Authorised capital, also known as nominal or registered capital, is the maximum amount of share capital that a company is legally allowed to issue to its shareholders, as stated in its Memorandum of Association (MOA). When we do company incorporation, we generally keep authorised shared capital anywhere between 1 Lakh to 15 Lakh as the stamp duty for small companies is less. However, when a company needs more funds from its existing or new investors, this amount acts as a ceiling for the company's ability to raise funds through equity and therefore it is required to increase the company's authorised share capital. Over time, as companies grow and seek to raise more funds, they may need to increase their authorised capital.

In case, a company has to issue preference shares, it needs to increase authorised share capital for preference separately.

This GrowthX article written by CA Manish Mishra explores in detail how companies can increase their authorised capital under the Companies Act, 2013, outlining the legal framework, procedure, necessary forms, and other key aspects such as stamp duty, the impact on the company's finances, and the rationale behind the decision.

Legal Framework: Companies Act, 2013

The Companies Act, 2013 governs all aspects of the formation and management of companies in India, including regulations about share capital. Specifically, provisions concerning authorised capital are mentioned under various sections, and this legal framework ensures transparency and compliance in increasing authorised capital.

Key Sections:

• Section 61 of the Companies Act, 2013: This section grants the company the power to alter its share capital. It lays out the process to increase, consolidate, subdivide, or cancel shares.
• Section 13: This section deals with the alteration of the Memorandum of Association (MOA). Since authorised capital is mentioned in the capital clause of the MOA, any change in authorised capital necessitates an amendment to the MOA.

Difference Between Authorised Capital, Issued Capital, and Paid-Up Capital

• Authorised Capital: This is the upper limit of capital that the company can issue. It is specified in the MOA at the time of incorporation and can only be increased through legal procedures.

• Issued Capital: This is the portion of the authorised capital that the company has actually issued to shareholders. It is always less than or equal to the authorised capital.

• Paid-Up Capital: This is the portion of issued capital that has been paid by the shareholders through right issues or private placement. For example, if a company issues shares with a face value of ₹10 and receives ₹5 from shareholders, the paid-up capital is half of the issued capital.

Why Increase Authorised Capital?

Companies increase their authorised capital for various reasons, including business growth, expansion, or new funding rounds. Let's explore the most common scenarios:

• Expansion of Business: As companies scale their operations, they may need to raise additional funds to invest in infrastructure, technology, or acquisitions. Increasing the authorised capital provides them with the flexibility to issue new shares to finance such activities.

• Raising Investment: If a company plans to attract new investors, it might need to issue new shares. To issue more shares, it must ensure that its authorised capital is sufficient. If the authorised capital is low, it limits the company’s ability to raise equity from investors.

• Meeting Regulatory Requirements: In some industries, companies must maintain a minimum authorised capital to comply with regulatory norms. For instance, certain businesses or government contracts require a company to have a minimum threshold of authorised capital to qualify for participation.

• Debt-Equity Ratio Management: Some companies prefer raising capital through equity rather than taking on additional debt. This is particularly true when a company's debt levels are already high, and further borrowing could lead to an unfavorable debt-to-equity ratio.

Did you know that increase in authorised capital makes alteration in MOA but increase in paid up share capital has no change in the MOA subscriber sheet.

Impact of Increasing Authorised Capital on the Company

• Balance Sheet Impact: Initially, an increase in authorised capital doesn’t directly impact the balance sheet. Only when new shares are issued does it reflect on the balance sheet, leading to an increase in the company's share capital and possibly an influx of cash.

• Shareholder Dilution: Issuing new shares after increasing the authorised capital may lead to dilution of the existing shareholders’ ownership percentages. For instance, if a company issues new shares to external investors, the ownership percentage of the current shareholders will reduce, unless they participate in the new share issuance.

• Legal and Financial Implications: The increase in authorised capital means higher potential issuance of shares, which may affect the company's valuation and financial strategy. Additionally, legal compliance costs, including stamp duty and ROC filing fees, must be factored into the company’s budgeting.

Sections and Rules Governing Authorised Capital Increase

The legal process of increasing authorised capital involves two key sections of the Companies Act, 2013:

• Section 61: This section provides the framework for altering the company’s share capital. Under this section, a company can increase its authorised capital by amending the MOA, consolidating or subdividing shares, or cancelling unissued shares. However, shareholder approval is mandatory for any such alteration.

• Section 13: Since the Memorandum of Association (MOA) contains details about the authorised capital, any increase requires an amendment to the capital clause (Clause V) of the MOA. Section 13 outlines the process for altering the MOA, which includes passing a special resolution in a general meeting.

MCA Forms Required for Increasing Authorised Capital

To increase the authorised capital, certain forms must be filed with the Registrar of Companies (ROC). These forms ensure legal compliance and transparency.

• Form SH-7: This form is used to notify the ROC about the increase in share capital. It must be filed within 30 days of passing the resolution to increase authorised capital.

• Form MGT-14: This form is filed when a special resolution is passed at a general meeting. The company must file the details of the resolution along with a copy of the altered MOA.

