Introduction

A company’s share capital is a central mechanism through which a company raises funds, allocates risks, confers rights, and distributes control. Over the life-cycle of a business, a company may need to restructure its capital base — for example by increasing authorised share capital, sub-dividing shares, consolidating them, converting shares into stock, or cancelling unissued shares. Indian company law recognises this need, but it ensures that such changes are done within a well-defined statutory framework to protect shareholders, creditors and other stakeholders. The key statutory provision in this context is Companies Act, 2013 (“the Act”) Section 61, which deals with the power of a limited company (i.e., a company limited by shares) to alter its share capital. The statute sets out the permissible kinds of alteration, the procedural safeguards, and the requirement of authorisation in the company’s articles. This portion of the article explores the power under Section 61, the procedural steps, the doctrine of bona fide exercise, and some practical issues.

Statutory Provision and Scope

Section 61(1) of the Act provides that a limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to: (a) increase its authorised share capital by such amount as it thinks expedient; (b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares, subject to a proviso that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal in the prescribed manner; (c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination; (d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so however that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; and (e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. Sub-section (2) clarifies that the cancellation under sub-section (1) shall not be deemed to be a reduction of share capital.

The ambit of Section 61 therefore covers five specific alterations: increase of authorised capital; consolidation and re-division; conversion of fully paid-up shares into stock; sub-division of shares; and cancellation of unissued shares. Each of these alterations must be done in accordance with the company’s articles and the procedural norms.

Key Conditions and Procedural Safeguards

First and foremost, the company’s articles of association (AoA) must authorise the alteration. If the articles do not contain a provision for the proposed change, then the company must first amend its articles under Section 14 of the Act (which requires a special resolution) to incorporate such power. Without such authorisation the resolution to alter share capital would be ultra vires.

Second, the alteration resolution must ordinarily be passed in a general meeting of shareholders (thus reflecting collective shareholder decision rather than only board action). The Act does not state explicitly that the resolution must be an ordinary or special resolution for all the types of alteration, but often companies adopt a special resolution (especially when the articles themselves require a special resolution or where creditors’ protection is needed). Practitioners often follow the safer route of a special resolution.

Third, certain alterations which may affect shareholder rights (for example, consolidation of shares into a larger amount) are subject to further safeguard: if consolidation and division results in a change in the voting percentage of shareholders, then such alteration shall not take effect unless it is approved by the Tribunal (e.g., National Company Law Tribunal) under the prescribed manner. This condition protects minority shareholders from arrangements that may change their relative voting position without independent judicial oversight.

Fourth, once a company passes a resolution under Section 61, it must comply with the notice requirement under Section 64, which mandates that within thirty days of such alteration the company file a notice with the Registrar of Companies (ROC) in the prescribed form (Form SH-7) along with the altered memorandum. Failure to do so attracts penalties.

Illustrations of Alteration Powers

If a company finds that its authorised share capital is exhausted or not adequate to issue further shares, the board may recommend to shareholders an increase in authorised capital by 100 lakh rupees. Upon shareholder approval (and articles authorising the same), the company may alter its memorandum to reflect the new authorised share capital figure. This is permitted under Section 61(1)(a).

If, by contrast, a company has very small denominated shares (say, ₹2 per share) and wants to simplify its capital structure by consolidating into ₹10 shares, it may consolidate and divide under Section 61(1)(b). If that consolidation alters the voting percentage of existing shareholders (e.g., some shareholders lose proportionate votes), then tribunal approval is required.

For conversion into stock: a company may convert all fully paid-up shares into stock under Section 61(1)(c) (which means the shares cease to be shares and become stock and then can be reconverted into shares of any denomination).

For sub-division: under Section 61(1)(d) the company may sub-divide its shares (say divide each ₹10 share into ten ₹1 shares). The proportion between the amount paid and the amount unpaid, if any, must remain the same in the reduced shares.

For cancellation of unissued shares: under Section 61(1)(e) if a company has shares authorised but not taken up or subscribed, it may cancel those shares and diminish its authorised capital accordingly. Importantly, this cancellation is not deemed a “reduction of share capital” for purposes of Section 66 (which involves actual reduction of paid-up capital and further creditor protections). The statute clarifies that.

