Increase Authorized Share Capital in India

Authorized capital, also known as nominal capital or registered capital, is the maximum amount of share capital that a company is authorized to issue to its shareholders as per its Memorandum of Association (MoA).

It is the upper limit of capital a company can raise through the issuance of shares without amending its MoA. To issue shares beyond the authorized capital, the company must amend its MoA and file Form SH-7 with the Registrar of Companies (ROC).

Classification of Share Capital

Share capital is classified based on how much has been offered to investors and how much has been paid. The main types are:

• Authorized Capital: The maximum capital a company is permitted to issue.
• Issued Capital: The portion of authorized capital that the company has offered to the public for subscription.
• Subscribed Capital: The part of the issued capital that has been subscribed by the public.
• Paid-Up Capital: The portion of subscribed capital that has been paid by the shareholders. This is the amount of money the company has received from its shareholders in exchange for the shares issued.
• Called-up Share Capital: The amount that the company has asked shareholders to pay on their shares.
• Uncalled Share Capital: The part of subscribed capital that has not yet been called for payment.

Where is Authorized Capital Mentioned?

The authorized capital is defined in the capital clause of the company’s MoA, which acts as its constitution. This clause:

• Specifies the maximum number of shares the company can issue
• Defines the nominal value of each share
• Sets the upper limit of capital the company can raise without amending the MoA

Any change to authorized capital requires:

• Shareholder approval
• Amendment of the MoA
• Hold a board meeting to approve the change
• File Form SH-7 with the ROC, along with the required resolutions and fees
• Submit all necessary documents to the Registrar of Companies (ROC)

Keep in mind: This change can also affect your company’s registration fees and stamp duty during incorporation.

Note: There’s no fixed legal limit for private companies; although Nidhi Companies are required to have Rs. 10 lakhs paid-up capital within a year as per Nidhi Rules, 2014.

Capital Types Comparison Table

Understanding different types of capital helps in knowing how companies raise and manage funds. Here’s the quick comparison between types of capital:

Authorized share capital is the maximum amount of capital a company can raise by issuing shares. Sometimes, a company needs to increase this limit to meet its financial needs. This process is called alteration of share capital or increase in authorized share capital.

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

1. To Raise More Funds from Investors

When a company wants to get more money from investors, it can issue new shares. But the company cannot issue shares beyond its authorized capital limit. So, if the company plans to raise more funds by selling shares, it must first increase its authorized capital.

• Passing a board resolution to approve the capital increase.
• Getting approval from shareholders through a special resolution.
• Filing the required documents with the Registrar of Companies.

By increasing authorized capital, the company can issue more shares and get fresh investment without increasing debt.

2. For Business Expansion and New Projects

Expanding a business or starting new projects often requires a lot of money. Existing authorized capital may not be enough to issue shares for raising this capital. Increasing authorized capital gives the company the ability to:

• Raise funds for new offices, factories, or technology.
• Enter new markets or launch new products.
• Support long-term business growth plans.

This way, alteration of share capital helps the company match its capital structure with its expansion needs.

3. To Convert Debt into Equity

Sometimes, companies convert their debt into equity shares. This helps reduce interest costs and improve financial health. But to give equity shares to lenders, a company needs enough authorized capital.

Increasing authorized capital allows the company to:

• Issue shares to creditors by converting loans into equity.
• Strengthen its balance sheet by reducing liabilities.
• Improve its net worth and credit rating.

This process helps both the company and its creditors by making the company more stable financially.

4. To Improve Borrowing Capacity and Company Net Worth

Lenders look at a company’s net worth before giving loans. Net worth depends on the company’s equity capital. By increasing authorized capital and issuing shares, the company can:

• Increase its net worth.
• Get better terms on loans and credit.
• Boost confidence among investors and banks.

So, an increase in authorized share capital can improve the company’s borrowing capacity and financial standing.

To successfully increase your authorized capital, certain key documents must be prepared and specific forms filed with the Registrar of Companies (ROC). Here are the details:

Documents Required

• Certified true copy of the Board Resolution.
• Certified true copy of the Ordinary Resolution passed at the EGM.
• An altered MoA reflecting the new authorized capital.
• Altered AoA, if any amendment was required.
• Notice of the EGM along with the explanatory statement.

Filing e-Form SH-7

Within 30 days of passing the ordinary resolution in the EGM, the company must file e-Form SH-7 (Notice of alteration of Share Capital) with the Registrar of Companies (ROC). This form informs the ROC about the increase in authorized capital.

Filing e-Form MGT-14

If the company changes its AoA to add a rule about increasing authorized capital, it must pass a special resolution.

• After passing this special resolution, the company must file e-Form MGT-14 with the Registrar of Companies (ROC) within 30 days.
• If the company only passes an ordinary resolution to increase authorized capital, and the AoA already allows this, then filing MGT-14 is usually not needed.
• Filing MGT-14 is required mainly when the AoA is changed or a special resolution is passed.

The process of increasing a company's authorized capital in India involves several key steps as per the Companies Act, 2013:

Step 1: Checking the Articles of Association (AoA)

The first step involves a thorough examination of the company's AoA. It must contain a specific clause permitting the company to increase its authorized share capital.

What to Do if Your AoA Does Not Have the Provision?

If the AoA lacks such an enabling provision, the company must first alter its Articles of Association. This alteration involves:

• Prior Amendment: The AoA must be amended to include the power to increase authorized capital.
• Special Resolution: This specific alteration requires a special resolution passed by shareholders (at least 75% approval).
• Form MGT-14: Following the special resolution, e-Form MGT-14 must be filed with the ROC within 30 days.

Step 2: Conducting a Board Meeting

Once the AoA is in order, the company's Board of Directors convenes a formal board meeting. In this meeting, the board finalizes the amount of the proposed increase.

