Increase Authorized Share Capital

Increase Authorized Share Capital
Do you want to increase your company’s share capital base? Taxneu's experts will set up your compliances and documents.
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How to Increase Authorized Capital?

In India, to run a company or business you need more funds over time & these funds can be required on a long & short-term basis. A short-term need can be satisfied by taking loans & advances, but for the long run the company will need more funds. For a Private Limited Company, this can be done by simply increasing the company’s authorized capital. Since, the Private Limited Company is regulated under the Companies Act, 2013 to make alterations in the business structure it is important to follow the Companies Act and Rules. While incorporating the Private Limited Company, the paid-up & authorized capital is specified in the capital mentioned in the Memorandum of Association (MoA). If any Company wants to issue more shares than the limit that is specified then amendments need to be done in the Memorandum of Association. So, it is necessary to check if the Authorized Capital of the Company is adequate for increasing the paid-up share capital of the Company. Scroll down to check more about how to increase Authorized capital.

Authorized Capital – Meaning

It’s the maximum amount of share capital that a Company is allowed to issue to its shareholders as per its constitutional documents. Shares are defined as the financial instruments that form units of the overall capital and it is used to raise funds from the public. It is used to limit the ability of Directors to allot new shares which may have consequences over the control of the Company. It’s used to prevent any shift in the profit distribution balance. Often, the amount provided as Authorized Capital is not fully used & a small % to be kept as a safety buffer to raise additional capital when you need to increase.

What are the primary components of Authorized Capital?

Following are the main components of Authorized Capital:

  1. Authorized Shares: This means the maximum number of shares a Company can legally issue and it is specified in the MoA (Memorandum of Association) or AoA (Articles of Association) of a Company.
  2. Total Value: Nominal Capital signifies the maximum amount of capital a Company can raise via share issuance. You can calculate it by simply multiplying the number of Authorized Share by the par value per share.
  3. Par Value per Share: This denotes the nominal value assigned to each share & sets a minimum issuance price. Remember that Par Value may not necessarily show the market value of the shares.

What are the Advantages of Increasing Authorized Capital?

Following are the advantages that you can get once you Increase Authorized Capital:

  1. Increasing the Confidence of Investor: Authorized Capital increases confidence in investors by demonstrating the Company’s capacity to raise additional capital when required. It signifies the Company’s preparedness to support its growth plans, pursue strategic initiatives & meet financial obligations, increasing investor trust & attracting potential stakeholders.
  2. Ensuring Flexibility in Capital Structure: Registered capital provides Company’s flexibility to structure its capital base. It allows the Company to issue new shares & raise additional funds as required, subject to compliance with legal regulations & obtaining shareholder approval.
  3. Facilitating Future Growth: By setting a higher authorized capital, a company can plan for future expansion & accommodate potential funding requirements without the need for frequent changes to its capital structure. This enables the Company to adapt to changing market conditions & seize growth opportunities.
  4. Protection against dilution: Authorized capital also safeguards existing shareholders from dilution, this is because the Company cannot issue more shares than the Authorized Capital without amending the AoA, which would acquire the approval of the existing shareholders.
  5. More Opportunities for Mergers & Acquisitions (M&A): Companies with a high Authorized Capital are also more attractive to acquirers as they provide more opportunities for growth & expansion. This makes it easier for companies to enter into M&A which can be beneficial for both parties.

What is the process to Increase Authorized Capital of a Company?

Before starting with the procedure to increase Authorized Capital it is vital to verify the Articles of Association to make sure that there is a provision in the AoA referring to the increase of the Company’s Authorized Share Capital. If there is no such provision then the Company must first make alterations to the Articles of Association of the Company. Once you verify the AoA of the Company, then you can start with the procedure. Following is the process to increase Authorized Capital of a Company:

Step 1: Conduct a Board Meeting: It is important to conduct a Board Meeting by providing notice to the Director to increase Authorized Capital. In this meeting, it is vital to get approval from the BoDs for increasing the Company’s Authorized Share Capital. After this process, a date should be fixed to conduct an EGM (Extraordinary General Meeting) meeting to get approval of the Company’s Shareholders for increasing the Authorized Share Capital & make alterations to the Memorandum of Association of the Company. Lastly, get the approval of the BODs, the Company Secretary who is present at the meeting to present the notice of EGM to the shareholder. Basing the approval, the notice of EGM should be presented to the Director, Auditors & Shareholders of the Company.

Step 2: Conduct EGM: Conduct this meeting & get approval of the shareholders to increase the authorized share capital on the date, time & place that is cited on the notice. The approval of the shareholders of the Company to increase Authorized Capital must be in the form of an Ordinary Resolution.

Step 3: File ROC Forms: After the Ordinary Resolution is passed at the EGM Form SH-7 should be filed by the Company within 30 days of passing the Ordinary Resolution. The suggested Government Fees for the Authorized Capital must be paid & the documents mentioned below must be attached.

  1. Notice regarding EGM;
  2. Authorized true copy of the ordinary resolution;
  3. The altered MoA (which represents the higher authorized capital).

If the procedures cited in the Companies Act & Rules are followed to increase Authorized Capital of the Company then the Registrar would approve the filing & increase Authorized Capital. The new Authorized Share Capital will be shown on the MCA site.

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