Authorized share capital is the limit of the amount of capital that a company is allowed to raise by the issue of shares. This limit is outlined in the company’s Memorandum of Association (MoA) and Articles of Association (AoA). Companies, on most occasions, start their operations without utilizing the entire amount of authorized capital, and thus they maintain reserves for future expansions or to accommodate new shareholders. A company may find the need to increase its authorized capital when it wants to raise additional money through the issuance of new shares.
This blog outlines a step-by-step process for increasing authorized share capital in India, particularly for companies established in the state of Tamil Nadu, as per the provisions of the Companies Act, 2013.
Understanding Authorized Share Capital
It is important to know the distinction between the authorized and paid-up capital before proceeding with the process:
- Authorized Share Capital: The higher value of shares a company is permitted to issue by its MoA.
- Paid-up Capital: The real worth of the shares that were already issued and paid for by the shareholders.
Paid-up capital should not be more than the authorized capital. Therefore, when a company whose authorized capital is 20 lakhs has already issued 20 lakhs worth of shares, it must increase the authorized capital before issuing further shares.
What is the Purpose of Increasing Authorized Share Capital?
The following are some of the cases when it is needed to increase the authorized capital:
- To issue more shares to grow
- To bring in new investors or shareholders
- In order to meet the requirements of funding by venture capitalists or private equity firms
Step-by-Step Procedure to Increase Authorized Share Capital
1. Provisions in Articles of Association (AoA)
The initial procedure is to check the Articles of Association (AoA) of the company to determine whether it allows for an increase in authorized share capital. In case the AoA lacks such a provision, then it is necessary to amend it initially by passing a special resolution as prescribed in Section 14 of the Companies Act, 2013.
This allows the company to legally change its capital structure and proceed further.
2. Convene a Board Meeting
After the AoA has been confirmed or rectified, a Board Meeting should be convened. During this meeting:
- The increase in the authorized share capital will be proposed by the Board.
- Accept the notice of calling an Extraordinary General Meeting (EGM).
- Confirm the date, time, and place of holding the EGM.
- Pass the resolution to amend the capital clause in the MoA (and AoA, as may be necessary).
Notice of the EGM should be given to all the shareholders, directors, and auditors of the company as stated in Section 101 of the Companies Act, 2013. Section 102 Statement of purpose of meeting and reasons for the increase of authorized capital should also be contained in the notice.
3. Hold the Extraordinary General Meeting (EGM)
During the Extraordinary General Meeting:
- The resolution to increase authorized share capital will be voted on by members.
- A Section 61(1)(a) Ordinary Resolution of the Companies Act, 2013 has to be passed.
- In case it is necessary to change the AoA in any way, a Special Resolution under Section 14 has to be passed as well.
4. File Form SH-7 with the Registrar of Companies (RoC)
Once the resolution is passed, the company has to submit e-Form SH-7 to the RoC within 30 days of the EGM. The following documents should be provided together with this form:
- Board Resolution, Certified true copy of the Board Resolution
- Certified true copy of the Shareholders’ Resolution Document
- Modified MoA and AoA (where necessary)
- Notice of EGM and explanatory statement
The form should be accompanied by the payment of applicable government fees.
5. RoC Approval
The RoC will review the documents, and if all is in order, it will confirm the increase in authorized share capital. Confirmation and new records indicating the changed authorized capital will then be sent to the company.
Conclusion
An increase in authorized share capital is a strategic choice that helps a company diversify its activities, increase its funds, or admit new partners. This process, however, ought to follow the Companies Act, 2013, to the letter. The legal formalities required to increase capital formally include ensuring that there are resolutions, documentation, and filing with the RoC within the prescribed time.
To ensure a hassle-free execution with no error, many companies seek the help of legal and compliance specialists, in particular in cases involving statutory filings and corporate resolutions.
