How to Increase Paid-Up Share Capital of Private Limited Company?
Private Limited Company

How to Increase Paid-Up Share Capital of Private Limited Company?

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The generally understood definition of paid-up share capital is the total amount paid by a company to its shareholders in consideration of fully paid shares issued by it. This can be said as a part of designed authorised share capital of a company as financed by the shareholders, and it is done through different avenues such as IPO, private placement or rights issue. Paid up capital represents the actual amount of money committed by the shareholders and is an important source of funds long term with regard to the entity. The latter, unlike accrued share capital, concerns what a company has actually used and, as such, is recorded on the balance sheet under the heading ‘equity’ among the shareholders.

For companies that can, perhaps in agreement with the upper limit defined by the authorised amount set forth by the company, they are not obliged to have all their authorised shares issued at most. Where in such a situation, paid up capital would not feature as high as the authorised capital. The paid up share capital also develops financial strength and credibility, strengthening confidence in creditors and investors the more it is.

Modes of Increasing the Paid-Up Share Capital of a Private Limited Company

The ways through which a private limited company can enhance its paid-up share capital under the Companies Act, 2013 are the approval of articles of association of the company

The paid up equity share capital can be enhanced by means of:

1. Issue of New Shares of Equity

Existing or prospective shareholders’ issuance of new equity shares to obtain the company’s fundraising that would be undertaken through:

(ii) Rights Issue: Share subscription among existing shareholders on proportionate terms with their existing holding at a determined price.

(ii) Private Placement: Offer to 200 persons for an accounting year through a PAS-4 offer letter for shares issued to targeted persons or institutions.

(iii) Preferential Allotment: Issued to specific investors at a fixed price by the existing laws.

2. Conversion of Loans or Debentures into Equity Shares

It is often within the loan terms or debenture terms under which a company converts its loans into shares. This results in lenders allowing conversion of outstanding loans into shares as a way of improving the company’s equity base.

3. Issuance of Bonus Shares

Bonus shares fully paid up can be transferred to existing shareholders from free reserves, securities premium accounts, or capital redemption reserves. Though it does not result in any cash transactions, it increases paid up capital.

4. Employee Stock Option Plans (ESOPs)

Shares can be transferred from the ESOP program on the basis of remuneration or loyalty incentives to employees or directors. It raises the paid up capital on exercise.

5. Sweat Equity Shares

The sweat equity shares equivalent under employees, the director will receive sweat equity shares either at a nominal price or in respect of non monetary contributions through the form of intellectual property or proficiency in some knowledge.

6. Conversions from Preference Shares to Equity Shares

The issued convertible preference shares, such preference shares can be converted into equity shares, so it increases paid up capital for a corporation.

7. Share Forfeiture and Reissue

These forfeited shares can be issued again by the company, increasing the paid up capital. In this case, allotment or call money that remains unpaid causes shares to be forfeited.

Procedure To Increase Paid Up Share Capital

Increase the paid-up capital of a private limited company as strategic for the improvement of financial stability, for continued growth, or to fulfil commercial needs. It is essential to ensure compliance with the Companies Act, 2013 in force at the AOA of the company.

The very process of upgradation of paid up capital reflects an experience of drastic planning in an orderly manner as it considers all the technical and practical perspectives. A company can further its financial base, encourage expansion, and generate shareholder value by issuing new equity shares or converting existing debt into equity or offering equity stock options to the employees. However, this will be subject to the law and the relevant regulatory requirements pertaining to adequate resolutions and filings in time, along with issuing share certificates.

This indeed builds a company holistically, even when it allows the company to create its paid-up share capital. Below is an organised and detailed process of the increase in the paid up share capital of a private limited company:

1. Check Articles of Association (AOA)

First, confirm this: Is the increase in the paid up share capital allowed within the Articles of Association of the company? If allowed, proceed to the next step. If not allowed, pass a special resolution in the shareholders’ meeting to amend the AOA to allow the increase in paid up capital. Further course of action would require a board meeting to sanction the amendment of AOA and obtain a special resolution passed at the EGM and then file Form MGT-14 with the Registrar of Companies (ROC) within 30 days from the date when the resolution is passed.

2. Meeting of the Board

The Company’s Board is to meet in order to debate and approve the decision to further raise the paid up share capital. The agenda of the board meeting:

(i) To sanction the techniques to raise capital.

