A company upon its inception or incorporation records the foundation upon which it is built which means that it records the objectives that it has, founding members and importantly its authorized share capital in its charter documents. All the things, figures are recorded in the documents that a company holds.
The definition of the “Authorised share capital in the Companies Act, 2013 has been enumerated as the maximum amount of the share capital as authorised or which is authorised by the company's memorandum i.e. the maximum value of the shares that the company may issue or in other words “
authorised capital” or “nominal capital” to mean the maximum amount of share capital, as
authorised by the company’s memorandum i.e. the maximum value of shares the company may issue. What this denotes is the maximum value of securities that the company can issue in a legal manner. Which means that the authorized share capital is the maximum value that a company can hold.
It is a natural process that as a person grows his or her business and therefore, at a point when a person plans to grow business the first step is to get funding. The question that arises is from where does a person gets funding and what kind of funding is one actually looking at?
The nature of the funding can be debt or equity funding. Whenever a company chooses to go the equity route to raise the funding, it is then supposed to first check the value of share capital of the company. Almost in all the cases of the share subscription cases, fresh issues are issued to the new investor of the company and in all such cases where the ceiling of the authorized capital has already been reached, the company has to first undertake an increase in its authorized share capital.
Some of the relevant provisions related to the increase in share capital of the company are as follows:-
Section 61 of the Companies Act 2013 says that “Power of a limited company to alter its share capital
(i) a limited company having a share capital may if so authorized by its articles alter its memorandum in its general meeting for the purpose of the
- To increase its authorized share capital by the amount it thinks relevant;
- To consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares; with a proviso that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;
- To convert all or any of its fully paid-up capital shares into stock and reconvert that stock into fully paid up shares of any denomination;
- To sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;
- To cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled.
(ii) The cancellation of shares under sub-section (
1) shall not be deemed to be a
reduction of share capital.”
When section 61 of the companies act talks about the
power of the limited company to alter its share capital, section 64 of the Companies act 2013 mentions about the notice to be given to the registrar if any alteration is made in the authorized share capital of the company. The proviso lays down the following
“64. Notice to be given to Registrar for alteration of share capital
(
1) Where—
(a) a company alters its share capital in any manner specified in sub-section (
1)
of section 61;
(
b) an order made by the Government under sub-section (
4) read with
sub-section (
6) of section 62 has the effect of increasing authorized capital of a
company; or
(
c) a company redeems any redeemable preference shares,
the company shall file a notice in the prescribed form with the Registrar within a period of
thirty days of such alteration or increase or redemption, as the case may be, along with an
altered memorandum.
(
2) If a company and any officer of the company who is in default contravenes the
provisions of sub-section (
1), it or he shall be punishable with fine which may extend to one
thousand rupees for each day during which such default continues, or five lakh rupees,
whichever is less.”
Let us discuss in detail the procedure for increasing the authorized share capital.
- The authorization of Articles of Association
The articles of the association of the company must authorize them to increase the authorized share capital of the company. Another important point to note is that according to section 61 of the Companies Act, 2013, mandatorily requires that to increase the authorized share capital of the company, there must always be such an authorization in the AOA of the company. Basically, the company’s Articles of Association must always contain a provision authorizing it to increase its authorized share capital. This is also very important to note while drafting the Articles of Association of a company, thereby, keeping in mind the potential future needs of a company.
If the Articles of Association of the company provides for the proviso of changing the authorised share capital then the step further to that would be that in case there is no such provision in the AOA then the company has to do it according to the section 14 of the Companies Act 2013 with a view to change the authorised share capital of the company or in other words increase it.
- Board Meeting of the Company
A notice has to be issued as per Section 173(3) of the Companies Act, 2013 so as to convene a meeting of the board of directors of the company. The agenda for such a board meeting of the company should among other things (as applicable) for the purposes of increase in the share capital of the company include the following items:
Obtaining an in-principal approval of the directors of the company to increase the authorised share capital of the company;
Fixing of the date and time and the place for holding an extraordinary general meeting of the company so as to get the approval of the shareholders of the company for increase in the share capital of the company, by passing an ordinary resolution for increase in the authorised share capital of the company. This increase in the authorised share capital of the company has to be in accordance with and as per the requirement of Section 61 of the Companies Act, 2013;
The board of directors will have to approve the notice of the extraordinary general meeting of the company along with the agenda and the explanatory statement to be annexed to the notice of the extraordinary general meeting of the company as per the requirement of Section 102(1) of the Companies Act, 2013;
The board of directors will have to authorise a director or the company secretary of the company to issue the notice for the extraordinary general meeting of the company to authorise the increase in share capital of the company. A notice of the EGM of the company to authorise the increase in the share capital has to be issued to the members, directors and the auditors of the company according to the Section 101 of the Companies Act 2013 with the mandatory provisions of the Secretarial standard - 2 issued by the Institute of Company Secretaries of India;
- Extraordinary general meeting of the company
At the extraordinary general meeting of the company held on the due date and time, the shareholder of the company have to pass the necessary ordinary resolution under Section 61(1)(a) of the Companies Act, 2013, and thereby approve an increase in the authorised share capital of the Company.
- Form filing with the Registrar of Companies
The company is mandatorily required to file form SH-7 (within 30 days of the resolution passed at point 4 above, with the concerned Registrar of Companies, and Form SH-7 has to be accompanied with the following attachments as per the requirement of Section 64 of the Companies Act, 2013, i.e. the notice of the extraordinary general meeting of the company to authorise the increase in share capital of the company and the certified true copy of the resolution passed at the extraordinary general meeting of the company to authorise the increase in share capital of the company; and the altered memorandum of association of the company.
The Registrar will from thereon go for the verification process which means that he will first verify the form and the attachments with the form such as the various different identity cards etc.. after the verification of the attachments and the form is completed he will then approve the increase in the authorized share capital of the company. If there is an increase in the authorized share capital then for that the stamp duty is also required which needs to be paid electronically.
Form MGT-14 is also required to be filed along with a certified true copy of the resolution, notice of the extraordinary general meeting of the company to authorise the increase in share capital of the company, and explanatory statement thereto within 30 days from the passing of resolution along with the amended memorandum of association of the company and the articles of association of the company along with the requisite fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. An important point to make a note of is that unlike in the case of Form SH 7 the date of filing of the form of MGT-14 would not be the effective date regarding the increase in the authorized share capital of the company.
As a matter of best practice it is always advisable that the company while passing the relevant board resolution and shareholder resolution authorises two or more – directors and/or company secretary of the company for the purposes of carrying on relevant actions to give final effect to the increase in the share capital of the company, and also, more importantly, to ensure that all legal compliances have been carried on properly and in due time.
Further, it must always be kept in mind that there should be a complete compliance of any sectoral laws that may be applicable to the company, thereby requiring additional compliance to be undertaken by the company – these may be depending on the nature of the business undertaken by the company, include filing and consent requirements with respect to the relevant sectoral regulators.
Therefore, in order to increase the authorized share capital of the company one needs to abide by the procedures mentioned above and the non-compliance of which will be punishable as in accordance with the Companies Act, 2013. There are a few new amendments in place after the coming up of the Companies Act 2015, but they are with a view to foster ease of doing business and hence increasing the authorized share capital would not be affected.
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