If you wish to know how to increase the authorised share capital of your company to raise funds, this article is for you.
Purpose of Authorised Capital
Limiting the ability of directors to issue new shares that may affect the control of the company and preserving the balance of profit distribution are the primary purposes of authorised capital. Typically, only a portion of the authorised capital is utilised, and a fraction is kept as a safety net to raise additional capital when required.
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. It is necessary to know how to increase the authorised share capital. Considering the fact that a company may operate for many years and will continue to increase in size and will definitely strive to scale its operations, it will require funds. Their first preference could 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 us now 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. |
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, it is the bylaws of the company. The capital clause in the MOA is where the authorised share capital of a company is mentioned. So from this definition itself, we can understand that to change the authorised share capital of the company, we will have to amend the MOA of the company.
How to Increase the Authorised Share Capital of a Company
Before moving forward, we must check the Memorandum of Association and Articles of Association to check if the articles allow enhancing the authorised share 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 the 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.
| Increasing in authorised Capital of the Company is subject to the approval of the shareholders of the company |
All You Need to Know About Calling a Board Meeting to Increase the Authorised Share Capital of a Company
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.
At the board meeting, the Board of Directors will discuss and approve the following points:
- 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 capital
- Approval and distribution of the Notice for the EGM, including the agenda and an explanatory statement, to all members, directors, and 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.
- The authorised director or company secretary of the company to issue a notice of EGM
| The EGM for the purpose of increasing authorized share capital is to be held as per the date, day, time, and venue specified by the board of directors in the board meeting. The shareholders will give their assent to the decision to increase the authorised share capital by passing an ordinary resolution where the approval of at least 50% of the shareholders will be required. |
Special Resolution or Ordinary Resolution? What Is Necessary for Increasing Authorized Share Capital
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 capital procedure. However, the following compliances are to be done 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 the 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 of 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 share capital under the company profile on the MCA site.You can increase the authorised share capital seamlessly with the help of Vakilsearch using the following link: Increase in Authorised Share Capital.We hope this article helps 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 share capital following the procedure as mentioned above.
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