can issue to its shareholders, as stated in its Memorandum of Association. Depending on the requirement of the Company, the authorized share capital can be classified into two categories i.e., Equity and Preference Shares.

In some cases, a company may have authorized share capital in the form of equity shares, however it may want to issue preference shares without further increasing the authorized share capital. In such a scenario, the Company may opt for reclassification of its authorized share capital by converting unissued equity authorized share capital into fresh preference authorized share capital.

Reclassification of shares is the process of classifying unissued existing class of shares of a company into another, such as converting unissued preference share capital into equity share capital or vice versa without payment of MOA fees and stamp duty.

It is essential for companies to adhere to legal requirements under the Companies Act, 2013 (the Act) and ensure transparency and fairness in the reclassification process to protect the interests of all shareholders involved.

2.Methodology for reclassification:

Reclassification implies two actions to be carried out by a company i.e.,?

• First cancellation of a part of the existing class of shares as per section 61(e) and,
• Then increase in another class of share as per section 61(a).

3.Enabling Provisions for reclassification of authorized capital under the Act:

• Section 13: Alteration of MOA
• Section 61: Powers of Limited Company to Alter its Share Capital

Alteration of the MOA relating to reclassification of shares often requires a special resolution. This means that 3/4th of majority of shareholders consent must be obtained for the proposed alteration.

4.Steps involved in Reclassification of share capital:

1. Check Articles of Association whether it authorizes changes in share capital or not.
2. Conduct a Board Meeting to discuss the requirements and need to reclassify share capital and pass the necessary Resolutions.
3. Call for EGM and pass the resolutions for Reclassification of shares and alteration in MOA
4. File SH-7 as required under Section 64 to inform Registrar about reclassification within 30 days of EGM.
5. File MGT-14 for special resolution passed within 30 days of EGM

Conclusion:

In summary, Reclassification of share capital enables the companies to convert one class of share into another class of share without payment of Roc fees and stamp duty by utilizing the unissued shares of one class. The process does not usually involve changes in shareholding pattern. Therefore, such a conversion is permissible under the Act and no provision of the Act prohibits this.

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