Can a company change the number of shares ? – A Complete Guide

A listed company holds the right to modify the number of shares held by its promoters and top ten shareholders if needed. This authority allows the board to increase or decrease share counts as part of their strategic decisions. When such adjustments occur, it is mandatory to file a return in a prescribed format to reflect the changes accurately and ensure that regulatory bodies are kept informed. This requirement is crucial for maintaining transparency and upholding investor confidence in the company’s governance and management practices.

Under Rule 13 of the Companies (Management & Administration) Rules, 2014, any variation in the shareholding pattern of the promoters or top ten shareholders must be reported. This rule applies when there is a change—whether an increase or decrease—in the number of shares held by these key stakeholders. The rule mandates that every listed company must submit Form MGT-10 to the Registrar within fifteen days of any such change. The term “change” encompasses any variation in the existing number of shares, meaning that if a promoter or one of the top ten shareholders alters their holding by two percent or more relative to the company’s total share capital, the company must act promptly. Failure to comply with this filing requirement renders the reported changes invalid and may even be deemed an inappropriate practice, potentially leading to further regulatory scrutiny.

In practice, the process of adjusting shareholding figures is closely monitored under Section 93 of the Companies Act, 2013. This section states that any alteration in the aggregate ownership of promoters or the top ten shareholders that results in a two percent or more shift must be communicated to the Registrar through Form MGT-10. The emphasis on a two percent threshold is designed to capture even subtle yet significant changes in shareholding. For instance, if a company’s promoter increases their holding from 20% to 23%, the increase, although seemingly modest, signifies a rising interest in the company and triggers the need for regulatory notification. Similarly, a decrease from 85% to 75% could raise concerns regarding the company’s future direction, and must be reported to ensure all stakeholders are informed of the evolving dynamics.

The filing process is essential not only for compliance with legal requirements but also for providing investors with a clearer picture of the company’s health. When a company files Form MGT-10, it supplies detailed information about the shareholding changes. This includes both the percentage of shares held before and after the change. Although the electronic version of the form may sometimes lack certain percentage columns present in the paper format, companies are still obligated to furnish accurate and complete data according to the guidelines laid out in Rule 13. This information becomes a vital resource for shareholders, analysts, and potential investors who rely on the data to assess the company’s performance and management’s strategic decisions.

The underlying purpose of these regulatory requirements is to ensure that there is no ambiguity or misinterpretation regarding the changes in shareholding. By enforcing a structured and timely disclosure process, the authorities aim to uphold the integrity of the financial markets. Shareholders and investors need to have a reliable source of information to determine whether changes in promoter or top shareholder positions signal positive growth or potential red flags. For example, an increase in promoter holdings might indicate that the management is confident in the company’s future prospects. On the other hand, a consistent decline in promoter ownership could be interpreted as a lack of confidence, potentially warning investors to be cautious.

Moreover, the regulatory framework offers clarity regarding what constitutes a “change.” It is not solely about an outright increase in shareholding; it equally addresses any decrease in holdings. This balanced approach ensures that any significant modification in the shareholding pattern is scrutinized. Whether the change is upward or downward, the filing of Form MGT-10 is mandatory, ensuring that every key adjustment is recorded and verified by the Registrar. This transparency serves to protect the interests of all market participants and maintains the overall credibility of the capital markets.

A notable aspect of these requirements is that they apply even when the change occurs as part of a single transaction. Whether the adjustment in shareholding is isolated or occurs cumulatively over a series of transactions, if it results in a two percent or more change in the shareholding position of promoters or the top ten shareholders, the company must file the return within the prescribed 15-day period. This stringent timeline is designed to ensure that any material changes are promptly communicated to the relevant authorities, thereby preventing delays that could obscure the true financial position of the company.

Section 93 of Companies Act: An analysis

Additionally, the precise definitions provided under Rule 13 and Section 93 play a critical role in ensuring that there is no ambiguity in what needs to be reported. The rules clearly specify that the changes must be in relation to the company’s total share capital, and this precision helps maintain consistency across filings from different companies. The detailed instructions on how to fill out Form MGT-10, including the need to report both the pre-change and post-change shareholding percentages, underscore the importance of accuracy and accountability in the disclosure process.

Understanding the purpose behind these regulations is crucial for both companies and investors. Consider a scenario where ABC Limited experiences a change in promoter shareholding. Suppose the promoter’s stake increases from 20% in one quarter to 23% in the next. This upward trend can be a positive indicator of the management’s growing confidence in the company’s future prospects. Investors might interpret this as a sign that the promoters are willing to invest more of their capital in the business, which could enhance the company’s stability and long-term value. Conversely, if a company with a historically high promoter stake sees a downward trend—from 85% to 75%—it could raise concerns about the management’s confidence in sustaining current performance levels.

These changes are not merely numerical adjustments; they carry significant implications for market sentiment. A rise in promoter holdings may encourage investors to take a closer look at the company’s prospects, while a decline might prompt a reassessment of the company’s strategic direction. Therefore, the requirement to file Form MGT-10 is not only a compliance measure but also a tool for market participants to gauge the health and direction of a company. By closely monitoring these filings, investors can make more informed decisions based on the evolving shareholding patterns.

It is also important to note that, after the Companies Act, 2017 Amendment, certain requirements related to Section 93 of the Companies Act, 2013 were omitted. However, the obligation to file returns detailing changes in the shareholding pattern of promoters and top ten shareholders remains a key aspect of maintaining market transparency. The historical framework provided by these regulations continues to influence how companies approach the disclosure of shareholding changes, ensuring that even subtle modifications are duly reported and analyzed.

Conclusion

In summary, a listed company possesses the ability to change the number of shares held by its promoters and top ten shareholders, but such changes are subject to strict regulatory oversight. The filing of Form MGT-10 within 15 days of any change—defined as a variation of 2% or more in shareholding relative to the company’s total share capital—is a critical step in maintaining transparency and safeguarding investor interests. This process, guided by Rule 13 of the Companies (Management & Administration) Rules, 2014 and Section 93 of the Companies Act, 2013, ensures that any significant alterations in shareholding are promptly and accurately disclosed to the Registrar. By doing so, the regulatory framework not only enforces compliance but also enhances market confidence by providing clear insights into the evolving dynamics of promoter and top shareholder interests. Ultimately, these measures are designed to foster an environment of trust and accountability, which are essential for the smooth functioning of the capital markets and the overall health of the financial ecosystem.

FAQs regarding these regulations frequently address common concerns such as whether the MGT-10 form needs to be filed for a single transaction or cumulative transactions, what Section 93 of the Companies Act, 2013 entails, who is responsible for filing the return, the required time period for filing, and the prescribed manner in which the return must be submitted. In every instance, the answer remains consistent: any change that meets the threshold necessitates a prompt filing to ensure that the Registrar is fully informed of the company’s current shareholding pattern. This proactive approach to compliance underscores the importance of regulatory diligence and ensures that any significant shifts in shareholding are both monitored and validated, contributing to the overall stability and transparency of the market.

Bibliography

• Section 93, The Companies Act, 2013
• Rule 13 of the Companies (Management & Administration) Rules, 2014
• A Ramaiya, Guide to the Companies Act (19th ed. 2020)
• T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.