Increase Authorized Share Capital

Every business requires additional funds over time to sustain its operations, addressing both short-term and long-term needs. Short-term financial requirements can be met through loans and advances. However, for the sustained operation of a Private Limited Company, obtaining additional funds becomes crucial. In the case of a Private Limited Company, this is achieved by increasing the authorized capital, a process governed by the Company Act, which dictates the necessary procedures and rules.

During the registration of a Private Limited Company, the authorized and paid-up capital is stipulated in the Memorandum of Association (MOA). The company has the flexibility to issue new shares within the limits set by the authorized capital outlined in the MOA. However, if the company intends to issue shares beyond the specified limit, amendments must be made to the MOA in accordance with the provisions of the Company Act. This ensures compliance with regulatory requirements and facilitates the seamless expansion of the company’s capital structure.

Understanding Authorized Capital:

Authorized capital, as defined by Section 2(8) of the Companies Act, 2013, refers to the capital amount sanctioned by the memorandum of the company, representing the maximum share capital the company can have.

Increasing Authorized Share Capital:

A company may find the need to augment its authorized share capital before issuing new equity shares and enhancing the paid-up capital. Authorized share capital signifies the total value of shares a company is permitted to issue, while the paid-up capital represents the total value of shares that have been issued.

If a company with an authorized capital of Rs. 10 lakhs and paid-up capital of Rs. 10 lakhs seeks to bring in new shareholders, it can do so by either increasing the authorized share capital and issuing new shares or transferring shares from existing shareholders to new shareholders. After issuing new shares, the authorized capital is typically increased.

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Steps to Increase Authorized Share Capital:

1. Verify Articles of Association (AOA): Before commencing the process, ensure the Articles of Association contain provisions for increasing authorized share capital. If not, amendments to the AOA are necessary.

   Note: Most AOAs typically have provisions for increasing authorized share capital.

2. Convene a Board Meeting: Convene a Board meeting, providing notice to directors, to secure approval for increasing the authorized share capital.

3. Extraordinary General Meeting (EGM): Fix a date for an Extraordinary General Meeting to obtain shareholders’ approval for increasing authorized share capital and making changes to the Memorandum of Association (MOA).

4. Present Notice to Stakeholders: Following Board approval, present the notice of the EGM to all shareholders, directors, and auditors, seeking their approval.

5. Conduct EGM: Hold the EGM on the specified date to secure shareholders’ approval through an ordinary resolution for increasing the authorized share capital.

6. File ROC Forms: After passing the ordinary resolution, file Form SH7 with the Registrar of Companies (ROC) within 30 days. Pay the prescribed government fee and attach documents such as the EGM notice, authorized true copy of the ordinary resolution, and the amended MOA reflecting the higher authorized capital.

   If the procedure outlined in the Companies Act and the Companies Rules is adhered to, the ROC will approve the filing, and the increased authorized share capital will be updated on the MCA portal.

Allotment of Shares:

Upon the increase in authorized share capital, the company can raise its paid-up share capital by issuing fresh equity shares.