If you wish to know how to increase the authorised share capital of your company to raise funds, then read this article.
Whenever a Company is in the incorporation process, one of the most important decisions that the promoters, who conceive the idea of the company, have to make is deciding the amount of authorised share capital of the company. It is essentially the capital that the company will raise throughout its life which may extend to perpetuity. Knowing how to increase the authorised share capital is necessary.
Considering the fact that a company may operate for as many years and will continue to increase in size and will definitely strive to scale their operations for this they will require funds. Their first preference can be raising funds through the issue of the share capital of the company. Still, at times it is possible that the company’s paid-up capital is at par with the authorised share capital; hence, the company will need to raise its authorised share capital. Increasing Authorised share capital enables you to raise more funds. Let’s dig deeper and understand the Nitty-gritty of authorised share capital from a legal perspective:
Memorandum of Association and Articles of Association are the Charter documents of a company. While the Memorandum of Association sets out the significant clauses of the company like the name, object, capital, liability, domicile, and subscription, the Articles of Association sets out the rules and regulations for the company, and it also prescribes various power and authority bestowed to the stakeholders of the company essentially they set out the bylaws of the company. The capital clause is where the authorised share capital of a company is mentioned. So from this definition itself, we can understand that to change the authorised capital of the company, we will have to amend the memorandum of the company.
Authorized capital refers to the maximum amount of capital that a company is authorized to issue in the form of shares. In other words, it is the maximum amount of capital that a company can raise through the issuance of shares. There are several advantages of authorized capital that companies can enjoy:
- Flexibility in raising capital: Authorized capital gives companies flexibility in raising capital as it allows them to issue more shares in the future if needed. This makes it easier for companies to raise capital without having to go through the process of amending their articles of association to increase their authorized capital.
- Protection against dilution: Authorized capital also protects existing shareholders from dilution. This is because the company cannot issue more shares than the authorized capital without amending the articles of association, which would require the approval of the existing shareholders.
- Easier to attract investors: Companies with a high authorized capital are often perceived as more stable and trustworthy by investors. This is because the high authorized capital indicates that the company has the potential to grow and expand in the future.
- More opportunities for mergers and acquisitions: Companies with a high authorized capital are also more attractive to potential acquirers as they offer more opportunities for growth and expansion. This makes it easier for companies to enter into mergers and acquisitions, which can be beneficial for both parties involved.
- Protection against hostile takeovers: High authorized capital can also protect a company from hostile takeovers. This is because it makes it harder for a hostile acquirer to acquire a controlling stake in the company, as they would need to purchase a significant amount of shares, which would require a large amount of capital.
Increasing the Authorised Share Capital of the Company
Scrutinising articles of associations – Before moving forward, we must check the Memorandum of Association and Articles of Association to check if all the articles allow enhancing the authorised capital and if the necessary powers or authority required have been provided. As mentioned earlier, articles set out the authority for making decisions for the company. If it’s the case where the articles of association do not authorise to increase of the authorised share capital, then it becomes necessary to amend the provisions of articles of association in the manner prescribed by the Companies Act, 2013 under section 14 to include provisions authorising the company to increase its share capital, which can be done by passing of the special resolution.
Meeting of the Board of Directors
- Calling Board of Directors for Board Meeting: In order to convene a Board meeting, a notice of the board meeting will need to be issued at least seven (7) days before the date of the meeting
- Holding the Board Meeting: In the Board Meeting, the Board of Directors will discuss and approve the following points:
-Increasing in authorised Share Capital of the Company is subject to the approval of the shareholders of the company
-Fixing the date, day, time, and venue for holding the Extraordinary General Meeting (“EGM”) of all the shareholders of the company to get approval for an increase in Authorised Share Capital
-Approval and issue of Notice for the EGM along with agenda & explanatory statement to all members, directors & auditors of the Company
-To effect an EGM, the Board of Directors must pass a board resolution
-This notice must specify the method of voting to be used at the EGM
-Such Notice must be issued to all the stakeholders at their registered addresses at least 21 days before the date of the Extraordinary General Meeting
-Authorising Director or Company Secretary of the company to issue Notice of EGM.
Holding EGM – The EGM is to be held as per the date, day, time, and venue as specified by the board of directors in the board meeting. The shareholders will give their assent to the decision to increase the authorised capital by passing an ordinary resolution where the approval of at least 50% of the shareholders will be required.
Compliances to be done with the registrar of companies – Following forms need to be filed with the registrar of companies:
- Filing of Form MGT-14 – The company is required to submit this form to the registrar of the company within 30 days from passing of the special resolution at the EGM for altering the provisions of the Articles of Association. Necessary enclosures include a copy of:
- Passed Ordinary resolution
- New MOA with the amended capital clause.
- New AOA (with changed provisions for authorising the enhancement of share capital)
- Filing of Form SH-7 – The company needs to file this form with the registrar of the company within 30 days from passing the ordinary resolution at the EGM. Necessary enclosures include a copy of:
- Passed Ordinary resolution
- New MOA with the amended capital clause.
- New AOA (with changed provisions for authorising the enhancement of share capital, if applicable)
- While filing Form SH-7, the MCA portal will require the Service Request Number (SRN) of the form MGT-14, so make sure to submit MGT-14 before SH-7 in cases where the articles of Association also need to be changed
- You will have to pay the specified stamp duty online.
After completing the procedure, you can check the status of the changed authorised capital under the company profile on the MCA site.
Do We Need a Special Resolution or Ordinary Resolution Is Enough?
As mentioned earlier, an ordinary resolution is required to pass the resolution for Increasing the Authorized share capital, whereas a special resolution will be required in cases where the Articles are also needed to be amended.
Changes to the Authorised Capital Procedure
There have been no changes in the changing the authorised share capital procedure.
You can increase in authorised share capital seamlessly with the help of Vakilsearch using the following link: Increase in Authorised Share Capital.
I hope this article helped you understand a very important aspect of a company’s growth which is the Capital Clause. To conclude, we can say that authorised capital is the maximum permissible capital that a company is authorised to issue and to increase its funding through the issue of shares over and above its existing authorised share capital, it will have to increase the authorised capital following the procedure as mentioned above.
Read More:
