One of the primary clauses that every MOA has to have, i.e. one of the mandatory clauses, is the ‘Capital Clause’. This clause decides the authorized capital that a company can have.
What is the MOA
The Memorandum of Association/MOA, is a public legal document that every company requires. It illustrates and specifies the objectives of the company, the scope of the business activities of the company, and the limits of the company’s operating processes. This document is required for the company registration procedure; no company can be incorporated without it. It’s popularly referred to as a memorandum or charter of the company.
The Memorandum of Association defines the kind of relationship the company will have with the general population and shareholders. Any act by a company that is beyond what is specified in the MOA is void. The MOA is the foundation of any company. The MOA combined with the AOA form the constitution of a company. The MOA is the most important document for any company and is second only to The Companies Act, 2014. Every person willing to invest in the company or collaborate with the company is expected to have gone through the MOA. The MOA is also called a charter of a company as it specifies all the relevant information regarding it. The Memorandum of Association is a binding document for all the members of a company and can only be altered prospectively.
The Capital Clause
The Capital Clause is the fifth clause of the MOA, it serves the following functions:
- It specifies the share capital with which the company is being registered. It also states the maximum capital that that company is permitted to raise; this is often also referred to as authorised or nominal capital of the company.
- No company can raise capital that is higher than the amount specified in the Capital Clause or issue shares that are more than the number specified in the Capital Clause. In case a company intends to do so; first, they need to amend the MOA to allow for the increased number of shares or capital value, as the case may be.
- The Capital Clause also specifies the types of shares the company will have, how many of each type of shares the company will have, and the face value of each of the shares. While private companies and unlisted public companies are permitted to assume any face value for their shares (dependent on certain factors), all listed public companies that need to have a prescribed face value for their shares.
Companies that are limited by guarantee generally have a Capital Clause that states for no capital due to the fact that companies limited by guarantee tend to have no share capital. However, it is possible in rare situations for a company limited by guarantee to introduce share capital. There is no special procedure for such a situation; the general procedure for altering the share Capital Clause shall apply.
Altering the Capital Clause
There can be five types of alterations in the Capital Clause:
- The first type of alteration is increase of shared capital, by way of which, as the name suggested, the authorised share capital of a company is increased.
- The second is an alteration where there is a consolidation of share capital; what this means is that the shares of the company which are of smaller denomination are consolidated with shares of the company of larger denomination.
- The third type of alteration is the conversion of share capital; in this type of alteration, a company can either alter their stock into fully paid-up shares or convert their fully paid-up shares into stock.
- The fourth kind of alteration is known as a subdivision of share capital, where the company divides its existing number of shares into even smaller shares and increases the number of shares.
- The fifth and final type of alteration is the cancellation of share capital, where the company reduces its number of shares and in turn reduces their share capital.
Procedure for altering Capital Clause:
Altering the Capital Clause of a company means to alter the MOA, which is a significant change. To alter Capital Clause the following procedure has to be followed:
- The first step is to issue the board notice with at least seven days of prior notice and the agenda of the meeting.
- The next step for altering the Capital Clause is to pass a resolution for the alteration of share capital in that board meeting.
- This resolution then has to be approved by the shareholders in a shareholder meeting; hence, the date, time, and venue for a shareholder meeting has to be decided upon.
- The company director has to send a notice of an Extraordinary General Meeting to the shareholders. This notice should be sent at least 7 days prior to the date of the meeting.
- At the shareholders meeting, the shareholders need to pass a resolution by a majority approving such a change in the share capital of the company.
- Finally, the Registrar of Companies needs to be notified about the alteration in the capital clause within 30 days from the passing of such resolution. If the same is not notified within 30 days the company shall have to pay a fine.
The Capital Clause is one of the fundamental clauses in an MOA, and altering the same is a major change. Due to this altering the Capital Clause needs a company to follow a complex procedure and get the assent of the Board as well as the shareholders.
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