• Board Resolution: The board passes a resolution approving the proposal to increase the authorized capital.
• EGM Scheduling: The board also sets the date, time, and venue for an Extraordinary General Meeting (EGM) of shareholders, where the resolution for capital increase will be presented. This is the board resolution for an increase in authorized capital.
• Notice Approval: The board also approves the draft notice for the EGM and the explanatory statement. A sample board resolution for increasing authorized capital is often used as a template.

Step 3: Calling an Extraordinary General Meeting (EGM)

Following the board meeting, notices for the EGM must be dispatched to all registered shareholders, directors, and auditors. This step ensures all relevant parties are informed and can participate.

• Issuance of Notice: Formal notices detailing the meeting agenda are sent out.
• Notice Period Compliance: These notices must adhere strictly to the prescribed notice period (typically 21 clear days).
• Clear Agenda: The notice should explicitly state the purpose of the meeting, including the specific proposal to increase the authorized capital.

Step 4: Passing the Ordinary Resolution in the EGM

At the EGM, shareholders will discuss the plan to increase the authorized share capital. For this change, shareholders need to pass an ordinary resolution, which means more than half of the votes cast by those present and voting must agree.

• Shareholder Discussion: Shareholders will review the proposal and all related details.
• Ordinary Resolution Requirement: This means a simple majority (over 50%) of votes cast by shareholders present and voting must be in favor. This resolution for an increase in authorized share capital is central to the process.

Note: As per Section 61 of the Companies Act, 2013, increasing authorized capital usually requires a special resolution if the Articles of Association demand it. Otherwise, an ordinary resolution is sufficient, along with updating the Memorandum of Association.

Step 5: Filing Forms with the ROC

Following the successful passing of the resolution at the EGM, the company has a statutory obligation to file the necessary forms with the ROC. This crucial step officially registers the increase in authorized capital, making the alteration of share capital legally recognized.

• Mandatory Filing: Required forms must be submitted to the ROC.
• Official Registration: This action legalizes the change in the company's authorized capital.
• Timeline: These forms typically need to be filed within 30 days of passing the resolution.

The cost involved in increasing authorized capital primarily includes ROC fees and stamp duty. Here are more details:

ROC Fees for Increasing Authorized Capital

The Registrar of Companies (ROC) levies fees based on the amount of increase in the authorized capital. These fees are prescribed under the Companies (Registration Offices and Fees) Rules, 2014.

How to Calculate ROC Fees for Increasing Authorized Capital?

The ROC fee structure is slab-based. You pay a certain fee for each slab of increased capital.

Example:

Let’s say a company wants to increase its authorized capital from ₹25,00,000 to ₹1,20,00,000. That means an increase of ₹95,00,000.

Now, we apply the ROC fee slab:

1. First ₹5,00,000: ₹200 per ₹10,000
   → ₹5,00,000 ÷ 10,000 = 50 units × ₹200 = ₹10,000
2. Next ₹45,00,000: ₹100 per ₹10,000
   → ₹45,00,000 ÷ 10,000 = 450 units × ₹100 = ₹45,000
3. Next ₹45,00,000: ₹50 per ₹10,000
   → ₹45,00,000 ÷ 10,000 = 450 units × ₹50 = ₹22,500
4. Remaining ₹5,00,000: ₹25 per ₹10,000
   → ₹5,00,000 ÷ 10,000 = 50 units × ₹25 = ₹1,250

Total ROC Fee = ₹10,000 + ₹45,000 + ₹22,500 + ₹1,250 = ₹78,750

ROC Fee Structure for Increase in Authorized Capital

Please note that these fees are subject to change as per government notifications.

Stamp Duty on Share Capital Increase

In addition to ROC fees, stamp duty is payable on the increased authorized capital. The stamp duty rates vary from state to state in India.

State-wise Stamp Duty on Increase in Authorized Capital

Note: These rates are indicative and subject to change based on state government notifications and specific regulations. It's crucial to verify the current rates applicable in your specific state.

The process to increase authorized capital usually takes about 7 to 15 working days if all documents are ready and there are no delays from the company’s side. This includes:

• Calling and conducting the board meeting and Extra-Ordinary General Meeting (EGM).
• Passing the required resolutions (ordinary or special, depending on the case).
• Preparing and filing the necessary forms with the Registrar of Companies (ROC).
• Paying the required stamp duty.

However, if the company needs to amend its Articles of Association (AoA) before increasing the authorized capital, the process may take longer. This is because:

• Amending the AoA requires a special resolution.
• Additional approvals and filings must be completed.
• Sometimes, the Registrar may take more time to approve the changes.

Other factors that can affect the timeline include:

• The company’s readiness in submitting the correct documents.
• Speed of obtaining shareholder approvals.
• Efficiency of the ROC in processing filings.

Proper planning and preparation can help complete the entire process smoothly within two weeks.

Failing to comply with the procedure for an increase in authorized share capital under the Companies Act, 2013, can lead to significant penalties for both the company and its officers. It is important to follow all legal steps carefully to avoid fines and legal issues.

Key Points on Penalties

• Under Sections 61 and 64 of the Companies Act, 2013, any increase in authorized capital must be filed with the Registrar of Companies (ROC) within the prescribed time.
• If the company fails to file e-Form SH-7 (Notice of alteration of share capital) within 30 days of passing the resolution, it will be liable for penalties.
• The company and every officer responsible for the delay can be fined up to Rs. 1,00,000.
• If the default continues, a further fine of Rs. 5,000 per day may be imposed until the filing is completed.

Similar penalties apply for delays in filing e-Form MGT-14 when required, such as when amending the Articles of Association through a special resolution.