Increase Authorized Capital

Overview

During the initial phase of a company’s formation, promoters must decide on the initial capital investment. With the growth of the business, there may be a need to infuse additional funds to broaden the company’s operations, size, or structure. This often involves raising the company’s share capital. Occasionally, the needed capital may exceed the current authorized capital, which is the maximum share capital stipulated by the company for issuance to shareholders.

Under Section 2(8) of the Companies Act, 2013, the limit of Authorized Capital is detailed in the Memorandum of Association’s Capital Clause. While a company can take steps to raise this limit to issue more shares, it must not exceed the set authorized capital.

Why Increase Authorized Capital

The following are some reasons why a company may need to increase its authorized capital:

1. To accommodate new shareholders: As a company expands, it may need to issue new shares to new shareholders. Increasing the authorized capital allows the company to issue more shares.
2. To raise additional funds: A company may need to raise additional funds for expansion or other purposes. Increasing the authorized capital allows the company to issue more shares and raise more funds.
3. To meet regulatory requirements: Some regulatory bodies require companies to have a certain amount of authorized capital before they can engage in certain activities.

Procedure

To alter the Authorized Capital, one must first review the Articles of Association, which governs the company’s internal management. This document must be checked for any clauses permitting changes to the authorized capital before any increase or decrease can occur.

If such a clause is present, the process is straightforward. If not, the Articles must be amended following Section 14 of the Companies Act, 2013, before proceeding with any changes to the authorized capital.

The following are the steps involved in increasing the authorized capital of a company:

Holding a general meeting

During the Extraordinary General Meeting, the proposal to raise the share capital is introduced. A structured vote is conducted to decide on the proposal. Following the vote, with the resolution approved, an explanatory statement is appended, and the Authorized Capital increment is executed.

Mandatory Board meeting 

For a Board Meeting regarding Authorized Capital changes:

• Directors must receive a 7-day notice of the meeting’s agenda at their registered addresses.
• At the meeting, pass a resolution to convene an Extraordinary General Meeting (EGM), as per Section 101 of the Act, to propose changes to the authorized capital in the Memorandum of Association, requiring an Ordinary Resolution in line with Section 60.
• Shareholders should be informed of the EGM details, including agenda, date, time, and location.
• The notice should outline the voting method for the resolution at the EGM.
• Issue the EGM notice to directors, shareholders, and auditors at least 21 days before the EGM. A shorter notice is permissible with 95% member consent, obtained in writing or electronically.

Mandatory Filing with the Registrar

During the EGM, the proposal to raise the share capital is tabled and voted upon. Following approval and resolution passage, an explanatory statement is attached, formalizing the Authorized Capital increase.

Subsequent filings with the Registrar of Companies must occur within 30 days:

1. Form MGT – 14: Filed first within 30 days post-resolution, it includes company details, resolution purpose, notice dispatch date, resolution date, and specifics. Attachments include the EGM notice, Section 102 explanatory statement, certified resolution copy, and updated MOA and AOA sections.
2. Form SH – 7: Submitted within 30 days post-resolution, it informs the Registrar about the authorized capital increase, detailing the company’s CIN, resolution type, meeting date, SRN of Form MGT – 14, original and new authorized capital amounts, additional share capital breakdown, Stamp Duty Fees, and necessary digital signatures. Attachments include a certified resolution copy and updated MOA and AOA sections. 

Documents Required

The following are the documents required to increase the authorized capital of a company:

1. Board resolution
2. Special resolution
3. Altered Memorandum of Association
4. Form SH-7
5. Form MGT-14

Process

The process of increasing the authorized capital of a company typically takes 2-3 weeks from the date of filing the necessary forms and documents with the ROC. It is important to ensure that all the necessary forms and documents are filed accurately and on time to avoid any delays or complications.

Benefits

The following are some benefits of increasing the authorized capital of a company:

1. Ability to accommodate new shareholders: Increasing the authorized capital allows a company to issue more shares and accommodate new shareholders.
2. Ability to raise more funds: Increasing the authorized capital allows a company to issue more shares and raise more funds for expansion or other purposes.
3. Compliance with regulatory requirements: Increasing the authorized capital may be necessary to comply with regulatory requirements.
4. Improved credibility: Increasing the authorized capital can improve the credibility of a company and signal to investors that the company is well-positioned for growth.

Impact of Increased Authorised Capital

1. Facilitates Future Growth and Expansion: Increased authorized capital provides the company with the flexibility to issue additional shares in the future. This, in turn, allows the company to raise more funds through equity financing, enabling it to undertake expansion projects, acquire assets, invest in new ventures, or pursue strategic opportunities.
2. Enhances Financial Flexibility: With a higher authorized capital, the company can respond to financial needs more effectively. It can access a larger pool of shares for potential issuance, providing enhanced flexibility in capital structuring and financial planning.
3. Improves Creditworthiness: A higher authorized capital can positively impact the company’s creditworthiness. Lenders and creditors may view a larger authorized capital as a sign of financial strength and stability, potentially improving the company’s ability to secure favorable terms for loans and credit facilities.
4. Meets Regulatory and Contractual Obligations: In certain cases, such as specific regulatory requirements or contractual agreements, an increased authorized capital may be necessary to comply with legal or commercial commitments. This flexibility is crucial for companies operating in regulated industries or engaging in complex business arrangements.
5. Supports Strategic Alliances and Partnerships: An increased authorized capital may bolster the company’s position in negotiating partnerships, joint ventures, or collaborations with other entities. It can signal the company’s capacity for growth and strategic alliances, potentially leading to expanded business opportunities and synergies.
6. Improves Investor Confidence: An increase in authorized capital can demonstrate the company’s readiness to accommodate future investments, potentially leading to improved investor confidence. This could attract new investors and provide existing shareholders with assurance regarding the company’s long-term growth prospects.

It’s important to note that while the increase in authorized capital presents various opportunities for the company, it also requires careful management to ensure that the funds raised are utilized effectively and in alignment with the company’s strategic objectives. Additionally, any dilution of existing shareholders’ ownership resulting from the issuance of new shares should be considered and communicated transparently.