Company Authorized Capital Increase

Each business needs more funds over time to run business. These funds can be required on a long- and short-term basis. A short-term need can be satisfied by taking loans and advances. But in the long run, the company will require more funds. For a Private Limited Company, this can be done by increasing the company’s authorised capital. Since the private limited company is governed and regulated under the Company Act to make changes in the structure, it is necessary to follow the Act and the rules stated.

ZuluFilings makes it easy to increase your company’s authorized capital. Our experts guide you through every step, ensuring a hassle-free experience.

What is Authorized Capital?

According to Section 2 (8) of the Companies Act 2013, “Authorized Capital” is the capital authorized by the company’s memorandum to be the maximum amount of the share capital of the company.

The company can expand its business to the level of the authorized capital. If the company has to expand the business, infusing more funds than at first, the company has to increase the authorized capital.

Authorized and Paid-Up Capital of a Company

Authorized share capital represents the total potential value of shares a company can issue. In contrast, paid-up capital is the actual value of shares that have been fully issued, subscribed to, and paid for by shareholders. The company cannot exceed its authorized share capital with its paid-up capital. Therefore, if a company’s paid-up capital reaches the limit of its authorized capital and it aims to welcome new shareholders, it has two options:

Either increase its authorized share capital and then issue new shares or

Facilitate the transfer of shares from current shareholders to new ones.

Authorized Share Capital Increase

Authorized share capital increase refers to raising the maximum amount of share capital that a company is legally permitted to issue to its shareholders. This is typically achieved through an amendment to the company’s Memorandum of Association (MOA)

By increasing the authorized share capital, a company expands its capacity to issue additional shares, enabling it to raise funds from existing or new shareholders. This process is often undertaken to support business expansion, finance new projects, or meet evolving financial needs.

Amending the MOA for Increasing Authorized Capital

During the formation of a Private Limited Company, the initial authorized and paid-up capital levels are established in the company’s Memorandum of Association (MOA). This sets the maximum amount of share capital that the company is allowed to issue to its shareholders. Should the company aim to exceed this predetermined cap by issuing additional shares, it necessitates an amendment to the MOA to raise the authorized capital threshold, thereby accommodating the issuance of new shares beyond the original limit.

Reasons for Increasing Authorized Share Capital

As mentioned above, a company might consider increasing its authorized capital for several reasons, including:

• Addressing significant financial needs
• Funding new business initiatives
• Facilitating mergers or acquisitions and infusing capital as part of a restructuring plan
• Issuing additional shares
• Converting debt into equity
• Meeting regulatory requirements, if applicable

Documents Required for Authorized Share Capital Increase

Specific documentation must be submitted within 30 days following shareholder approval to formalize an increase in authorized share capital. For private companies, this involves submitting the resolution through e-form SH-7, while the submission of e-form MGT-14 is not required. Ensure the following documents are prepared for filing:

• The latest amended version of the Memorandum of Association (MoA)
• The most recent or revised copy of the Articles of Association (AoA), particularly in cases where the AoA has been altered
• A copy of the ordinary resolution approved by the company’s shareholders

Procedure to Increase Authorized Share Capital

The process involves several essential steps to ensure compliance with regulatory requirements and secure shareholder approval for the proposed increase.

Review the Articles of Association (AoA)

The AoA outlines the company’s governance, including capital management. Initially, verify if the AoA permits changes to the authorized capital.

• Check for Provision: The process is straightforward if the AoA includes a provision for altering authorized capital. Otherwise, the AoA needs amending.
• Amend the AoA if Necessary: In the absence of a provision, amend the AoA as per Section 14 of the Companies Act, 2013, to include the capability for authorized capital alteration.
• Proceed with Capital Modification: Once the AoA allows it, the company can officially change its authorized capital.

