The Capital Clause

For every company having a share capital, the Capital Clause, required by Section 4(1)(e), states the amount of share capital with which the company is to be registered — commonly called the authorised or nominal capital — and the division of that amount into shares of a fixed face value each. For instance, a company might be registered with an authorised capital of a stated sum divided into a stated number of equity shares of a fixed face value; this figure represents the ceiling up to which the company may issue shares to raise capital without first increasing that ceiling through a formal alteration, not the amount the company has actually collected from its members at any given time (which is its issued, subscribed, or paid-up capital, each a smaller and separately tracked figure).

The Capital Clause tells prospective investors and creditors the maximum scale at which the company's own memorandum currently permits it to raise share capital, and it is the clause a company most frequently needs to revisit as its business grows. The Companies Act, 2013 makes a clear distinction between alterations that simply reorganise the existing capital structure and an actual reduction of capital already paid up. Under Section 61, a company may, if its Articles of Association authorise it, alter its share capital by an ordinary resolution — to increase its authorised capital by issuing new shares, to consolidate and divide existing shares into shares of a larger denomination, to convert fully paid-up shares into stock (and reconvert stock into shares), to sub-divide existing shares into shares of a smaller denomination, or to cancel shares that have not been taken up by any person, without this cancellation being treated as a reduction of capital. A genuine reduction of share capital already paid up, by contrast, is a materially more serious ste …