Consolidation of shares [Section 94(1)(b) Companies Act, 1956)

Consolidation is the process of combining a specified number of shares into one new share; the new share has to be of a nominal value equal to the aggregate of the shares so consolidated. This power has also to be exercised in the general meeting in the manner authorized by the articles. Table A (of Schedule 1 of the 1956 Act) prescribes only an ordinary resolution. But in the absence of such a power in the articles of a special resolution may become necessary to authorize the alteration and then under the authority of such a resolution the requisite resolution for consolidation may be passed.

Where a company’s capital is restated in its equivalent in decimal currency it does not amount to an alteration of the memorandum of association as it is merely a change of label, so to speak. No formalities are required for effecting such a change. But where the conversion is not a mere change of label but affects the intrinsic value also, consolidation into exactly convertible units will be the only mode of conversion and the formalities therefor must be observed.

Approval of Tribunal in specific cases

As mentioned previously, under the 2013 Act, section 61(1)(b)-provision requires that consolidation and division which results in changes in the voting percentage of shareholders shall take effect only when it is approved by the Tribunal on an application being made. This is a divergence from the position in sub-section (1)(b) of s. 94 of the 1956 Act. The application is to be made as per the rules that will govern the Tribunals. The sections constituting the Tribunal and rules under those sections are not notified at the time of going to press.

Meaning of stock and conversion of shares into stock and vice versa [Section 94(1)(c) of Companies Act 1956]

Stock is the aggregate of fully paid shares legally consolidated, portions of which aggregate may be transferred or split up into fractions of any amount, without regard to the original nominal amount of the shares. Section 94 of the 1956 Act enables a company limited by shares or limited by guarantee with a share capital, if so authorized by the articles, to alter the conditions of its memorandum for converting the whole or any of its paid-up shares into stock or vice versa.

Stock cannot validly be issued directly, even against payment of full nominal amount in cash. Shares must first be issued and paid-up in full and then converted into stock. Home and Foreign Investment and Agency Co., Re, (1912) 1 Ch 72. Such a direct issue stock is, however, an irregularity only, which may be cured by lapse of time, but a  direct issue of stock either as a bonus without any payment or against part payment is ultra vires and wholly void and the holders cannot be placed on the list of contributories in winding-up (ibid). As for the differences and resemblances between shares and stock. The effect of conversion is that the holders of stock are to have, according to the amount of stock held by them, same rights, privileges and advantages as regards dividends, voting etc., as the articles may provide, as if they are still holding the shares from which the stock originated and no more. Warrants to bearers can then be issued in respect of the stock.

Sub-division of shares [Section 94(1)(d) of the Companies Act, 1956]

A company may sub-divide its share capital if so authorized by its articles. It is done by an ordinary resolution passed in general meeting, eg. the shares of Rs. 100 may be sub-divided in 10 shares of Rs. 10 each. Such a change, commonly called a share split, is sometimes made by a company in order to widen the ownership of its shares. The sub-division must be such that the proportion between the amount paid and the amount if any unpaid on each sub-divided shares is the same as it was in the case of shares from which reduced share is derived. While a company that has adopted Table A of Schedule 1 of the 1956 Act, as its articles can do so by an ordinary resolution, an unlimited company would to alter its capital clause for this purpose by a special resolution. Consolidation and sub-division may be effected by the same resolution, provided that the result does not involve fractional holdings.

Sub-division of shares into shares of similar amount

The tedious court route suggested by the Department could easily be avoided by a little thought. Even though section 94(1)(b) of the 1956 Act[talks of consolidation into shares of larger amount only section 94(1) (c) permits sub-division of shares. Hence shares could first be consolidated into shares a larger amount under clause (b) and then be sub-dividend into shares of smaller amount under clause (d) [of section 94 of the 1956 Act]. For example, two shares of Rs.15/- each can be consolidated into one shares of Rs.30/-, which can then be sub-divided into three shares of Rs.10/- each.

Cancellation of shares not taken up by any person

Sub-division of shares and cancellation of unissued shares or shares issued but not taken up by any person may be effected without seeking confirmation of the court. But a cancellation not within paragraph (e) of sub-section (1) cannot be carried out without confirmation of the court. Under Section 94 sub-sections (1) [section 61(1) of 2013 Act] it is open to a limited company to cancel shares which have not been taken by any person but an ordinary resolution for such cancellation is required to be passed by the company in general meeting under section 94 (2). The exercise of power of a company to cancel the unissued shares cannot be restrained by an injunction. It is not the function of the court to interfere with the Company’s power to consider a resolution for cancelling the unissued portion of its share capital. The court observed per curium that a company would only be prevented from cancelling shares where a person had entered into a contract to take the shares in question. The mere fact that somebody had unilaterally consented to taking shares would not mean that the company had agreed to allot him the shares. Section 94 (1) € of the 1956 Act does not limit other methods of reducing capital which can be attempted with the conformation of the court. Unissued capital as well as issued capital which has not been taken up can be cancelled.

Maintenance of nominal capital and international accounting standards

Maintenance of nominal capital of companies is one of the essential bases for limited liability companies. Hence, maintenance of nominal capital is also one of the key bases on which general purpose financial statements of companies are prepared. The framework for the preparation and Presentation of Financial statements provides that maintenance of nominal financial capital is one of the bases while laying down the framework for accounting standards.

Restructuring of capital by paying dividend in kind

A scheme was for the distribution of the shares of a group company to the members of the holding company in lieu of dividend. The question arose whether this in specie dividend constituted capital or income of the shareholders. The court first stressed the normal rule which is that all cash distributions by a company, subject to a few exceptions are to be treated as income and not capital. In applying this rule, no distinction is to be drawn between a distribution in money and one in money’s worth. But on the facts, the court said that the reorganization of the income but was a capital reconstruction in which one capital asset in the hands of the shareholder, namely, shares in the holding company, were replaced by two capital assets, namely, the holding company’s and the newly created subsidiary’s shares. Accordingly, the shares which the shareholders were to receive were a part of the capital and not income.

Notice to Registrar

Whenever any of the above power is exercised, section 95 of the 1956 Act comes into play and would require notice to be given to the Registrar. In context of the 2013 Act, notice will have to be provided under Section 64 of the 2013 act. For more clarification about Company Registration process kindly visit our site and feel free to contact us. Thanks for reading!!!