Convening a Board Meeting for Authorized Capital Increase

• Notice for Board Meeting: Dispatch a notice detailing the meeting’s agenda to all directors at least 7 days in advance to their registered addresses.
• Board Resolution: During the board meeting, a resolution will be passed to convene an extraordinary general meeting (EGM). This involves issuing a notice in line with Section 101 of the Companies Act to present and seek approval for the revised authorized capital clause in the Memorandum of Association via an Ordinary Resolution, as per the guidelines of Section 60 of the Act.
• Shareholder Notification: Inform shareholders about the EGM specifics, including the agenda, date, time, and venue. The notice should also outline the voting method for resolution approval.
• Distribution of EGM Notice: Ensure the EGM notice reaches the following parties:
  Directors
  Shareholders
  Auditors
• EGM Notice Period: The notice for the EGM should be issued at least 21 days before the scheduled date. However, a shorter notice period is permissible if at least 95% of voting-eligible members consent, which can be obtained either in writing or via electronic means.

Conducting the Extraordinary General Meeting for Capital Increase

• During the EGM: The agenda item for increasing the authorized share capital is formally presented to the attendees.
  Voting Process: The voting occurs as outlined in the EGM notice, allowing shareholders to vote on the proposed increase.
• Resolution Approval: The resolution to increase the authorized capital is officially passed upon securing the necessary approval through voting.
• Documentation: An explanatory statement detailing the resolution and its implications is prepared and appended to the official records, marking the authorization of the capital increase.

Regulatory Filings for Authorized Capital Increase with ROC

Post-resolution, within 30 days, the company must complete the following filings along with the applicable fees:

Filing of Form MGT – 14:

This form must be submitted to the Registrar of Companies (RoC) within 30 days following the adoption of the relevant resolution.

Details Required:

• Company information including Corporate Identification Number (CIN).
• The purpose of the filing.
• Dates of notice dispatch and resolution passage.
• Resolution specifics.
• Digital signatures and director identification numbers (DINs) are required.

Documents Required:

• Notice of EGM with the Explanatory Statement under Section 102.
• Certified copy of the EGM resolution.
• Updated Memorandum of Association (MoA) reflecting the Capital Clause alteration.
• Updated Articles of Association (AoA) if it includes provisions for authorized capital increase.

Filing Form SH-7 for Authorized Capital Increase

Form SH-7 must be submitted to the Registrar of Companies (RoC) within 30 days following the resolution to increase the authorized share capital. This form notifies the Registrar about the specifics of the authorized capital augmentation.

Details Required:

Company information, including CIN.

• Resolution type.
• Meeting date.
• Service Request Number (SRN) of Form MGT – 14, if already filed.
• Original and new authorized share capital amounts.
• Breakdown of the additional share capital.
• Stamp Duty Fees details.
• Digital Signatures and DINs as necessary.

Documents Required

• A certified true copy of the capital alteration resolution.
• Updated MoA with the Capital Clause changes.
• Updated AoA if it includes a new provision for capital increase.
• Any other optional documents, if required.

Payment of E-Stamp Duty

Complete the e-stamp duty payment for the augmented Authorized Share Capital amount via the Ministry of Corporate Affairs (MCA) Portal, as law requires.

Procedure Following Authorized Share Capital Increase

After the authorized share capital increase, certain steps need to be followed to ensure regulatory compliance and effective implementation of the decision.

Update MOA and AOA

Ensure that all copies of these documents reflect any changes made to the Memorandum of Association (MOA) and Articles of Association (AOA). This is to maintain consistency and legal compliance across all official company records.

Share Allotment

With the authorized share capital now increased, the company can increase its paid-up share capital. This is typically achieved by issuing new equity shares to existing or new shareholders, thereby infusing additional funds into the company.

Penalties for Non-Compliance with Authorized Capital Increase Procedures

While the Companies Act 2013, specifically in Sections 61 and 65, outlines the provisions for increasing authorized capital, it doesn’t directly specify penalties within these sections. However, Section 450 of the Act addresses penalties for general non-compliance.

• When a company or its officers fail to adhere to the prescribed rules, a penalty of Rs. 10,000 is imposed.
• An additional daily penalty of Rs. 1,000 is levied for ongoing violations until the issue is resolved.
• Specifically concerning the late submission of Form SH-7, which is required within 30 days of the resolution to increase authorized capital, the penalty accrues at Rs. 1,000 per day of delay.
  This penalty continues until the default is corrected, subject to a maximum cap of Rs. 25 lakh, whichever amount is lower.