In this article, you will get to know the concept of Indian Corporate Law. Read on to know more.
What exactly is authorised share capital? Why do you need it? In this article, we’re going to discuss the authorization of share capital, who can approve it, the consequences of authorizing more than the maximum share capital, and everything else you need to know about this concept in Indian Corporate Law.
1) Authorised Share Capital Needs to Be Increased
Share capital needs to be increased when the company’s shareholding exceeds 500 shareholders, and its authorized share capital is not more than Rs.10 crores.
If a company has more than one class of shares, it should increase the share capital proportionately for each type of share.
The Board of directors should approve any increase in the share capital, and it should send its resolution to shareholders with a notice calling on them to assemble at an extraordinary general meeting (EGM) where they are called upon to pass a special resolution authorizing the increase in authorised share capital.
2) Admission of New Equity Shares by a Company
A company may, subject to any restrictions in its articles of association and the provisions of this act, admit new equity shares by issuing a notice of a general meeting to its members. The notice shall contain full particulars of the proposed issue, including the number of new shares to be issued and the price thereof.
At such meeting, every member shall have a right either-
(a) To purchase as many new shares as he may choose; or
(b) To sell all or any of his old shares for such a proportionate number of new shares as his old claim bears to the total number of existing shares, excluding those proposed to be issued.
3) Increase in Share Capital Upon Conversion of Preference Shares
Increase in share capital upon conversion of preference shares. In some cases, a company may have to increase its authorized share capital if the conversion of preference shares increases the authorized share capital. The amount required to be paid on account of such an increase is calculated as follows:
If the authorized share capital available for allotment before the conversion has been fully subscribed, then the additional required amount is one-tenth (1/10th) or such other proportion as may be specified by resolution or regulation, whichever is less, of the paid-up value of each ordinary share which will be issued upon allotment; and
4) Registration With Registrar
With the Registrar of Companies, you need to take a few more steps before your company is officially registered. These involve submitting an application, filing a declaration, and providing two passport-size photographs of all directors. Additionally, you will need to provide a copy of the Memorandum and Articles of Association.
It can complete the process within a week if everything goes smoothly. Once your application is accepted and processed, you will receive your Certificate of Incorporation with details about your authorized share capital and other information.
5) Increase for Promoter’s Shares
An equity share capital is a measure of shareholders’ ownership interest in an entity.
If the company has issued 100 equity shares, each with a par value of ₹10, and one of these shares is allotted to its promoter for ₹40, then the authorized share capital would be increased by ten (10) shares from 100 to 110 shares.
6) Increase Due to Preferential Allotment to Companies or Institutions
A company’s authorised share capital is not a binding limit or restriction on the company. The law does not require the share capital to be fully paid up, but companies are limited to a minimum of two shareholders.
The Board of Directors determines how much authorized share capital needs to be issued. If a company has a positive net worth and there is no preference share increase, it can offer equity shares up to its authorized limit.
7) Conversion from Debentures into Equity Shares and Vice Versa
The conversion of debentures into equity shares and vice versa is restricted. Under securitisation, the conversion of the notes into shares is not permitted as this could be detrimental to the interests of other investors.
In a restructuring exercise, if there are restrictions on the conversion of equity shares, these cannot be removed without the consent of all shareholders. Moreover, it is not permissible to convert preference shares into ordinary shares and vice versa.
8) Issue of bonus shares
In India, the issue of bonus shares is regulated by section 185 of the Companies Act. To issue bonus shares, a company must meet two criteria.
Firstly, it must have a share capital that is not less than one lakh rupees, and secondly, the company should have either paid up money that is not less than ten thousand rupees or a net worth that is not less than twenty-five thousand rupees.
In addition to these requirements, there are certain restrictions on issuing bonus shares. For example, a company may only print one type of share as bonus equity, and any such issues may not exceed fifty percent of the total issued share capital.
9) Issue as Part-Payment of Consideration
In commercial terms, the authorised share capital is considered a company’s equity and the number of shares it can issue from all these parts. In other words, it is the minimum number of shares a company can issue without having to get its shareholders’ approval. The shareholders’ approval is also called a special resolution, which requires more than 50% of votes from all shareholders.
In addition, if a company wants to issue more units (units equal to 100 shares) beyond its authorized share capital, then this would require another type of resolution called ordinary resolution. This type of vote needs more than 50% votes from all shareholders.
10) Liquidation Distribution on Amalgamation, Demerger, etc.
There are two types of distributions that a company can make during liquidation, namely: (a) return of capital; and (b) dividends. The first type is the distribution of a company’s net assets to its shareholders by way of return of capital.
This comprises the reduction of share capital, and the residual amount after such removal is paid out to shareholders. The second type is the distribution by a company, during its winding up, of all or any part of its shares or shares capital to its shareholders as a dividend.
Conclusion
Authorised Share Capital (ASC) refers to the maximum number of shares that a company can issue. Every company incorporated in India has to have an authorized share capital, regardless of whether it has given all its claims or not. The shareholders can issue the unissued shares as per their wish and whenever they want, as long as it is within limits specified by the Articles of Association (AoA). ASC plays a vital role in ensuring that the rights of shareholders are not violated while also allowing them to invest additional funds into the company if needed. For further details contact Vakilsearch.
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