Want to increase the share capital of your company? Then this is the right place to know everything about the share capital increase, the procedure for raising your business’s capital base and the advantages and disadvantages of the same.
How Does Issuing New Shares Raise Capital: The company after issuing its initial public offering (IPO), the company has the authorisation to alter its share capital. The alteration of share capital can either mean an increase or decrease in the share capital of the company.
Equity financing is basically the process of issuing and selling shares of stock to raise money. Investors who buy shares of a company become shareholders and can earn investment gains if the stock price rises in value or if the company pays a dividend.
According to the relevant provisions of the Companies Act, 2013, the alteration of capital includes different ways such as increase or decrease in capital, consolidation of capital, sub-division of capital and conversion of share capital. Here, let’s discuss the specific alteration types, which are the increase in share capital and conversion of capital. The increase in capital can happen in two ways as
- Increase in Authorised Share Capital
- Increase in Subscribed Share Capital
Procedure for Increasing Share Capital of the Company
According to Section 2(8) of the Companies Act, 2013, the authorised share capital, registered capital, or nominal capital is the maximum ceiling limit authorised by the Memorandum of Association (MOA) that is shown under the ‘capital clause’ section. The company has authorisation only to issue the shares under this ceiling limit. If the company wishes to issue shares beyond the authorised capital limit, then it calls for an alteration of share capital. The company shall follow the procedure for authorised share capital increase as given below:
Steps Involved In Increasing the Authorised Share Capital of the Company under the Companies Act 2013 –
Step 1: AOA and Special Resolution
The first and foremost step after deciding to increase in Authorised Share Capital of the company is to check the Articles of association (AOA). The AOA need to be checked for whether any necessary power/authority exists relevant to increasing the authorised capital.
If the AOA lacks such authority, then it is amended according to relevant provisions by passing a ‘special resolution’ authorising the company to increase the authorised capital.
Step 2: Board Meeting and EGM
The next step after verifying the AOA is holding the Board of Directors (BOD) or Board meeting. The notice of board meeting shall be issued not less than seven days before convening such meeting.
The following points are approved in the board meeting such as:
- Increase Authorised Share Capital
- Deciding and approving the day, date, time, and location of the Extraordinary general meeting (EGM) for shareholders’ approval regarding raising the capital base
- Issue of the notice of EGM by the authorised BOD or Company Secretary not less than 21 days before conducting such EGM to all shareholders, directors, members and auditors of the company
- Convening the EGM on the designated criteria of day, date, time and location
- Passing the ‘ordinary resolution’ for shareholders’ approval in the EGM and approving the increase of authorised share capital
- Any other legal procedure applicable to the company is to be followed within the prescribed time.
Step 3: Filing of Forms with ROC
The final step in increasing the authorised capital of the company is to file the required forms with the Registrar of Companies (ROC) within the prescribed time frame. The form SH-7 (Along with MGT-14 if Special Resolution is also passed for Alteration of AOA) is to be filed with ROC within 30 days of such alteration.
The following attachments to the SH-7 form are also to be filed with ROC, such as Altered MOA, Notice of EGM, and the copy of the resolution for capital alteration. The company shall make such payments for forms and other stamps. In case the company contravenes the applicable provisions, the authorised officers shall be liable to penalties and fines as prescribed.
The altered and new authorised share capital of the company will be updated accordingly. The company can verify the updated status of authorised capital in their company profile on the Ministry of Corporate Affairs (MCA) website.
The procedure and steps involved in increasing authorised share capital or share capital increase involve a lot of paperwork, drafting of resolutions, and filing of forms with the government. You can experience the quick and hassle-free way to raise your company’s authorised share capital under the guidance of professional legal experts. Contact us now!
Procedure for Increasing Subscribed Share Capital
Subscribed capital is nothing but the capital that is subscribed or purchased by the investors from the issued capital. Subscribed capital is part of the issued capital. The subscribed share capital increase can be further done in two ways: issuing new shares and converting debenture capital or loans into shares.
Procedure for Issuing or Further Allotment of New Shares
- The company shall do the further allotment after one year from the first allotment or after the expiry of two years from the registration date, whichever is earlier
- The priority shall be given to ‘existing shareholders’ for offering the new shares. This ‘rights issue’ shall be offered in proportion to the members’ shareholding
- The new shares can be offered to outsiders and the public at large only when a special resolution is passed in the GM, or an ordinary resolution is passed along with CG approval
- The offer notice shall be sent to existing members at least before 15 days from the date of such offer acceptance
- If the existing shareholders do not accept the offer within the specified time, then the offer is deemed to be refused, and the BOD can offer such shares through FPO or in any other manner that is beneficial to the co.
The procedure for conversion of debenture capital or loans into shares shall also be done in line with the provisions laid by the Companies Act, 2013.
Disadvantages of Increasing Capital Stock
- The share capital increase results in the ‘dilution’ of shares
- Accordingly, the voting rights and ownership of shareholders decrease with an increase in the capital base
- The ‘diluted EPS’ and the overall EPS amount comes to the relatively small figure
- The increase in capital stock indicates that there is a constant need for further financing for the company and also unstable financial solvency.
Benefits of Increasing Capital Stock
- The share dilution is protected by the ‘rights issue’ to the existing shareholders. This rights issue enables the existing shareholders to retain and protect their control over the company
- Even if there is any dilution in shares, this can be compensated and mitigated by the increased dividend payout ratio with an increase in the capital stock
- The return on equity will also be increased with additional stock
- Existing members can benefit when the company issues additional stock without witnessing a significant drop in share price.
Conclusion
The procedure for increasing the share capital of the company involves a bunch of compliances with the relevant provisions under the Companies Act, 2013: Here, one can get familiarised with the share capital increase procedures, steps involved in increasing the authorised and subscribed share capital and more. If you want to raise your company’s authorised share capital, then opt for the seamless and quick way only at Vakil Search.
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