In this article we will discuss about the Alteration of Share Capital for Reconstruction.

A company can alter its share capital, if it is empowered by its articles to do so.

Alteration, as distinct from reduction, may involve the following:

(1) Conversion of shares into stock;


(2) Increase in capital;

(3) Decrease (without reduction in the paid up amount) in share capital;

(4) Consolidation of shares of smaller denomination into shares of higher denomination or sub-division of shares into shares of smaller denomination.

Section 94 to 98 of the Companies Act, 1956 govern alteration of capital.


Conversion into Stock:

Fully paid up shares can be converted into “stock”, if the company is so authorised by its articles. “Stock” is not divided into equal and serially numbered parts and hence the members will hold so much amount of share capital after the shares have been converted into stock, rather that so many shares.

Thus, if A held 20 shares of Rs 100 each previously, after conversion into stock he will be said to hold Rs 2,000 stock. He will then be able to transfer any amount even if it is odd. The position may be likened to cups of tea which would be “shares”; if all the cups of tea are poured into the tea pot the tea in the teapot would be “stock”.

Lord Cairns says, “The use of the term ‘stock’ merely denotes that the company has recognised the fact of the complete payment of the shares and that the time has come when these shares may be assigned in fragments, which for obvious reasons could not be permitted before, but that stock shall still be the qualification, e.g., of directors who must possess a certain number of shares and that the meeting shall be of persons entitled to this stock who meet and vote as shareholders in the proportion of shares which would entitle them to vote before the consolidation into stock”


After shares have been converted into stock, notice of the conversion must be filed with the Registrar within one month. Thereupon, those provisions of the Companies Act which apply only to shares cease to apply to so much of the share capital as is converted into stock. Also, the Register of Members, thereafter, will show the amount of stock held by each member instead of the number of shares.

The conversion of shares into stock is recorded in the books of account by the entry:

(Say) Equity Share Capital Account …Dr.

  To Equity Stock.


Stock can be reconverted into shares. The shares need not be of the same denomination as before.

Increase in Capital:

Increase in capital can be, of course, brought about of offering more shares for subscription. The only restriction is that the offer must first be made to the existing members (equity) in proportion to their holdings (unless the company has decided otherwise by a special resolution of by an ordinary resolution with the approval of the Central Government).

A member must have at least 15 days to decide whether he will (or not) exercise the option to buy the new shares offered to him. If the members do not exercise the option, within the period allowed, the directors will be free to dispose of the shares as they think most beneficial to the company The option is saleable in the market.


In case the capital is increased beyond the authorised capital, the notice of increase together with the particulars regarding class of shares and the conditions under which they are to be issued must be sent to the Registrar within thirty days of the passing of resolution making the increase.

Decrease in Share Capital:

A company has the power to cancel the shares which, at the date of the passing of the necessary resolution, have not been subscribed or agreed to be subscribed by any person, and thus diminish the amount of its share capital. A company, however, cannot, without the sanction of the Court, cancel the amount unpaid on shares already issued or agreed to be subscribed.

Consolidation, etc.:


A company has the power to consolidate shares of smaller value into shares of bigger denomination or sub-divided shares of bigger denomination into shares of smaller denomination. Care must be exercised to see that in case of partly paid up shares, the amount paid up bears the same ratio to the nominal value after consolidation as before.

For example, if shares of Rs 100 each, Rs 80 paid up (80%) are converted into shares of Rs 10 each, the paid up amount must be Rs 8 per share, i.e., 80% of the nominal value. An entry is passed to record the changes.

Suppose 10,000 shares of Rs 100 fully paid are sub-divided into shares of Rs 10 each, the entry will be:

Share Capital A/c (Rs 100) … Dr. 10,00,000


To Share Capital A/c (Rs 10) 1,00,00,000

Notice in all cases of alteration discussed above must be sent to the Registrar within 30 days.

Reserve Liability or Reserve Capital:

According to section 99 of the Companies Act, a limited company may, by special resolution, determine that any portion of its share capital which has not already been called up shall not be called up except in the event and for the purposes of the company being would up. Such uncalled capital is known as “reserve capital”.

In all the above-mentioned cases, no sanction of the Court is required. Special resolution of the company is enough.

Illustration 1:


Pass journal entries for the following:—

(i) Conversion of fully paid equity share capital of Rs 6,00,000 into equity stock.

(ii) Cancellation of unpaid amount of Rs 2,00,000 in respect of 1,00,000 equity shares of Rs 10 each, Rs 8 called and paid up.

(iii) Sub-division of 20,000 fully paid equity shares of Rs 100 each into 2,00,000 equity shares of Rs 10 each fully paid.

(iv) Consolidation of40,000 14% preference shares of Rs 25 each, fully paid up into 10,000 14% preference shares of Rs 100 each.

(v) Conversion of equity stock of Rs 2,50,000 into 25,000 equity shares of Rs 10 each.