Any business will require more money to function over time. These funds may be required for both long-term and short-term purposes.
Taking out loans and advances may be necessary to address an immediate need.
However, the company will require more funds to function. This can be performed for a Private Limited Company by increasing the maximum authorised capital of the company.
Increasing the maximum amount of capital, a company is authorised to issue to its shareholders is an authorised capital increase.
This increase in authorised capital is normally accomplished by modifying the company's articles of association. It does not always mean the firm will issue all newly authorised shares.
When a company wants to raise additional funds for expansion or other commercial goals, the procedure of authorised capital increase is often undertaken.
By expanding its authorised capital, the company can issue more shares in the future without repeating the time-consuming process of changing its articles of organisation.
Understanding that an authorised capital increase does not necessarily mean that the firm will issue additional shares or that existing shareholders will be diluted.
The decision to issue new shares, as well as the terms of such issuance, will be subject to approval by the company's board of directors and shareholders and will be influenced by a number of variables, including market circumstances, the company's financial needs, and the interests of existing shareholders.
What is Authorised Capital?
The maximum amount of share capital a company authorises to issue to its shareholders, as specified in its statutory documents, is referred to as authorised capital.
Authorised share capital, registered capital, and nominal capital are other terms for it.
The authorised capital is specified in the articles of association and can only be changed by a shareholder vote.
The authorised capital cannot be exceeded, and the number of shares issued must always be less than or equal to the registered capital.
The authorised capital is often divided into a set number of shares with a specific nominal value, and businesses often issue just a portion of their authorised capital at first.
The leftover authorised capital can be used for various purposes in the future, such as financing acquisitions, supporting new initiatives, or offering employee incentives.
It should be noted that authorised capital is not the same as issued capital, which refers to the actual number of shares issued by the firm and held by its shareholders.
The difference between authorised capital and issued capital shows the company's unissued or unused authorised capital.
Let's now discuss the steps for increasing the authorised capital.
Process for Increase in Authorized Share Capital
Companies usually decide to increase authorised capital when they need to expand their firm and require a large amount of capital.
Increased authorised capital allows your company to apply for greater loans from banks and other financial organisations.
Here's a step-by-step method for increasing your company's authorised capital:
Step 1: Modification of the AOA (Articles of Association) of the company
The Memorandum of Association and Articles of Association of your firm hold the key to modifying the authorised capital.
The Articles of Association (AoA) is a legal document containing information such as the company's scope of activity, purpose, internal rules and regulations, etc.
A Memorandum of Association (MoA) contains the company's by-laws and other matters.
Every firm must indicate the authorised capital it will require over its existence in its Articles of Association.
It generally includes a provision for expanding or decreasing the authorised capital.
So, the first step in changing the authorised capital is to see if the AoA and MoA allow it.
If the Articles of Association do not provide a provision for changing authorised capital, you must revise the Articles of Association.
These adjustments must be made in accordance with Section 14 of the Companies Act of 2013 by passing a special resolution.
Step 2: Get the Board of Directors' approval
The company's board must approve any amendments to the authorised capital of directors. To call a meeting, you must notify all board members.
The Board meeting should follow the following guidelines:
- The agenda for the meeting must be sent to the directors' registered addresses at least 7 days in advance.
- Pass a Board Resolution calling for an Extraordinary General Meeting and providing notice in compliance with Section 101 of the Act. Adopting an Ordinary Resolution will allow the modified authorised capital in the Memorandum of Association to be proposed for approval. The proposed amendment must follow the provisions of Section 60 of the Act.
- The notice of the meeting, which includes the agenda, date, time, and location, must be communicated to the shareholders.
- The mode of voting to be used at the Extraordinary General Meeting to pass the resolution must be mentioned in the notice.