(ii) Techniques involve Rights issues, Private placements or Employee Stock Ownership Plans.

(iii) Fix a date, day, and hall of the EGM if called

(iv) Sanction draft notice inviting EGM if issued.

(v) Appoint a chairman or a secretary to communicate the EGM notice to all the shareholders.

3. Obtain Shareholder Consent Where Needed

The capital formation process and rules specified by its memorandum and articles might demand a shareholding agreement of shareholders to validate this particular corporate action. To take necessary measures in doing this – hold an EGM 
where a special resolution is passed to increase the paid up share capital. Share issues are often subjected to shareholder approval, especially in the case of Private Placement or Rights Issues. In most cases, it is also necessary for Bonus share issuance or loan conversion into equity.

4. Issue and Allot Shares

The company will issue and allot shares according to the mode of capital increase chosen.

Modes of Allotment:

  • Rights Issue: Shares are offered to existing shareholders according to their existing holding.
  • Private Placement: Issues shares with certain persons or organizations.
  • Bonus Shares: Made from capitalization of reserves.
  • Employee Incentives: Make use of ESOPs or Sweat Equity Shares for employees or directors.
  • Convert outstanding loans and debentures into equity shares.

After deciding the mode of allotment, issue and dispatch offer letters. Obtain application monies in the bank account of the company and call a Board meeting for share allotment approval. Pass a Board Resolution for the share allotment.

5. Filing of Statutory Forms with the Registrar of Companies (ROC)

The statutory forms to be filed with the ROC for the increase in paid up share capital are mandatory. File Form PAS-3 Return of Allotment within 15 days of allotment of shares. It would comprise information about shareholders, number of shares allotted and the share price. If a special resolution has been passed on this issue, use Form MGT-14. File Form SH-7 for any increase in authorised share capital by the company before the increase in paid up capital. Attachments for PAS-3: Board resolution regarding allotment, a list of allottees, and Shareholder resolution (if applicable). Prepare a valuation report if required and draft an offer letter for private placement.

6. Issue Share Certificates

After allotment, the corporation is liable to issue share certificates to its shareholders.

There should be issuing of share certificates in Form SH-1, within 2 months of allotment. Stamp duty on share certificates has to be levied according to the rules prevalent in the respective states. The certificates shall be signed both by the directors or one director and the company secretary if one is appointed. The register of members and shareholder’s ledger is updated.

7. Updating the Statutory Records

The company should update the register of members and record the increase in paid up capital. Update the Register of Members (Form MGT-1). Update Register of Shares (Form SH-2). The company’s balance sheet under the Equity section should include share issuance records.

8. Further Compliance with the Additional Regulatory Provisions

Further compliance may be required depending upon the method adopted for the issue of shares:

(i) Valuation Report: Get a valuation report from a certified valuer if shares are issued at a premium or for other than cash consideration

(ii) SEBI Regulations: In case the company is to become a public company, later on, it will be subjected to SEBI guidelines.

(iii) Filing with RBI (in case of Foreign Investments): The shares issued to Non-resident Indians have to file FC-GPR with the RBI within 30 days of allotment.

Conclusion

Increasing the paid up share capital will strengthen not only the financial base of the company but also support the realisation of growth-related developments. In the long term, this can help in establishing the credibility of the company, enhancing its borrowing capabilities, creating opportunities for further expansion and diversification and acquiring quite advanced technologies in specific sectors. For this reason, the whole task of increasing the paid-up capital would require full compliance with the statutory measures, the major one being as described under the Companies Act of 2013. It is really good in pulling potential investors toward it and captures the market effectively. Using these routes, that is new equity shares, rights shares, or conversion of existing securities, a pretty strategic management of the capital process can be carried out while retaining ownership control. The intent is to ensure that both the financial requirements, shareholder interests, and regulatory requirements are accurately evaluated under the capital accretion process. Eventually, a timely increase in paid up capital would indeed provide amazing support in the endurance of the company’s finances while increasing market positions and encouraging sustainable growth in business.

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I am a qualified Company Secretary with a Bachelors in Law as well as Commerce. With my 5 years of experience in Legal & Secretarial. Have a knack for reading, writing and telling stories. I am creative and I love cooking. Travel is my go-to for peace and happiness.
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