Concept of Increase in Authorized Capital of Company

Promoters of a company decide the capital investments at the incorporation stage. As the business grows, the company expands its operation. Sometimes the capital surpasses the limit of authorized capital. To facilitate this the management increase in authorized capital of company. The authorized capital is the amount of capital for which companies have the right to issue shares to the shareholders.

Let us look into the authorized capital of the company, increase in authorized capital of company, the method to alter the authorized capital, and filing of form to ROC.

What is Authorized capital?

An authorized capital is a capital which is authorized in the Memorandum ofAssociation (MOA) to be the maximum amount of share capital of the said company. This has also been defined under Section 2(8) of the Companies Act. So we can say that a company can take all the steps for increasing the authorized share capital limit in order to issue more shares, but it cannot issue shares which are exceeding the authorized limit.

It is mandatory for a company to increase the authorized share capital only if authorization under AOA or after member approval in ordinary resolution in EGM.

Increase in Authorized Capital

The authorized capital is the total worth of the shares or value of shares the company can issue. It is important for the company to increase the share capital before they issue the new share and also increase the paid-up capital. Moreover, the paid-up capital is the total value of the shares the company has already issued. Furthermore, the paid-up capital should not exceed the authorized capital. The new shareholder can be inducted by increasing the authorized share capital, issuance of new shares, and transfer of existing shares.

Alteration of Authorized Capital

Alteration of authorized share capital means an increase in authorized capital of company, consolidation or division or sub-division of shares, conversion of paid-up shares into a stock or vice versa, or lastly cancellation of unsubscribed shares.

Need for Alteration of Authorized Capital of the Company

The main reason for the alteration of the authorized share capital of a company is to increase the share capital so that the company receives more capital for growth.

Since we already discussed that authorized share capital is the maximum amount of share capital of the company, so one of the main fundamental reasons to alter share capital is for increasing the capital of the company for its growth.

One form of alteration is the sub-division of shares. The sub-division increases the liquidity of shares in the market and increases the number of small shareholders in the market.

Mode to increase authorized capital

Companies can alter the authorized share capital by alteration of the capital clause in the MOA. Section 13 of the provides that one can alter the share capital according to section 61 of the Act.

Companies Act, 2013 in section 61 talks about the power of the limited company to alter the share capital. Furthermore, section 61 is only talking about the type of alteration of authorized share capital in limited companies ranging from the issued capital or paid-up or un-paid capital, etc.

The first step towards alteration or increase in authorized capital of company is to check whether the company can alter shares under AOA.

In the case of an unlimited company, the alteration of share capital can be complete under section 65. Section 65 of the Companies Act deals with the reserve of the share capital. On conversion to a limited company.

Before alteration of share capital, the unlimited company has to convert itself and then alter the share capital in the following ways-

• By increasing the nominal amount of share capital but it can’t be called up except in case of winding up of the company. So we can say that company can increase the nominal value of the existing share to increasing the share capital
• The company can reserve the uncalled share capital for winding up of the company.

Procedure for alteration of the share capital of the company

• Verification of AOA:
  The AOA or Article of Association is a document having the rules and regulations of the company. Before there is an increase in authorized capital of company, it is necessary to verify the contents of the Article of Association. Verification is necessary to ensure that they have the provision of alteration or increase of authorized share capital. If the provision is there, the alteration is simple and easy.
  But if the company does not have the provision for the increase in authorized share capital, then they have to amend the AOA. The company can proceed with alteration only when the alteration is complete.
  There can be an increase in the authorized share capital by passing resolutions either in the board meeting or through circulation.
• Board Meeting:
  It is mandatory to send notice of board meeting to the director at least 7 days in advance for increasing the authorized capital of the company. The companies need the approval of the board of directors for increasing the capital.
  Once the approval is complete, the board decides to conduct the general meeting. This meeting is necessary for the approval of shareholders for alteration or increase in the authorized share capital. It is also important in terms of amendments to the MOA. Notice of general meeting also has an explanatory statement according to section 102.
  Lastly, the company passes a board resolution for the extraordinary general meeting and issues notice under section 101. Under this, the altered clause on the authorized share capital in MOA can be shown for approval by passing the ordinary resolution.
• Extra-Ordinary General Meeting
  The directors, shareholders, and auditors receive the notice of the extraordinary general meeting or EGM. This notice is not given less than 21 days prior to the date of EGM. A shorter period is also allowed if 95% of the members vote for it at the meeting. This consent can be either in writing or electronic mode.
  The notice has the date, day time and place of the EGM. Once the meeting starts, the matter relating to the increase in authorized capital of company is put forth. Then the voting takes place and thereafter the resolution is also passed along with an explanatory statement. The approval for increasing the authorized capital should be in ordinary resolution.
• Filing ROC Forms:
  If the AOA of the company already authorizes an increase, then they need to submit Form SH-7 under section 64 of the Companies Act, 2013 within a span of 30 days of alteration.
  Along with Form SH-7, the company needs to submit the true certified copy of the resolution altering the share capital, Altered MOA and lastly, if the change is due to the order of the Central government of NCLT, then such order also needs to be given.
  After this, the Registrar approves the filing and increase in authorized capital of company. the new updated share capital will be shown on the official MCA Portal.
  The company has to file e-form SH-7 and MGT-14(if applicable) within 30 days of resolution along with the prescribed fees.
  • E-form MGT-14
    This form has the details of the company, the main purpose of the company, date of notice, resolution, and other details about the resolution and digital signatures and DIN.
    Along with e-form MGT-14, the company needs to submit the following documents-
    • The notice of extraordinary general meeting along with the explanatory statement.
    • The certified copy of the resolution is given in EGM.
    • The new copy of the MOA and AOA.
  • E-Form SH – 7
    E-form SH-7 states the details of the increase in authorized capital of company. this form is filed within 30 days of resolution.
    This form has details of the company, type of resolution along with SRN, date of the meeting, details about the authorized share capital, digital signature, and stamp duty.
    The company has to attach a copy of the resolution, new MOA and AOA, and other optional attachments if any.

Allotment of Shares

After the company increases the authorized capital, there can be an increase in paid-up share capital by issuing fresh equity shares.

Penalty

Section 61 and 65 don’t talk about the penalty, the act states about the penalty in section 450. In case of non-compliance with the guidelines, the company and the officers in default have to pay Rs. 10,000. On continuous default, the party has to pay Rs. 1000 per day till the default is rectified.

If the company fails to submit SH-7 within 30 days, then Rs.. 1000 fine per day is there till the default continues or Rs. 25 Lakh whichever is less.

Conclusion

Companies often look to expand their operations, size and structure. For this, they need funds by increasing the authorized capital of the company. Sometimes this amount surpasses the authorized capital. Hence the authorized capital is the maximum amount of capital for which the company has the liberty to issue shares.