- The following individuals will be notified of the Extraordinary General Meeting:
- The EGM notice must be given at least 21 days before the EGM date. However, if and only if the permission of at least 95% of the members entitled to vote at the meeting is secured, a shorter notice period may be given. Consent of the members can be obtained in the following ways:
- Mode Electronic
Step 3: Hold Extra Ordinary General Meeting
During the EGM, shareholders must discuss the justifications for increasing the authorised capital before voting on the issue.
The resolution occurs when 50% of the board members vote to increase the authorised capital.
The topic of increasing the share capital is raised at the start of the meeting.
The matter is subsequently decided through voting in a predefined order. After receiving approval and passing the resolution, the explanatory statement is attached, and the Authorized Capital is increased.
The shareholders must approve an ordinary resolution to increase the authorised capital.
Step 4: Filling the form with ROC
Within 30 days of the ordinary resolution being approved at the extraordinary general meeting, submit Form SH7 and eForm MGT-14 (if applicable) to the Registrar.
The documents listed below must be submitted, together with the specified government fee for the authorised capital.
- Confirmed Exact Copy of the Ordinary Resolution
- Related Notice for the Extraordinary General Meeting
- Amended Memorandum of Association
The registrar would approve the paperwork and increase the authorised share capital of the business if the procedure stated in the Companies Act and the Companies Rules was followed.
Step 5: Allotment of Shares
When the authorised share capital is raised, the company's paid-up share capital can also be raised by issuing more equity shares.
Documents needed to increase the authorised capital
- Digital Signature Certificate
A Digital Signature Certificate (DSC) is essential in increasing the authorised capital of an organisation since it is affixed on documents presented in electronic form by the authorised person, ensuring the security and authenticity of the documents.
Form SH-7 must be filed with the Registrar of Companies (ROC) for increasing authorised capital, and a copy of the form must be signed by a director or manager of the company using a DSC.
The DSC authenticates documents, papers, and other items and is essential for the business incorporation process.
- Altered Memorandum of Association
If a company wants to increase its authorised capital, its Memorandum of Association (MoA) must reflect the increased amount.
The Companies Act, Section 13, allows for altering the MoA. As a result, if a company wants to increase its authorised capital, it must follow The Companies Act's procedure for changing the MoA.
The amended Memorandum of Association must be submitted to the Registrar of Companies. (ROC).
- Altered Article of Association
To increase a business's authorised capital, the company must first determine whether it is permitted to do so by its articles of association (AOA).
If permitted, the business must pass an appropriate board of directors and shareholder resolution and change the capital clause of the memorandum of association.
(MOA). Within 30 days, a notice of alteration must be filed with the Registrar of Companies (ROC).
- Form SH - 7
This form must be submitted to the RoC within 30 days of the resolution's approval.
The objective of this form is to notify the Registrar of the details of the authorised capital increase. The following information is entered into the form and sent to the MCA portal:
- The company's information, including its CIN.
- Type of resolution.
- The date of the meeting.
- A Service Request Number was assigned to Form MGT-14. (SRN).
- Information about the initial authorised share capital as well as the current authorised share capital.
- Information on how the new share capital will be distributed.
- Details of the Stamp Duty Fees Paid.
- Use digital signatures and DIN whenever possible. (Director Identification Number).
To avoid penalties or eventual sanctions for which the company and its officers will be held accountable, the paperwork must be delivered within the time span given. RoC will process your application after you have completed the forms.
- Form MGT – 14
Form MGT-14, which is used to send specific opinions to the Registrar of Companies( ROC), was added as a result of the 2013 Companies Act.
The form is designed to give a basis for the directors to file resolutions made at various meetings of the organisation's Board of Directors, Shareholders, or Creditors.
This form must be submitted to the RoC within 30 days of the resolution's approval.
The following information must be entered into the form and submitted to the MCA portal:
- Details about the company, including the 21-digit Corporate Identification Number.
- The justification for submitting the form.
- The dispatch date of the notice.
- A copy of the ordinary resolution that was passed.
- A copy of the resolution was approved at the EGM.
