Increasing of Authorized Share Capital

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Increasing of Authorized Share Capital of the Companies

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In the dynamic landscape of business, companies often find the need for additional funds to fuel their operations. While short-term financial needs can be met through loans, long-term sustenance often requires a more substantial approach. For Private Limited Companies, the avenue to secure additional funds lies in increasing the authorized capital, a process governed by the Company Act and its associated regulations.

During the registration of a Company, the Memorandum of Association (MOA) specifies both the authorized and paid-up capital. The company is permitted to issue new shares within the confines of the authorized capital outlined in the MOA. Should the company intend to exceed this limit, amendments to the MOA become imperative.

Understanding Authorized Capital

As per Section 2(8) of the Companies Act, 2013, “Authorized Capital” refers to the maximum amount of share capital authorized by the company’s memorandum. The authorized capital sets the upper limit to which a company can expand its business. When a company seeks to infuse additional funds beyond the initially authorized capital, it must follow the steps outlined in this article.

Increasing Authorized Share Capital

Before issuing new equity shares and augmenting the paid-up capital, a company may need to raise the authorized share capital. This is crucial as the authorized share capital represents the total value of shares a company can issue, with the paid-up capital being the total value of issued shares.

To achieve this, a company with an authorized capital of, say, Rs. 10 lakh and a paid-up capital of Rs. 10 lakh, wishing to bring in new shareholders, can either increase the authorized share capital and issue new shares or transfer existing shares from current shareholders to new ones. In most cases, the issuance of new shares results in an increase in authorized capital.

Procedure to Increase Authorized Share Capital

  1. Verify Articles of Association (AOA): Before commencing the procedures, ensure that the AOA contains provisions for increasing authorized share capital. If not, amendments to the AOA become necessary.
  2. Convene a Board Meeting: A Board meeting must be convened, with notice provided to directors, to secure approval for increasing the authorized share capital.
  3. Extraordinary General Meeting (EGM): Following Board approval, an EGM should be scheduled. During this meeting, shareholder approval is sought for increasing the authorized share capital and amending the MOA.
  4. File ROC Forms: After obtaining shareholder approval through an ordinary resolution, Form SH-7 must be filed within 30 days. This includes prescribed government fees and documents such as the notice of EGM, an authorized true copy of the ordinary resolution, and the amended Memorandum of Association reflecting the enhanced authorized capital.

By adhering to the procedures outlined in the Companies Act and Rules, the filing is subject to approval by the registrar. Once approved, the MCA portal will reflect the increased authorized share capital of the company.

In summary, expanding authorized share capital for Companies is a strategic move to accommodate the evolving financial needs of a growing business. Adherence to regulatory processes ensures a smooth and legally compliant transition to an augmented capital structure.