Step-by-Step Procedure to Increase Authorized Share Capital

Every business dreams of growth and expansion, and companies may often need additional funding. This is where authorized share capital comes into play.  It is the maximum capital a company is legally allowed to issue to shareholders. The companies initially set a limit on their share capital, but as they grow, they may need to increase their authorized share capital to raise more funds or attract new investors.

Under the Companies Act, 2013, increasing the authorized share capital requires shareholder approval and legal compliance. This process ensures transparency and allows businesses to scale efficiently while following regulations and guidelines. Let us explore the concept of increasing authorized share capital and its process.

What is Authorized Share Capital?

Authorized share capital is the maximum amount of capital that a company can raise by issuing shares. It is decided at the time of incorporation and mentioned in the Memorandum of Association (MOA). The companies may not always issue the entire authorized capital at once. The following details include how it differs from other types of share capital:

• Issued Share Capital: The portion of authorized capital that the company has issued to shareholders.
• Subscribed Share Capital: The part of the issued capital that the investors have agreed to buy.
• Paid-up Share Capital: The actual amount the shareholders have paid to the company.

What are the Primary Elements of Authorized Share Capital?

Let us discuss the primary elements of Authorized share capital:

• Authorized Shares: When a company is set up, it decides the maximum number of shares it can legally issue to investors and is known as authorized shares. The details of these shares are mentioned in the important company documents, such as the Memorandum of Association (MOA) or the Articles of Association (AoA). But just because a company is allowed to issue a certain number of shares doesn’t mean it has to issue all of them at once.

Example: If a company’s authorized share capital is ?10 lakhs and it has issued shares worth ?6 lakhs, then it can still issue shares worth ?4 lakhs without increasing the capital.

• Total Value: The total value of these shares is known as nominal capital. This represents the highest amount of money a company can raise by issuing shares. You can calculate it using a simple formula, which is by multiplying the number of authorized shares by the par value per share.
• Par Value per Share: It is the face value assigned to each share when the company is formed. This sets the minimum prices at which the shares can be issued. It is important to note that the par value is not the same as the market value. The market value of a share fluctuates based on demand, company performance, and other factors, but the par value remains fixed.

Reasons for Increasing Authorized Share Capital

A company may choose to increase its authorized capital for several reasons:

1. Need for additional working capital
   To meet day-to-day operational expenses, a company may require more funds. Increasing authorized capital allows issuing more shares to raise that capital.
2. Expansion or diversification plans
   Businesses expanding to new markets or launching new products need more funds. Increased capital enables funding of such growth initiatives.
3. Issuance of new shares to investors
   When a company brings in new investors, it must have sufficient authorized capital to issue fresh equity. This ensures smooth onboarding of investment.
4. Rights or bonus issue to existing shareholders
   For issuing rights or bonus shares, a company must have enough authorized share capital. It ensures compliance while rewarding existing shareholders.
5. Regulatory requirements or investor commitments
   Sometimes investors or regulatory bodies require a minimum capital threshold. Increasing authorized capital helps meet such statutory or contractual obligations.

Legal Provisions under the Companies Act, 2013

The process of increasing authorized share capital is governed by:

• Section 61 of the Companies Act, 2013
• Section 13 (for alteration of MOA)
• Articles of Association (AOA)
• Companies (Share Capital and Debentures) Rules, 2014

Step-by-Step Process to Increase Authorized Share Capital

The process involves legal steps and approvals, which are as follows:

Step 1: Check the Articles of Association (AoA)

The company must check its articles of association (AoA) before increasing the authorized share capital. The AoA is a legal document that outlines the company’s internal rules. It should include a clause that allows the company to increase its authorized capital. If the AoA already permits an increase in share capital, the company can proceed, and if not, the AoA must first be amended through a special resolution before moving forward.

Step 2: Hold a Board Meeting

The company’s Board of Directors must meet to discuss and approve the proposal to increase the authorized share capital. During the meeting, the board will pass a board resolution approving the increase. Then decide on the amount by which the capital should be increased. After all of these, fix the date, time, and venue for an extraordinary general meeting (EGM), where shareholders will give their approval where shareholders will give their approval.

Step 3: Issue Notice for the EGM

Once the board has approved the decision, the company must inform its shareholders about the upcoming EGM. A formal notice must be sent to all shareholders at least 21 days before the meeting. The notice should mention the agenda of the meeting and the draft resolution to be passed.

Step 4: Conduct the EGM and Pass a Special Resolution

During the EGM, the board presents the proposal to shareholders, and they discuss and vote on the resolution. A special resolution must be passed to approve the increase in authorized capital. This is an important step because the companies cannot increase their authorized share capital without shareholder approval.

Step 5: File Necessary Forms with the Registrar of Companies (ROC)

Once the resolution is passed, the company must officially inform the Registrar of Companies (ROC) about the change. This is done by filing Form SH-7 within 30 days of passing the resolution. The following documents must be submitted along with the Form SH-7:

• A copy of the special resolution passed at the EGM by the company.
• The updated MOA reflects the new authorized share capital.
• A certified copy of the board resolution approving the increase.

Step 6: Approval from the ROC

The ROC will review the submitted documents and verify that the company has followed the correct legal procedures. If everything is clear and in order, then the ROC approves the increase in authorized share capital. The company will then receive the official confirmation.