- The resolution's details.
- Wherever possible, use digital signatures and DINs.
- Notice issued at EGM.
Reasons for Increasing Authorised Capital
A firm could opt to raise its authorised capital for a number of reasons. Some of them are listed below.
1. Needs for future funding
By raising the authorised capital, a company gains the ability to raise more money down the road if the need arises.
For instance, a business may need additional funding if it intends to grow or introduce a new product.
Without having to go through the time-consuming process of getting shareholder approval for an increase in authorised capital, the company can easily issue new shares to obtain the needed money with higher authorised capital.
2. Financing options
A business with a greater authorised capital may appeal to lenders or investors who are more eager to lend to or invest in a company with a bigger capital base.
This is due to the fact that a greater capital base suggests the company has the ability to earn better returns on investment, which can make the company more appealing to lenders and investors.
3. Acquisition opportunities
Increasing authorised capital can assist a company in taking advantage of future acquisition opportunities.
For example, if a company identifies a possible acquisition target, it may need additional funds to complete the acquisition.
With a greater authorised capital, the firm can issue additional shares to raise the necessary funds without seeking shareholder permission for a capital increase.
So the company raises its authorised capital to avoid future delays.
4. Increased credibility
A higher authorised capital might also help a company's reputation with investors and lenders.
This is because a greater capital base shows that the company can grow and expand in the future, which might make it more appealing to investors and lenders.
5. Shareholder value
Increased authorised capital has the ability to boost shareholder value. This is due to the fact that increased authorised capital might increase the market value of a company's shares.
As a result, shareholders may benefit by raising the value of their investments.
Furthermore, a larger authorised capital allows a company to issue fresh shares for employee stock options or to reward shareholders with stock dividends.
Benefits of Authorised Capital Increase Service from Especia
- Especia can assist firms with their approved capital expansion by providing financial counselling and consultancy services.
- By reviewing the company's funding requirements and studying its financial situation, Especia's financial experts may aid businesses in identifying their appropriate capital structure.
- Before proceeding with an increase in authorised capital, it is essential to ensure that all stakeholders are on board. Especia can assist organisations in navigating the complexities of capital raising and compliance rules.
- Especia may assist companies in reviewing their Memorandum of Association and Articles of Association to ensure they are in accordance with the company's capital-raising strategies.
Increasing a company's authorised capital is a critical decision that can significantly affect its future growth and success.
By increasing authorised capital, a company can have more flexibility in the future to issue new shares, allowing it to generate more funds and expand its operations.
It can also boost the company's credibility and attractiveness to investors by indicating a willingness and the capacity to take on larger projects.
Increasing a company's authorised share capital is a decision made by the company's management and board members.
A company's authorised capital can be increased at any moment with the approval of its shareholders.
It is required for a company to increase its authorised share capital under AOA or following member approval in an ordinary resolution in an EGM.
A company may choose to increase its authorised capital for various reasons.
Several of the most typical reasons are growth, fundraising, gaining credibility, and others.
In general, the firm must file an application with the Registrar of Companies (ROC) and submit documents such as a board resolution, altered Articles of Association, altered Memorandum of Association, Form SH -7, Form MGT-14 (if applicable), and a certificate of incorporation.
A fee for the increase of authorised capital may also be required.
To ensure compliance with all relevant legislation and procedures, it is best to obtain the advice of a legal expert with Especia.
Why choose Especia for Authorised Capital Increase Service
They offer a perfect option for all of your financial and administrative requirements.
You receive a one-stop-shop and satisfied resolution from specialists who are the best in their field.
They provide one-stop finance outsourcing services such as valuation, secretarial and transaction advisory services, regular tax and compliance services, and virtual CFO services.
Tax and corporate rules are rapidly changing in order to increase transparency and governance in the operations of businesses.
They assist companies and founders in focusing on their core competencies while Especia manages your whole finance department operations.