The fund requirement of each business increases over the passage of time. These funds can be required on a long and short-term basis. A short-term need can be satisfied by taking loans and advances. But to run the business operations in long run, the company will require more funds. For a Private Limited Company, this can be done by increasing the authorized share capital of the company. Since the private limited company is governed and regulated by the Companies Act to make changes in the structure, it is necessary to follow the Act and the rules made thereunder.
According to Section 2 (8) of the Companies Act, 2013: “Authorized Capital” is the capital that is authorized by the memorandum of the company to be the maximum amount of the share capital of the Company that can be issued to its members.
The authorized share capital is the total value of the shares that a company can issue whereas the paid-up capital is the total value of the shares of the company that have been issued, duly subscribed and paid up by the members. The paid up share capital can never be increased beyond the authorized share capital of the Company. Hence, if the company has a paid up share capital same as authorized capital and it wants to induct new shareholders then it can be done by:
A Company may need to increase the authorised capital for a variety of reasons. Let's look at a few:
The necessary documents must be filed within 30 days of receiving the shareholders' approval for the increase in the authorized share capital of the company. Private companies must file the resolution in e-form SH-7 and filing e-form MGT-14 is not necessary in this case. The following documents must be kept handy while filing the e-form:
As per section 61 of the Companies Act, 2013 a limited company having a share capital may, by passing an ordinary resolution in a general meeting, alter the capital clause of its Memorandum of Association; provided authority to alter is given to it by its Articles of Association. A notice of alteration is required to be filed with the ROC in Form No. SH-7 within 30 days.
Company can increase its Authorized Share Capital, only if it is authorized by its Articles of Association and after obtaining approval of members by passing an ordinary resolution in Extra-Ordinary general meeting of the company. [Section 61(1)]. The authorized share capital of the Company is mentioned in Clause V of the MOA.
If there is no such provision in Articles then appropriate steps are required to be taken to amend its Articles of Association first.
To consider and approve increase of Authorized Share Capital and altering the Memorandum of Association, subject to the approval of shareholders in General Meeting.
To fix day, date, time and venue for holding General Meeting of the Company. To approve the draft notice of General Meeting along with explanatory statement annexed to the notice as per requirement of the Section 102 of the Companies Act, 2013.
To authorize the Director or Company Secretary to sign and issue notice of the General Meeting and to do such acts, deeds and things as may be necessary to give effect to the Board’s decision.
File a notice of alteration of Share Capital with the Registrar in E-Form SH-7 along with the prescribed fee within 30 days of such alteration along with the following documents:
Pay the e-stamp duty on the increased amount of the Authorized Share Capital through MCA Portal, if applicable.
Every Alteration made in the Memorandum of Association and Articles of Association of the Company shall be noted in every copy of the same.
Once the authorized share capital is increased the paid-up share capital of the company can be increased by issuing the fresh equity shares.
Section 61 and 65 of Companies Act, 2013 does not discuss about the penalty, however, the act mentions about the penalty in section 450 just in case of non-compliance with the rules, the company and the officers in default need to pay Rs. 10,000.
On continuous default, the company needs to pay Rs. 1000 per day till the default is rectified.
If the corporate 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 a smaller amount.
How is an increase in company share capital regulated under Indian Company Law?
The procedure by which the share capital in respect of a limited liability company can be increased is effectively governed by the Companies Act, 2013 by altering the MOA of a Company under Sections 61 and 64 read with Rule No. 15 of the Companies (Share Capital & Debentures) Rules, 2014.
Who is empowered to authorize an increase in the share capital of a company?
In terms of the Companies Act, an increase in a company’s share capital requires approval by means of an ordinary resolution of the shareholders unless the MOA and AOAs of a company stipulate any higher percentage than that required for an ordinary resolution (e.g. an extraordinary resolution).
What resolution is required to increase the authorized share capital?
The Company will convene a general meeting of the members, and at that meeting, the members will pass an ordinary resolution to increase the company's authorized capital and to make any required changes to the memorandum of association.
When should the authorized share capital increase?
The authorized share capital should be increased when the company needs to raise additional funds or issue more shares to investors.