Increase Authorised Share Capital (Companies Act, 2013)

Increasing a company’s capital base is a conditional compliance measure. It necessitates officially raising the authorized capital by submitting the necessary documentation to the Registrar of Companies whenever a company opts to enhance its capital.

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Overview of Increase Authorized Share Capital

Increasing the authorized share capital of a company in India is governed by the Companies Act, 2013, and its associated rules. The process begins with a board meeting to approve the proposal, followed by an extraordinary general meeting (EGM) where shareholders pass a special resolution. The company must then file Form SH-7 with the Registrar of Companies (RoC) within 30 days, along with the requisite fee and supporting documents, including a copy of the resolution and altered Memorandum of Association (MoA).

Upon submission, the RoC reviews the application, and if all documents are in order, updates the company’s authorized share capital in the records. This increase allows the company to issue additional shares, enabling it to raise more capital for expansion, operations, or other financial needs. Compliance with these procedures ensures legal validity and transparency in the capital structure of the company.

blank-paper-sheet-with-small-scooter-table
blank-paper-sheet-with-small-scooter-table

Increasing the authorized share capital of a company in India is governed by the Companies Act, 2013, and its associated rules. The process begins with a board meeting to approve the proposal, followed by an extraordinary general meeting (EGM) where shareholders pass a special resolution. The company must then file Form SH-7 with the Registrar of Companies (RoC) within 30 days, along with the requisite fee and supporting documents, including a copy of the resolution and altered Memorandum of Association (MoA).

Upon submission, the RoC reviews the application, and if all documents are in order, updates the company’s authorized share capital in the records. This increase allows the company to issue additional shares, enabling it to raise more capital for expansion, operations, or other financial needs. Compliance with these procedures ensures legal validity and transparency in the capital structure of the company.

Why Increase Authorized Share Capital?

Increasing the authorized share capital of a company can have several strategic and financial implications. Here's a brief overview

Enables Further Capital Raising
Supports Business Expansion
Enhances Credibility
Facilitates Strategic Alliances
Attracts and Retains Talent
Flexibility in Financial Management
Enables Further Capital Raising

Increasing authorized share capital allows a company to issue more shares, raising additional funds.

Supports Business Expansion

With more capital, a company can finance expansion projects, R&D, and enter new markets.

Enhances Credibility

A higher authorized share capital can improve a company's image, making it more attractive to investors.

Facilitates Strategic Alliances

More shares can be used as a tool for mergers, acquisitions, or forming strategic partnerships.

Attracts and Retains Talent

Additional shares can be allocated for employee stock option plans, helping to attract and retain top talent.

Flexibility in Financial Management

It provides flexibility in financial decisions, such as stock splits and dividend policies.

Differences between authorized & paid-up share capital

Here’s a table outlining four important differences between authorized share capital and paid-up share capital:

Feature Authorized Share Capital Paid-Up Share Capital

Definition

The maximum amount of share capital that a company is authorized to issue to shareholders as per its Articles of Association.

The part of the authorized share capital that has been issued and fully paid by shareholders.

Purpose

Represents the growth potential and the ceiling up to which a company can raise capital through the issuance of shares.

Indicates the actual capital that has been invested by shareholders and is available to the company for use.

Change

Can be increased or altered by following a specific legal procedure, including passing a resolution in a general meeting and filing with regulatory authorities.

Can be increased by issuing more shares up to the limit of authorized share capital but cannot exceed the authorized limit without amending it.

Impact on Company Value

Reflects the potential for future expansion and does not directly affect the company's current financial position.

Represents the actual capital contributed by shareholders and directly impacts the company's equity and financial stability.

Share capital can be classified as follows

Procedure For Increasing Authorized Share Capital


Increasing the authorized share capital of a company in India involves a series of regulatory steps as per the Companies Act, 2013. Here’s a detailed guide with a clear presentation of the procedure:

Initial Check: Verify the Articles of Association (AoA) to ensure that the company has the provision to increase its authorized share capital. If not, the AoA must be altered first.