Doctrinal Considerations: Bona Fides, Creditor Rights and Ultra Vires

The power under Section 61 is not unfettered. Indian jurisprudence and corporate law doctrine require that the power to alter share capital must be exercised bona fide in the interests of the company and not for purposes which unfairly prejudice minority shareholders or creditors. Although there are fewer reported Indian cases specifically on Section 61, the principle flows from common law: alterations of capital must be done in good faith and for the company’s benefit (see Piercy v. Mills (s) & Co. (1920) 1 Ch 77). In Indian context academic commentaries emphasise that if alteration adversely affects rights of classes of shareholders or is used to avoid creditor obligations, it may be struck down.

Creditors’ interests are indirectly protected because if a company increases or alters capital in a way that prejudices them, resort may lie to reduction-of-capital mechanisms (Section 66) or to winding up in appropriate cases. Additionally, the requirement to file a notice under Section 64 ensures transparency.

Filing, Registration and Practical Compliance

After passing the necessary resolution and altering the memorandum (and articles if needed), the company must file Form SH-7 with the ROC within 30 days of the alteration. The form must be accompanied by a copy of the resolution, a certified copy of the altered memorandum (and articles if altered) and the prescribed fee. Late filing attracts a penalty for each day of default. Once registered by the ROC, the alteration becomes effective, and the company may issue further shares or otherwise act upon the changed capital structure.

Practical Issues and Risk-Areas

In practice, the following areas require careful attention:

• Ensuring the articles authorise the alteration (if not, amend articles first).
• Passing the appropriate resolution (ordinary or special as per AoA).
• Ensuring no unintended change in voting percentage: if consolidation/division would affect shareholder voting rights, tribunal approval is required — failure to obtain it renders the alteration void.
• Avoiding using the alteration mechanism to evade creditor rights or to undermine classes of shareholders.
• Proper calculation of authorised vs paid-up capital; checking that issue of shares remains within authorised limits.
• Filing of forms and updating memorandum, articles and register timely.
• Disclosure obligations: after alteration the memorandum must reflect the new capital structure, and the company must, in its notices, statements, letter-heads etc., correctly reflect authorised, subscribed and paid-up capital under Section 60. (Indian Kanoon)

Overall, Section 61 provides sufficient flexibility for companies to adjust their capital base while enshrining procedural safeguards to balance flexibility and investor/creditor protection.

Further Issue of Share Capital

Introduction

While the power to alter a company’s share capital (Section 61) deals with structural change to authorised or existing share capital, the concept of further issue of share capital relates to issuing new shares (i.e., increasing subscribed capital) to raise funds, reward employees, or convert debt into equity. Under the Act, Section 62 is the primary provision governing further issue of share capital. It aims to protect existing shareholders by giving them pre-emptive rights (in many cases) and to regulate fresh issuance in a transparent way. This part of the article examines Section 62, its varied modes, exemptions, procedural steps, pricing and other legal issues, as well as recent developments and case law.

Statutory Provision and Right of First Refusal

Section 62(1) of the Act states that when a company having share capital proposes to increase its subscribed capital by the issue of further shares, such shares must first be offered to existing equity shareholders in proportion to their paid-up share capital on those shares (commonly referred to as the pre-emptive or right issue mechanism). The offer must be made by letter within a time period not less than fifteen days and not exceeding thirty days from the date of the offer, containing specified number of shares, and unless the articles otherwise provide, the right of each shareholder to renounce the shares offered to them in favour of another person.

Section 62(2) allows the company, after dealing with the existing shareholders, to dispose of remaining shares (if any) to other persons on such terms as decided by the board and approved by general meeting. Section 62(3) states that nothing in clause (1) is to apply if shares are offered to employees under an employee stock option scheme (ESOS) or employees’ share scheme. Section 62 further contains sub-sections (4) to (6) dealing with specific cases such as conversion of debentures or loans into shares, or government-directed conversion.

