Introduction
Every company eventually needs more money to run it. This fund might be required both immediately and later. A short-term requirement can be satisfied by loans and advances. However, in the long run, it will demand more money. This can be done for a Private Limited Company by increasing the company’s authorized capital. Any changes to the structure must comply with the Act and the guidelines outlined in the Companies Act, 2013, since the Private Limited Company is regulated and governed by the Company Act.
What is Authorized Share Capital?
The maximum number of shares that a company is allowed to issue to shareholders in accordance with its bylaws is known as authorized share capital. It’s possible that some of the capital has not been sold yet. The shareholders’ consent is required to change the authorized capital.
According to Section 2(8) of the Companies Act, 2013, the Authorized Capital limit is stated in the Memorandum of Association under the Capital Clause. In order to issue more shares, a business may take the appropriate steps to increase the approved capital limit, but it may never issue more shares than the authorized capital limit allows. The MOA must be amended, however, if the company wants to raise the amount of allowed capital.
What are the characteristics of authorized capital?
The following are the characteristics of authorized capital:
- When a company is formed and incorporated, the permitted capital is determined.
- The amount of approved capital will determine how much the ROC fees will increase.
- The MOA and AOA of a business must specify the authorized capital of the company.
- The nominal value of each share is based on the authorized share capital, which is the maximum amount of capital that a business can maintain.
- It can be changed at any time after the company is established.
- The permitted capital cannot be used to determine the Company’s net worth.
- A company is not required to issue shares equal to its authorized capital; instead, it may issue shares with a lower value.
What is the process to increase the authorized share capital of a Private Limited Company?
The company needs to modify its Articles of Association (AOA) before taking any action to increase or reduce its authorized capital. The AOA governs the internal operations of the company. To proceed with a change in authorized capital, the company must follow these steps:
Amend the Articles of Association
- Determine if there is a provision in the current AOA that allows for changes in the authorized capital.
- If no such provision exists, amend the AOA following the guidelines outlined in Section 14 of the Companies Act, 2013.
2. Conduct a Board Meeting
- Send the meeting agenda to the directors at least 7 days prior to the meeting, to their respective registered addresses.
- Pass a Board Resolution to call for an Extraordinary General Meeting (EGM) and issue a notice as per Section 101 of the Act. During this EGM, present the altered clause on authorized capital in the Memorandum of Association for approval by passing an Ordinary Resolution, complying with the provisions outlined in Section 60 of the Act.
- Notify shareholders of the meeting details, including the agenda, date, time, and location.
- Specify the voting method to be used in the notice.
- Notify the auditors directors, & shareholders about the EGM.
- Ensure that the notice of the EGM is sent at least 21 days before the EGM date, unless consent from at least 95% of eligible voting members is obtained. Consent can be obtained electronically or in writing.
3. Hold the Extraordinary General Meeting (EGM)
- During the meeting, discuss the proposal to increase the share capital.
- Conduct a vote in a predetermined order to reach a decision.
- Once approval is obtained and the resolution is passed, attach the explanatory statement and increase the Authorized Capital.
4. File Forms with ROC (Registrar of Companies)
- File eForm SH-7 and eForm MGT - 14 (if applicable), along with the prescribed fees, with the Registrar within 30 days of passing the resolution.
Form MGT - 14:
- File this form with the ROC within 30 days of passing the resolution.
- Submit the form on the MCA portal with the following information:
- Company information, including its CIN.
- Reason for filing the form.
- Dispatch date of the notice.
- Date of passing the resolution.
- Details about the resolution.
- DIN and Digital Signature, where required.
- Attach the following documents with Form MGT 14:
- Notice of the EGM and the Explanatory Statement required by Section 102 of the Companies Act, 2013.
- A certified copy of the EGM resolution.
- A copy of the new MOA.
- A copy of the new AOA (if it includes provisions for increasing authorized share capital).
Form SH - 7:
- File this form with the ROC within 30 days of passing the resolution.
- Use the MCA portal and provide the following information:
- Company information, including its CIN.
- Resolution type.
- Meeting date.
- Reference to Form MGT - 14 with its Service Request Number (SRN).
- Details of the original authorized share capital and the new authorized share capital.
- Details on how the additional share capital will be allocated.
- Particulars of the Stamp Duty Fees Paid.
- Whenever possible, use digital signatures and DIN (Director Identification Number).
- Attach the following documents with Form SH 7:
- A certified true copy of the resolution for capital change.
- A copy of the new MOA.
- A copy of the new AOA (if it includes provisions for increasing authorized share capital).
- Any additional optional attachments if required.
Ensure timely submission of these forms to avoid penalties or subsequent legal actions against the company and its officers.
Summary
The company has the capability to expand its operations up to the extent of its authorized capital. If the company intends to inject additional funds beyond its initial limit, it must proceed to increase its authorized capital by following the steps outlined in this blog.
