Overview on Increase in Authorized Share Capital

Increase in Authorized Share Capital

Brief Introduction

• Promoters of a corporation decide the capital investments at the incorporation stage. Because the business grows, the corporate expands its operation. It is commonly seen that the capital contribution exceeds the limit of authorized capital. Now, in order to facilitate the same, the management or the Board of Directors, look for the increase in authorized capital of their company.
• The authorized capital is that the amount of capital that companies have the right to issue shares to the shareholders.
• Let us check up on the authorized capital of the corporate, increase in authorized capital of company, the method to change the authorized capital, and filing of form to ROC.

Meaning of Authorized Capital

• An authorized capital is the amount of capital which is permitted within the Memorandum of Association (MOA) to be the maximum amount of share capital of the said company.
• This has also been defined under Section 2(8) of the companies Act. So, we can say that a corporation can take all the steps for increasing the authorized share capital limit so as to issue more shares, but it cannot issue shares which are exceeding the authorized limit.
• It is mandatory for an organization to increase the authorized share capital given that authorization under AOA or after member approval in ordinary resolution in EGM.
• Increase in Authorized Capital. The authorized capital is the total worth of the shares or value of shares the corporate can issue. it’s important for the corporate to extend the share capital before they issue the new share and also increase the paid-up capital.
• Moreover, the paid-up capital is that the total value of the shares the corporate has already issued. Furthermore, the paid-up capital shouldn’t exceed the authorized capital. The new shareholder is inducted by increasing the authorized share capital, issuance of recent shares, and transfer of existing shares.

Alteration

Alteration of authorized share capital means a rise in authorized capital of company, consolidation or division or sub-division of shares, conversion of paid-up shares into a stock or the other way around, or lastly cancellation of unsubscribed shares.

Need for Alteration

• The main reason for the alteration of the authorized share capital of a corporation is to extend the share capital in order that the corporate receives more capital for growth. Since we already discussed that authorized share capital is that the maximum amount of share capital of the corporate, so one among the most fundamental reasons to change share capital is for increasing the capital of the corporate for its growth.
• One variety of alteration is that the sub-division of shares. The sub-division increases the liquidity of shares within the market and increases the number of small shareholders within the market.

Mode to Alteration

Companies can alter the authorized share capital by alteration of the capital clause within the MOA. Section 13 of the provides that one can alter the share capital in line with section 61 of the Act.

• Companies Act, 2013 in section 61 talks about the facility of the limited company to alter the share capital. Furthermore, section 61 is merely talking about the sort of alteration of authorized share capital in limited companies starting from the issued capital or paid-up or un-paid capital, etc.
• The first step towards alteration or increase in authorized capital of company is to test whether the corporate can alter shares under AOA. In the case of an unlimited company, the alteration of share capital is often complete under section 65. Section 65 of the companies Act deals with the reserve of the share capital. On conversion to a company.
• Before alteration of share capital, the unlimited company has got to convert itself so alter the share capital within the following ways-
• By increasing the nominal amount of share capital but it can’t be called up except just in case of winding up of the corporate. So, we are able to say that company can increase the face value of the existing share to increasing the share capital.
• The company can reserve the uncalled share capital for winding up of the corporate.

Procedure for Alteration

1. Verification of AOA

• The AOA or Article of Association could be a document having the principles and regulations of the corporate. Before there’s a rise in authorized capital of company, it’s necessary to verify the contents of the Article of Association.
• Verification is necessary to make sure that they need the supply of alteration or increase of authorized share capital. If the availability is there, the alteration is simple and straightforward.
• But if the corporate doesn’t have the supply for the rise in authorized share capital, then they need to amend the AOA. the corporate can proceed with alteration only the alteration is complete.
• There will be a rise within the authorized share capital by passing resolutions either within the meeting or through circulation.

2. Conduct of Board Meeting

• It is mandatory to send notice of meeting to the director a minimum of 7 days ahead for increasing the authorized capital of the corporate. the businesses need the approval of the board of directors for increasing the capital.
• Once the approval is complete, the board decides to conduct the final meeting. This meeting is critical for the approval of shareholders for alteration or increase within the authorized share capital.
• it’s also important in terms of amendments to the MOA. Notice of general meeting also has an explanatory statement consistent with section 102.
• Lastly, the corporate passes a board resolution for the extraordinary general meeting and issues notice under section 101. Under this, the altered clause on the authorized share capital in MOA may be shown for approval by passing the normal resolution.

3. Conduct of Extra-Ordinary General Meeting

• The directors, shareholders, and auditors receive the notice of the extraordinary general meeting or EGM. This notice isn’t given but 21 days before the date of EGM. A shorter period is additionally allowed if 95% of the members vote for it at the meeting.
• This consent will be either in writing or electronic mode.
• The notice has the date, day time and place of the EGM. Once the meeting starts, the matter referring to the rise in authorized capital of company is put forth.
• Then the voting takes place and thereafter the resolution is additionally passed together with an explanatory statement. The approval for increasing the authorized capital should be in ordinary resolution.

4. Filing of ROC Forms

• If the AOA of the corporate already authorizes a rise, then they have to submit Form SH-7 under section 64 of the companies Act, 2013 within a span of 30 days of alteration. Along with Form SH-7, the corporate has to submit actuality certified copy of the resolution altering the share capital, Altered MOA and lastly, if the change is thanks to the order of the Central government of NCLT, then such order also has to run.
• After this, the Registrar approves the filing and increase in authorized capital of company. the new updated share capital is going to be shown on the official MCA Portal.
• The company needs to file e-form SH-7 and MGT-14(if applicable) within 30 days of resolution together with the prescribed fees.

5. Filing of E-form MGT-14

• This form has the main points of the corporate, the most purpose of the corporate, date of notice, resolution, and other details about the resolution and digital signatures and DIN.

Along with e-form MGT-14, the corporate must submit the subsequent documents-

• The notice of extraordinary general meeting together with the explanatory statement.
• Certified copy of the resolution is given in EGM.
• New copy of the MOA and AOA.
• E-Form SH – 7

E-form SH-7 states the main points of the rise in authorized capital of company. this way is filed within 30 days of resolution.

• This form has details of the corporate, sort of resolution together with SRN, date of the meeting, details about the authorized share capital, digital signature, and taxation.
• The company must attach a duplicate of the resolution, new MOA and AOA, and other optional attachments if any.

6. Allotment of Shares

After the corporate increases the authorized capital, there is a rise in paid-up share capital by issuing fresh equity shares.

Penal Provisions

• Section 61 and 65 don’t discuss the penalty, the act states about the penalty in section 450. just in case of non-compliance with the rules, the corporate and therefore the officers in default need to pay Rs. 10,000.
• On continuous default, the party needs to pay Rs. 1000 per day till the default is rectified.
• If the corporate fails to submit SH-7 within 30 days, then Rs. 1000 fine per day is there till the default continues or Rs. 25 Lakh whichever is a smaller amount.

Conclusion

• Companies often look to expand their operations, size and structure. For this, they have funds by increasing the authorized capital of the corporate. Sometimes this amount surpasses the authorized capital.
• Hence the authorized capital is that the maximum amount of capital that the corporate has the freedom to issue shares.

Complete Overview on Share Capital or Debenture