Increase in authorized share capital of company with its Procedure & Benefits

One of the most crucial considerations that the promoters must make throughout the incorporation process is the amount of capital to put in the company.  As the business grows, the company may consider expanding its operations, size, scale, or structure. To make that ambition a reality, additional money may need to be pumped into the company, thereby expanding the company’s share capital. The quantity of capital required may at times exceed the amount of capital authorised at the moment. The maximum amount of capital for which the Company can issue shares to shareholders is known as the authorised capital. In this article we will discuss Benefits and Procedure for Increase in the Authorised Share Capital.

Key Abstract

To maintain a business, each company need more capital over time. These cash may be needed in the long and near term. Loans and advances might be used to meet a short-term requirement. However, the company will require more funding for the run. This may be accomplished for a Private Limited Company by raising the company’s authorised capital. Because the private limited company is governed and regulated by the Companies Act, 2013 it is important to obey the Act and the laws indicated in order to make modifications to the structure.

The authorised and paid-up capital of a Private Limited Company is established in the company’s Memorandum of Association (MOA) when it is registered. As a result, the company can issue additional shares up to the authorised capital specified in the MOA. If the company desires to issue more shares than the stipulated maximum, revisions to the MOA must be made.

Meaning of Authorized Share Capital

The maximum amount of share capital that a company can issue to shareholders is known as Authorised Share Capital or authorised capital. This figure varies from company to company and is subject to modify only with shareholder consent. Assume that a business’s authorised capital is one lakh rupees. This indicates that the company can issue shares worth up to one lakh rupees. However, because this permitted capital is variable, it may be increased or lowered as needed. Let’s assume a company’s approved capital is Rs. 1 lakh, but an investor wishes to contribute Rs. 1 crore. In this case, the company’s authorized capital can be increased to Rs. 1 crore.

“Approved Capital,” as defined by Section 2 (8) of the Companies Act, 2013, is the capital that is authorised by the company’s memorandum to be the maximum amount of the company’s share capital.

The company can grow its operations up to the permitted capital limit. If the company needs to develop its operation by injecting more cash than initially. 

Purpose of Authorized Share Capital

It is used to limit the ability of directors to issue new shares, which may have implications for the company’s control. It’s also utilised to keep the profit distribution balance in check. Often, the amount set aside as approved capital is not fully utilised, and a small portion is set aside as a safety net in case further capital is required.

Benefits of Increasing Authorized Share Capital

The following are the benefits of Increasing Authorized Share Capital:

• Increases the amount of capital in the company: A company can raise any amount of authorised capital it wants, and the MoA will reflect this with changes. As a result, raising authorised capital has a cumulative effect on the entire share capital of the company.

• Borrowing Capacity is Increased:The company’s entire net worth grows in tandem with the rise in share capital. This increases the company’s borrowing capability even further.

It may entice investment since it can be readily accommodated if sufficient approved capital is available.

Increase in Authorized Share Capital

Before issuing additional equity shares and raising paid-up capital, a company may need to enhance its authorised share capital. The entire value of the shares a company can issue is known as authorised share capital. The whole value of the company’s issued shares is known as the paid-up capital.

The permitted capital is not exceeded by the paid-up capital. As a result, if the company has an authorised capital of Rs.10 lakh and a paid-up capital of Rs.10 lakh, it can induct additional shareholders by: 

• Issuing new shares and increasing the authorised share capital (or)
• Shares are transferred from current owners to new shareholders.

In most circumstances, the permitted capital grows when the additional shares are issued. For help with expanding the authorised share capital, contact our consultants at Legal Window.

Procedure for increasing the Company’s Authorized Share Capital

The company’s Authorised Share Capital can be raised at any time, subject to the limitations and restrictions imposed by Section 61 (read in conjunction with Sections 13 and 14) of the Companies Act, 2013.

Check the company’s AOA

Before beginning the steps for raising the authorised share capital, check the AOA to confirm that the increase of the authorised share capital is included in the Articles of Association. If such a provision does not exist, the company must first make revisions to its AOA.

Note that most AOAs include a mechanism for expanding the company’s authorised share capital.

Call a meeting of the Board of Directors

To increase the company’s authorised share capital, a Board meeting must be called by giving notice to the directors. Obtaining approval from the Board of Directors for expanding the authorised share capital is required at the Board meeting.

Following this procedure, a date should be set for an Extraordinary General Meeting to acquire shareholder approval for raising the authorised share capital and making modifications to the Company’s Memorandum of Association.

Finally, get consent from the Board of Directors, as well as the company secretary present at the meeting, to submit the notice of the Extraordinary General Meeting to the shareholders. The notice of extraordinary general meeting should be given to all of the company’s shareholders, directors, and auditors based on the approval.

Extra-Ordinary General Meeting 

Organize an extraordinary general meeting and get shareholder approval to increase the authorised share capital at the time, date, and location specified in the notification.

An ordinary resolution must be passed by the shareholders to approve the increase in authorised capital.

Fill out the ROC Forms

After the ordinary resolution is passed at the extraordinary general meeting, the company must file Form SH7 within 30 days of the ordinary resolution being passed. The required government charge for the allowed capital must be paid, as well as the papers listed below.

• Notice of Extraordinary General Meeting (EGM)
• A true copy of the ordinary resolution signed by the author.
• Amendments to the Memorandum of Association (Which depicts the higher authorised capital)

If the procedure outlined in the Companies Act and the Companies Rules is followed to increase the company’s authorised capital, the registrar will approve the filing and raise the company’s authorised share capital. The MCA portal will reflect the increased authorised share capital.

Allotment of Shares

The company’s paid-up share capital can be increased by issuing new equity shares after the authorised share capital has been increased.

Endnote

In the framework of a limited company, share capital is quite significant. Each company with share capital has authorised and issued shares that may be used to generate funds, decide ownership, and transfer ownership from one party to another.