Varieties of Further Issues

In practice, further issue of share capital can take several forms:

• Rights issue: existing shareholders are offered new shares in proportion to their current shareholding.
• Bonus issue: issue of fully paid-up shares to existing shareholders free of cost out of free reserves, though bonus shares are regulated under Section 63 and should not be confused with issue for consideration under Section 62.
• Preferential allotment: issue of shares for cash or other consideration to persons other than existing shareholders (subject to compliance with Section 62(1)(c) and the rules) and subject to additional securities law regulation if listed.
• Employee stock options or sweat equity: though exempt in certain respects from Section 62, they must comply with separate statutory rules.
• Conversion of debt or loans into equity: Section 62(4) onward deals with cases where government or creditor-directed conversions increase authorised or subscribed capital.

Pricing and Valuation Issues

When shares are issued for consideration other than cash (for instance, in preferential allotments or conversion of loan), the price of shares (or the value of non-cash consideration) must be determined by a registered valuer, except where the company is listed, in which case such price must comply with regulations issued by Securities and Exchange Board of India (SEBI). The rules (Companies (Share Capital and Debentures) Rules, 2014) and SEBI (ICDR) Regulations provide that the allotment must be for cash or other consideration and that appropriate disclosures must be made.

Procedural Steps for Further Issue

The procedural chain for a company proposing a further issue of share capital is normally as follows:

1. Board meeting to consider proposal and determine number, class, issue price and other terms of issue subject to articles and statutory compliance.
2. Notice of general meeting, if required for shareholder approval, with explanatory statement setting out terms of issue, class rights, effects on shareholding and dilution.
3. At the general meeting pass special resolution (or ordinary resolution as per/AoA) approving increase in subscribed capital and issue of further shares.
4. Offer letter to existing shareholders (in case of rights issue) within the time specified under Section 62(1).
5. After acceptance by shareholders (or renunciation), and disposal of unsubscribed portion (if any) to others under Section 62(2).
6. Allotment of shares, dispatch of share certificates (or credit of shares in demat) and filing of allotment/alteration with ROC including amendment of memorandum/articles if required.
7. Compliance with SEBI/stock exchange/investor protection norms (for listed companies) including pricing criteria, disclosures, lock-in, etc.

Protection of Existing Shareholders and Minority Rights

The essence of Section 62 is to protect existing shareholders from dilution without offering them fair opportunity to participate. The proportional offer requirement ensures that shareholders maintain participation rights before outsiders are brought in. Furthermore, the notice of offer must include the right of renunciation (unless waived by articles) so that shareholders can transfer their entitlement to others.

If a company fails to comply with Section 62 (for example, by issuing shares to outsiders without offering existing shareholders), the allotment may be vulnerable to challenge by shareholders or may involve rectification by regulatory authority. Courts and tribunals have emphasised that the right issue mechanism is mandatory unless exempted by statute or articles. For example, the NCLAT in a recent appeal noted that Section 62 is applicable to all companies (public or private) and requires strict adherence to offer procedure.

Special Cases and Exemptions

Certain categories of issuance fall outside the strict rights offer requirement:

• Employee stock option schemes (ESOS) as provided under Section 62(3).
• Issue of shares pursuant to any scheme of amalgamation or merger (subject to court/tribunal sanction).
• Conversion of debentures, loans or government-directed allocations under Section 62(4)-(6).
• Private companies sometimes have slight relaxations: in case of private companies, the notice period under Section 62(1)(a)(i) may be shorter if ninety per cent of shareholders have given their consent in writing or electronic mode.

Recent Developments and Observations

While much of the doctrine around Section 62 is well established, there have been continuing developments. For instance, recent tribunal orders emphasise that in preferential allotments (shares issued to persons other than existing shareholders) the company must follow Section 62(1)(c) and obtain valuation by a registered valuer (if listed) and obtain shareholder approval via special resolution and file necessary details with the ROC. Failure to comply can result in shareholder suit or regulatory action. Some recent commentary also highlights that the rights issue framework must align with SEBI (ICDR) and SEBI (LODR) regulations for listed companies, which may impose additional lock-in, pricing and disclosure obligations. These trends underscore the importance of aligning company-law compliance (sections 62, 64 etc.) with securities-law compliance.

