What is Authorized Capital?
According to Section 2 (8) of the Companies Act 2013, “Authorized Capital” is the capital authorised by the company’s memorandum to be the maximum amount of the share capital of the company.
The authorized share capital is the total value of the shares that a company can issue whereas the paid-up capital is the total value of the shares of the company that have been issued, duly subscribed and paid up by the members. The paid up share capital can never be increased beyond the authorized share capital of the Company. Hence, if the company has a paid up share capital same as authorized capital and it wants to induct new shareholders then it can be done by:
- Increasing the Authorized share capital and issuing new shares (or)
- Transferring shares from the existing shareholders to the new shareholders.
Need for an increase in Authorized Share Capital
A Company may need to increase the authorised capital for a variety of reasons. Let's look at a few:
- There is a huge financial requirement
- financing fresh ventures for the business
- Combining two businesses and injecting funds into them as part of an arrangement plan
- further issue of capital
- Conversion of debt into equity capital
- to comply with legal obligations, if any
Documents Required for Authorized Share Capital Increase
Specific documentation must be submitted within 30 days following shareholder approval to formalize an increase in authorized share capital. For private companies, this involves submitting the resolution through e-form SH-7, while the submission of e-form MGT-14 is not required. Ensure the following documents are prepared for filing:
- The latest amended version of the Memorandum of Association (MoA)
- The most recent or revised copy of the Articles of Association (AoA), particularly in cases where the AoA has been altered
- A copy of the ordinary resolution approved by the company's shareholders
Procedure to Increase Authorized Share Capital
Convening a Board Meeting for Authorized Capital Increase
- Notice for Board Meeting:
- Board Resolution:
- Shareholder Notification
- Distribution of EGM Notice
Directors
Shareholders
Auditors
- EGM Notice Period
Conducting the Extraordinary General Meeting for Capital Increase
- During the EGM: The agenda item for increasing the authorized share capital is formally presented to the attendees.
- Voting Process: The voting occurs as outlined in the EGM notice, allowing shareholders to vote on the proposed increase.
- Resolution Approval: The resolution to increase the authorized capital is officially passed upon securing the necessary approval through voting.
- Documentation: An explanatory statement detailing the resolution and its implications is prepared and appended to the official records, marking the authorization of the capital increase.
Regulatory Filings for Authorized Capital Increase with ROC
Post-resolution, within 30 days, the company must complete the following filings along with the applicable fees:
- Filing of Form MGT – 14:
This form must be submitted to the Registrar of Companies (RoC) within 30 days following the adoption of the relevant resolution
- File Form SH-7 with the ROC:
File a notice of alteration of Share Capital with the Registrar in E-Form SH-7 along with the prescribed fee within 30 days of such alteration along with the following documents:
- Certified true copy of Ordinary Resolution for increase in Authorized Share Capital
- Copy of altered MOA
- Copy of altered AOA, if any
- Shorter notice consent, if any
- Any other document, as may be applicable.
- Payment of e-Stamp Duty:
Procedure Following Authorized Share Capital Increase
After the authorised share capital increase, certain steps need to be followed to ensure regulatory compliance and effective implementation of the decision.
Update MOA and AOA
Ensure that all copies of these documents reflect any changes made to the Memorandum of Association (MOA) and Articles of Association (AOA). This is to maintain consistency and legal compliance across all official company records.
Share Allotment
With the authorised share capital now increased, the company can increase its paid-up share capital. This is typically achieved by issuing new equity shares to existing or new shareholders, thereby infusing additional funds into the company.
Penalties for Non-Compliance with Authorized Capital Increase Procedures
While the Companies Act 2013, specifically in Sections 61 and 65, outlines the provisions for increasing authorised capital, it doesn't directly specify penalties within these sections. However, Section 450 of the Act addresses penalties for general non-compliance.
- When a company or its officers fail to adhere to the prescribed rules, a penalty of Rs. 10,000 is imposed.
- An additional daily penalty of Rs. 1,000 is levied for ongoing violations until the issue is resolved.
- Specifically concerning the late submission of Form SH-7, which is required within 30 days of the resolution to increase authorised capital, the penalty accrues at Rs. 1,000 per day of delay.
- This penalty continues until the default is corrected, subject to a maximum cap of Rs. 25 lakh, whichever amount is lower.