Procedure for Increasing Authorised Capital

Step 1: Check Current Authorised Capital and MOA

Before proceeding, the company should review its current authorised capital and ensure that it falls short of the amount needed. The company's Memorandum of Association (MOA), specifically Clause V, contains details about the existing authorised capital. Any increase will require amending this clause.

Step 2: Hold a Board Meeting

The first formal step is convening a Board Meeting to discuss the need for an increase in authorised capital. A resolution proposing the increase and calling for an Extraordinary General Meeting (EGM) must be passed.

During the board meeting, the following resolutions must be passed:

• A resolution to increase the authorised capital.
• A resolution to amend the MOA (specifically the capital clause).
• A resolution to convene an EGM for obtaining shareholder approval.

Step 3: Issue Notice for an Extraordinary General Meeting (EGM)

The company must send a notice for the EGM to all shareholders at least 21 days before the meeting, as per the requirements of the Companies Act, 2013. The notice should include:

• The date, time, and venue of the meeting.
• The agenda, i.e., increasing the authorised capital.
• The draft resolution for the shareholders’ approval.

Step 4: Hold the EGM and Pass Special Resolution

At the EGM, the proposal to increase the authorised capital and amend the MOA must be put to a vote. The shareholders need to pass a special resolution, which requires a minimum of 75% approval from the shareholders present and voting.

Step 5: File Forms with ROC

After the special resolution is passed, the company must file the following forms with the Registrar of Companies (ROC):

• Form MGT-14: This form is filed with the special resolution and the amended MOA.
• Form SH-7: This form notifies the ROC about the increase in authorised capital. The company must attach the special resolution and pay the prescribed fees.

Both forms must be filed within 30 days of the passing of the special resolution to avoid penalties.

Step 6: Pay Stamp Duty

The company must also pay stamp duty on the increased authorised capital, which varies depending on the state of incorporation.

The stamp duty must be paid to the appropriate authorities, and proof of payment may be required when filing forms with the ROC.

Amendment of Memorandum of Association (MOA)

The Memorandum of Association (MOA) is a crucial legal document that defines the company's capital structure. Specifically, Clause V (the Capital Clause) in the MOA mentions the authorised capital of the company.

When a company decides to increase its authorised capital, it must amend this clause. The amendment process is legally binding and requires both board approval and shareholder approval through a special resolution. The amended MOA, once approved, must be filed with the ROC to update the company’s legal records.

Timeframe and Compliance Requirements

The entire process of increasing authorised capital, from the board meeting to the filing of forms with the ROC, generally takes about 1 month. The forms (MGT-14 and SH-7) must be filed within 30 days of the EGM to avoid penalties. Any delays in filing may attract penalties from the ROC, which could range from daily fines to lump sum penalties depending on the length of the delay.

Effect of Capital Increase on Business Operations

Increasing the authorised capital offers a company several strategic advantages, including:

• Increased Funding Capacity: The company can raise additional funds by issuing more shares. This is particularly useful for growing companies that need capital for expansion, R&D, or new projects.

• Changes in Shareholding Structure: Issuing new shares can affect the company’s shareholding structure. Existing shareholders may face dilution if they do not participate in the new share issuance. However, the additional capital can often lead to enhanced growth prospects, which can benefit all shareholders in the long run.

• Legal and Compliance Obligations: With increased capital, the company must ensure compliance with statutory filings and may need to reassess its internal financial controls.

FAQs

1. What is the maximum limit for authorised capital?

There is no specific maximum limit for authorised capital under the Companies Act, 2013. It is based on the company’s needs and strategic objectives.

2. Can a company increase authorised capital multiple times?

Yes, a company can increase its authorised capital multiple times. However, each increase requires following the legal process outlined by the Companies Act, 2013.

3. What happens if authorised capital isn’t increased?

If authorised capital isn’t increased, the company may find itself unable to raise additional funds by issuing new shares, which could limit its ability to finance growth or meet strategic goals.

4. Does increasing authorised capital immediately impact the company’s finances?

No, increasing authorised capital alone does not impact the company’s financials. It only gives the company the ability to issue more shares. The financial impact occurs when those shares are actually issued.

5. Are there any penalties for not filing the necessary forms on time?

Yes, if the company fails to file forms SH-7 and MGT-14 within 30 days of passing the resolution, it may face fines and penalties from the Registrar of Companies (ROC).

6. How does the increase in authorised capital affect dividends?

An increase in authorised capital does not directly affect dividends. However, if new shares are issued, the company will have more shareholders among whom it may distribute dividends, which could reduce the per-share dividend if profits don’t increase proportionally.

GenZCFO Advice

Increasing authorised capital is an important decision for companies looking to expand their operations, attract new investors, or meet regulatory requirements. The process is governed by the Companies Act, 2013, and involves several legal steps, including board approval, shareholder consent, and filing forms with the Registrar of Companies. At GenZCFO, we understand the procedure and its implications, companies can ensure compliance and strategically manage their capital structure for growth and success. Feel free to reach out if you have any questions on increasing authorised share capital of the company and our team will be glad to help you out.