Case Law and Tribunal Intervention

Though there are fewer landmark Supreme Court judgments focused exclusively on Section 62, several NCLT/NCLAT decisions reinforce the procedural strictness and the need for bona fide exercise. For example, the NCLAT in Company Appeal (AT) No. 9/2018 stressed that further issue of share capital must conform to Section 62 and that deviation cannot be justified as mere company convenience.

Another notable decision in the context of rights issue was a High Court’s observation that the allotment letter must clearly specify the number of shares offered, price and time limit in the offer notice — failure to meet these requirements may render the offer invalid and allow shareholders challenge. Academic commentaries suggest that directors need to act diligently in drafting the letter of offer, ensuring it is properly despatched and meets statutory timeframes.

Practical Considerations and Risk Areas

From a company secretary or board perspective, a number of practices must be carefully followed:

• Ensure proper authorisation in articles for fresh issue; ensure that increase in authorised capital (if required) is handled separately under Section 61 (and notice filed under Section 64).
• When designing a rights issue, ensure the offer letters are correctly dispatched within timelines, that shares are renounceable (if applicable), and that unsubscribed portion is disposed of in a manner not disadvantageous to shareholders.
• When implementing a preferential allotment or private placement to non-shareholders, ensure compliance with Section 62(1)(c), valuation by registered valuer (if needed), and for listed companies adherence to SEBI norms (pricing, lock in, disclosure).
• Ensure proper filing with ROC — Form PAS-3 (allotment of shares) and where authorised capital is increased, Form SH-7; update share capital figures in the register and reflect in balance sheet and annual return.
• Avoid informal issuance which ignores pre-emptive rights; existing shareholders may challenge allotment as unfair, and regulators may impose penalties.
• Plan for dilution effects, shareholders’ expectations, minority protection, and the impact on control and voting percentage.

Interplay between Sections 61 and 62

It is important to distinguish and understand how Sections 61 and 62 operate together. Section 61 deals with structural alteration of capital (authorised share capital, subdivision, consolidation etc.). Section 62 deals with raising of fresh capital by issuing further shares (i.e., increase in subscribed or paid-up capital). Thus, if a company proposes to issue further shares beyond its existing authorised capital, it must first increase authorised share capital (via Section 61) before issuing shares under Section 62. The company must ensure that authorised share capital is sufficient, and thereafter issue further shares to existing shareholders (rights issue) or others (with compliance) under Section 62. The sequencing is important: an attempt to issue shares beyond authorised capital without first altering capital may be ultra vires and the allotment may be impugned.

---

Conclusion

The power to alter share capital and the power to issue further share capital are key facets of the corporate capital-structure toolkit in Indian company law. Section 61 of the Companies Act, 2013 empowers limited companies (having share capital) to alter their memorandum in terms of share capital subject to articles, procedural safeguards and, in certain cases, tribunal approval. Section 62 empowers companies to issue further shares to raise funds or re-capitalise their business, subject to pre-emptive rights of existing shareholders (unless exempt), offer letters, valuation and shareholder approval. Together these provisions allow companies flexibility to adapt to changing business needs while imposing guardrails to protect shareholders and creditors.

For practitioners, boards and company secretaries, the key take-aways include ensuring articles authorise the change, following the correct procedure (board resolution, general meeting, notice, sanction by special resolution if required), meeting statutory timelines, filing with the Registrar, aligning fresh issues with rights and valuations, and coordinating with regulatory regimes such as SEBI for listed companies. While the statutory framework is well-developed, recent tribunal practice underscores that deviations from procedure, lack of bona fides, or disregard of minority rights may lead to void allotments or regulatory consequences.

In an era of rapid capital market evolution, corporate consolidations, start-ups raising venture capital, and strategic equity issues, mastery of Sections 61 and 62 and their practical compliance remains essential for legal advisors, company secretaries and directors. The legislative framework is robust; the corporate community’s challenge is to exercise these powers with transparency, good governance and adherence to investor-protection norms.