With the expansion of the business, all the companies require more funds to operate the business. These funds can be both short or long-term. If a company has a short-term need, it can be satisfied by taking loans or advances from the bank or investors. In the long run, the company may need more funds. A company can achieve it by increasing the authorized capital of the company. Since the private limited company is regulated under Government and Company Act, a certain procedure has to be followed to increase the authorized share capital.
A company should mention the authorized and paid-up capital limit in the MOA of the company. If the company wants to issue more shares than the limit mentioned in the MOA, it needs to make changes in MOA first.
As per Section 2 of the Companies Act, 2013, authorized capital is the capital authorized by the memorandum of the company as the maximum amount of the share capital.
According to Section 2 (8) of the Companies Act, 2013 “Authorized Capital” is the capital that is authorized by the memorandum of the company to be the maximum amount of the share capital of the company.
A company might want to increase the authorized share capital before issuing the equity shares. Authorized Capital is the total value of shares a company can issue and the paid capital is the total value of shares that have been issued by the company.
The paid capital should not be larger than the authorized capital. However, if the company has authorized capital of Rs.20 lakh and paid capital of Rs.20 lakh. Induction of new shareholders can be done.
Verify Articles of Association of the Company
Before initiating the procedure of increasing authorized share capital, verification of Articles of Association is necessary to ensure that there is some increasing share capital-related provision mentioned in the Articles of Association. If there is no such provision mentioned in the AOA, the company has to make changes in the AOA first.
However, most of the Articles of Association consist of the authorized share capital of the company, just in case if you don't have one; edit it.
Commence a Board Meeting
Commencement of the board meeting is necessary. A notice will be sent to the director to conduct a board meeting for increasing the authorized share capital of the company. Approval of the board of directors is required.
A date should be fixed to conduct the Extra-Ordinary General meeting to get the approval of all the shareholders to increase the authorized share capital and make required changes in the MOA of the company.
After completing the whole procedure, the company secretary present at the meeting will present the notice of Extraordinary general meeting to all the shareholders, auditors, and directors of the company.
To obtain the approval of shareholders to increase the authorized share capital an extraordinary general meeting should be conducted. Time, date, and place everything should be mentioned on the notice.
The approval of shareholders must be in the form of ordinary resolution notice.
File ROC Forms
An SH7 form should be filled by the company within 30 days of passing the ordinary resolution in the meeting. The government prescribed fees amount should be paid, along with the following documents:
If one follows the procedure of increasing share capital mentioned in the Companies Act and the Companies rule, then the registrar will approve the filling and increase the authorized share capital. It will be reflected on the portal of the Ministry of Corporate Affairs.
Allotment of Shares
Paid-up share capital can be increased by issuing fresh equity shares, once the authorized share capital is increased.
Within 30 days of passing the resolution, a company must file an eForm SH-7 and eForm MGT-14, along with prescribed fees.
A company cannot reduce its authorized capital legally. But can cancel the portion of share capital and reduce the share capital by the amount.
The authorized capital of the company equals the number of shares a company can issue to its shareholders. To increase the capital, a company should make sure the Article of Association must have a provision related to increasing capital.
You need to issue new shares and allocate them in the executive gathering to increase the paid-up capital.