Share Capital

Can Authorised Capital Be Increased In Future Days?

This blog will provide information about authorised capital, ROC compliance, payment of e-stamp duty and the procedure for increasing authorised share

Authorised share capital / authorised capital refers to the maximum value of shares, and there is a limit for increasing authorised share. It refers to the maximum number of capital a company can raise in its lifetime, be it with equity shares or preference shares.

Only if allowed by its articles of association and after receiving the members’ permission by ordinary resolution, a company may increase its authorised share capital.

The authorised share capital amount is fixed at the time of the business’s formation, and it is specified in the constitutional documents of the business. For example, in its Article of Incorporation, in its Memorandum of Association, and another similar document, based on the country where the business is being established.

The per share value must be decided when the authorised capital is being fixed.  It is decided by the promoters. To change the authorised capital amount, it needs the approval of majority of shareholders. Generally, it also needs the local regulatory authorities to give a go ahead.

Authorised Capital – Definition and Example

Based on jurisdiction, the authorised share capital could also be referred to as authorised shares, authorised stock, and even authorised capital stock.  Authorised capital describes the capital of a company. Authorised capital comprises all the shares of all categories that the company has the authority to issue.

Let us look at an example of authorised share.

Consider a company that has authorised share capital of one million common shares at a par value of ₹10 each, for a total of ₹10 million. The company’s issued capital stands at 100,000 shares, with a remaining 900,000 in the treasury of the company to be used when required. With the shares sitting in the treasury, it would appear that the company is just wasting ₹90,000,00 in the capital.  This is a good move considering the phases a business goes through. 

If the company here was a startup, it is seen as maintaining its authorised share capital high, but the actual issued capital of the company is low.  This will enable the company to conduct more financing rounds in future for investors. In case the startup tries splitting stock, shareholder approval could be denied. In case the startup already has held back a large amount of its stock, it will not require approval from shareholders for raising capital. 

Procedure for Increasing Authorised Capital

According to Section 61 of the Companies Act, a Limited Company with share capital can, if its articles authorize it, alter its memorandum in a General Meeting to raise the authorised share capital of the company by an amount it finds expedient. [Section 61(1) (a)]

It is a mandatory requirement to ensure that the Articles of Association of the company authorises an increase in the Authorised Share Capital and that approval has been taken from the members via ordinary resolution. [Section 61(1)]

The procedure for increasing authorised capital is as given below. 

Check the Company’s Article of Association (AoA):

Check if the Company’s Articles of Association has a provision that authorises it to increase the Company’s Authorised Share Capital. If such a provision is not there, appropriate steps must be taken for amending its articles for including the authorization.

There are two ways to increase authorised share capital:

  • Pass a resolution in a Board Meeting
  • Pass a resolution via circulation

To pass a resolution in a Board Meeting, convene a meeting of the Board of Directors.  To do so, you need to:

  1. Issue a notice for the Board Meeting to every Company Director at their addresses that is registered with the Company.  It must reach each of them minimum seven (7) days prior to the date of the Board Meeting. If the business is urgent, a shorter notice is allowed. 
  2. The Notice must have a draft resolution, agenda, and notes of the agenda.
  3. Conduct the meeting of the BoDs to pass the board resolutions.
  4. Submit the disclosure of the meeting of board no more than 24 hours post the meeting’s conclusion.  It should also be posted on the Company’s website within 2 working days. [Regulation 30 & 46(3) of the SEBI (LODR) Regulations, 2015]
  5. The Draft Minutes must be circulated within 15 days of the conclusion of the meeting of the board.
  6. Courier
  7. E-mail
  8. Hand-delivered
  9. Registered Post
  10. Speed Post

Increasing Authorised Share Capital with Passing of Resolution via Circulation

  1. The Board’s Chairman, in whose absence the Managing Director and in their absence any Director (except for an Interested Director) has to decide whether the Board’s approval will be obtainable via Resolution by Circular.
  2. Suppose the shareholders at the Company’s General Meeting approve it. In that case, the draft resolution to increase the Authorised Share Capital and alter the Company’s Memorandum of Association, along with the essential papers, will individually be sent to each Director on the same day via any of the means: speed post, hand-delivered, registered post, e-mail, courier, or any recognised electronic means to the Directors’ postal address/email that is registered with the Company.  If the e-mail or address is unavailable, it will be sent to such address as found in the DIN registration details of the Director.
  3. The Resolution needs to provide the proposal’s details and all material facts that will describe the nature, meaning the scope, and all the proposal’s implications.
  4. Directors are given seven (7) days in which to respond.
  5. In case a minimum of 1/3rd, Directors wish to decide the Resolution under circulation in a board meeting, and the Chairman should hold the Resolution by Circular at a Board Meeting.
  6. It is deemed that the Resolution is passed when a majority of the Directors are entitled to vote in favour of the Resolution.
  7. Such resolutions that get passed by circulation shall be noted at the next meeting of the Board, and the text thereof with dissent or abstention, if any, is to be recorded in the Minutes of that meeting.
  8. The draft minutes need to be prepared and circulated within 15 days from when the board meeting concluded.  They need to be sent out for comments to all Directors in any of the following ways: hand-delivered, registered post, speed post, e-mail, courier.

Convene General Meeting [Section 96, 100 and SS-2]

  1. The notice must be given a minimum of 21 days before the Meeting’s date for general meetings.  The period can be shorter if it has the approval of at least a majority in number and 95% of such part of the paid-up share capital of the company giving a right to vote at such a meeting under Section 101.
  2. The Notice must be sent to all Debenture Trustees, Secretarial Auditor, Company auditors, Members, and Directors.  It must also be sent to those entitled to receive the General Meeting Notice.
  3. Notice should include the Meeting’s date, day, time, and complete address of the Meeting venue.   It must also specify the business that is to be transacted in the Meeting.
  4. In the General Meeting, an Ordinary Resolution needs to be passed to increase the Authorised Share Capital and introduce required modifications to the Company’s Memorandum of Association (MOA).
  5. If the Company is listed, it needs to disclose the General Meeting’s proceedings within 24 hours of the conclusion of the meeting to the Stock Exchange.  The proceedings also need to be put up on the Company’s website within 2 working days. [Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015]
  6. If the company is listed, it must submit the voting result details to the stock exchange within 2 working days after the Meeting’s conclusion.  The same must be uploaded to the Company’s website. [Regulation 44 of the SEBI (LODR) Regulations, 2015]
  7. General Meeting’s Minutes must be prepared, signed, and compiled accordingly.

ROC Compliance

Notice for alteration of Share Capital needs to be filed with the Registrar using E-Form SH-7 and submitting the required fee.  It has to be filed within thirty (30) days of alteration of the Share Capital. The documents mentioned below need to accompany the Notice.

  • Certified true copy of the Ordinary Resolution for increasing the Authorised Share Capital
  • Copy of modified MOA
  • Copy of modified AOA (if there is one)
  • Consent for shorter notice consent (in case the meeting was held at a shorter notice)
  • Other document that might apply to the specific situation

Payment of e-Stamp Duty

Payment of the e-stamp duty needs to be made on the amount of Authorised Share Capital that has been increased, and it has to be paid via the MCA Portal of the Ministry of Corporate Affairs if required.

Conclusion

A private company’s authorised capital represents the maximum number of shares allowed to sell. Under the Companies Act, no minimum capital is required. When a company wants to increase its authorised share capital, an amendment needs to be made in the Memorandum of Association’s capital clause.  This needs to be done by passing an ordinary resolution by Company’s Board.

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