Step 7: Update the Company Record

Once the ROC approves the change, the company must update its statutory registers to reflect the new authorized share capital. Then make changes in financial records, share certificates, and tax documents. Inform everything to the stakeholders and investors about the updated capital structure.

Documents Required for Increasing Authorized Share Capital

The following details include the documents needed for increasing authorized share capital:

• Board Resolution
• Notice of Extraordinary General Meeting (EGM)
• Special Resolution
• Altered Memorandum of Association (MoA)
• Altered Articles of Association (AoA)
• Form SH-7
• Payment Receipt of ROC Fees
• List of Shareholders
• Minutes of the Board Meeting and EGM
• Declaration by the Director

How Long Does the Process Take?

The entire process from the board meeting to final approval usually takes around 2 to 4 weeks. It begins with a board meeting, which is usually 1 to 3 days, where the directors pass a resolution and schedule an EGM. A formal notice must be sent to the shareholders at least 21 days before the EGM. During the EGM, the shareholders discuss and vote on the proposal, and if it is approved, then a special resolution is passed.

The company must file Form SH-7 with the ROC within 30 days of the EGM. The ROC approval process takes around 7 to 15 days, which depends mostly on the workload and accuracy of the application. Once everything is in place and approved, the company updates its records to reflect the new share capital.

Costs Involved in Increasing Authorized Share Capital

The cost of increasing authorized share capital mostly depends on the government fees, which are based on the amount of capital that is being increased. The ROC charges fees according to specific slabs. If the increase is small, such as Rs. 1 lakh to 5 lakhs, the fees will be lower, and for a large increase, such as above Rs. 10 lakhs, the fees will be higher.

Apart from the ROC fees, there may be an additional professional fee. If the company hires a chartered accountant, company secretary, or legal advisor to handle the paperwork processes and compliance. Additional expenses may be included, such as notary charges, document stamping, and administrative costs for meetings and filings.

Government Fees for SH-7 (Sample Slab)

Why Do Companies Increase Their Authorized Share Capital?

A company may decide to increase its authorized share capital for several reasons, and these are mentioned as follows:

• Business Growth and Expansion

As the company grows, it may need more money to invest in new projects, hire more employees, open new branches, or improve its products or services. If the existing shares are not enough to raise the required funds, the company will increase its authorized share capital so it can issue more shares in the future.

• Meeting Investor Expectations

Companies often need additional funds for various purposes, such as launching new products, upgrading technology, or entering new markets. One way to raise money is by selling shares to investors. If the current authorized share capital is too low, the company may have to increase it so that it can issue more shares and bring in more investment.

• Raising Additional Funds

When investors put money into a company, they often have specific requirements. Some investors may ask for more shares to be issued in exchange for their investment. If the company’s authorized share capital is too low, it may need to increase the limit to accommodate these investors and secure the funding.

• Supporting Mergers and Acquisitions

Sometimes the companies merge or acquire other businesses to grow faster. In this case, they may need to issue new shares as part of the deal. If the existing authorized share capital is not enough to cover these new shares, the company should increase it.

Penalties for Non-Compliance with Authorized Share Capital

If a company fails to follow the legal procedures for increasing its authorized share capital, it can face penalties and legal consequences. Here are the penalties for non-compliance:

• Late Filing Penalty: If the company does not file Form SH-7 with the ROC within 30 days of passing the resolution, it will have to pay a late fee. The longer the delay is, the higher the penalty amount will be.
• Fine on the Company: As per the Companies Act, 2013, the company may have to pay a fine of Rs. 10,000, which can increase to Rs. 1000 per day if the delay continues.
• Fine on Directors: The directors and responsible officers of the company may also be fined personally between Rs. 10,000 and Rs. 25,000 for non-compliance.

You need to follow a proper legal process when increasing authorized share capital, as it is important to avoid penalties and ensure smooth business operations. Compliance with ROC regulations helps maintain the company’s credibility and prevents legal troubles. Increasing authorized share capital allows businesses to raise more funds, attract investors, and expand operations, which is important for growth.

The process involves legal paperwork and approvals, a seeking help from a chartered accountant, legal expert, or company secretary can make the process smooth and hassle-free. It takes proper planning and professional guidance to ensure that the capital increase is done smoothly, which allows the business to focus on its future goals. Here you learned a detailed explanation of the process to increase authorized share capital. Contact Online Legal India to get guidance and support from professional experts in this regard.

FAQs

Q1: Is approval from ROC mandatory to increase authorized share capital?

Yes, the company must file Form SH-7 with the ROC, and the approval is mandatory.]

Q2: Can a private company pass a resolution by circulation to increase capital?

No, shareholder approval via EGM is required.

Q3: Is MGT-14 required for every company?

No, it’s required only when a special resolution is passed, such as alteration of AOA (mostly in public companies).

Q4: Can we issue shares before ROC approves SH-7?

No, shares can only be issued after the authorized capital is legally increased and updated by the ROC.

Q5: What is the difference between authorized and paid-up share capital?

Authorized share capital is the maximum amount a company can issue, while paid-up capital is the amount actually issued and paid for by shareholders.