Convening the Meeting: Issue notices to all directors to convene a Board meeting.

Agenda Items: Discuss and approve the increase in authorized share capital, alteration of the AoA (if necessary), and fix the date, time, and agenda for the Extraordinary General Meeting (EGM) to obtain shareholders’ approval.

Notice of EGM: Issue a notice for the EGM to all shareholders, directors, and auditors of the company, clearly stating the agenda.

Passing of Resolution: At the EGM, pass an ordinary resolution for the increase of authorized share capital and, if required, an ordinary or special resolution for the alteration of the AoA.

Form SH-7: Within 30 days of passing the resolution, file Form SH-7 with the Registrar of Companies (RoC) through the MCA (Ministry of Corporate Affairs) portal.

Attachments: Attach the following documents to Form SH-7:

• Altered MoA and AoA, if applicable.
• Minutes of the EGM showing the passing of the resolution.
• A copy of the board resolution authorizing the capital increase.

Verification: The RoC will examine the filed documents and, upon satisfaction, approve the increase in authorized share capital.

Certificate of Registration: Upon approval, the RoC issues a certificate of registration regarding the alteration of the capital clause in the MoA.

Post-Increase Authorized Share Capital Compliances

NEED TO ADD TEXT HERE 

Updating Company Records

Statutory Registers: Update all relevant statutory registers, including the Register of Members and the Register of Share Allotments, to reflect the new authorized share capital.

Articles of Association (AoA): If the AoA was amended to increase the authorized share capital, ensure the updated AoA is recorded and accessible.

Compliance with SEBI Regulations

For listed companies in India, it is crucial to comply with the Securities and Exchange Board of India (SEBI) regulations, especially after an increase in authorized share capital and any subsequent issuance of shares.

This includes adhering to disclosure requirements and investor protection norms.

Annual Return Filing

The increased authorized share capital must be reported in the company’s annual returns filed with the Registrar of Companies (RoC).

 

This includes Form MGT-7, which captures details of the company’s share capital, among other things.

How V Smart Auditor Can Help ?

  • Expert Guidance

    We offer expert advice on the legal and procedural aspects of increasing authorized share capital, ensuring compliance with the Companies Act, 2013, and other relevant regulations.

  • Documentation Support

    The service can assist in preparing and reviewing all necessary documents, including resolutions for Board and shareholder meetings, alterations to the Articles of Association, and the filing of Form SH-7 with the Registrar of Companies.

  • Meeting Coordination

    Help in organizing and conducting the required Board and Extraordinary General Meetings (EGMs), including drafting notices, agendas, and minutes to ensure proper documentation and compliance.

  • Regulatory Filings

    The service can manage the submission of all necessary filings to the Registrar of Companies and other regulatory bodies, ensuring that all paperwork is completed accurately and submitted within the required deadlines.

  • Stakeholder Communication

    Assist in drafting and disseminating communication to stakeholders, including shareholders, employees, and creditors, to inform them of the changes in authorized share capital and the potential impact on their interests.

  • Post-Increase Compliance

    After the increase in authorized share capital, we provide ongoing support to ensure that the company remains compliant with post-increase requirements, such as updating company records, issuing share certificates, and monitoring compliance with shareholder agreements.

Frequently asked questions

What is authorized share capital?

Authorized share capital, also known as authorized capital or nominal capital, represents the maximum amount of capital that a company is legally allowed to issue in the form of shares. It is the upper limit of funds that a company can raise from its shareholders.

Why would a company want to increase its authorized share capital?

A company may want to increase its authorized share capital to raise additional funds for various purposes, such as expansion, acquisitions, or debt reduction. It provides flexibility for future capital needs without the need for formal changes in the company's articles of association.

How can a company increase its authorized share capital?

To increase authorized share capital, the company must hold a meeting of its shareholders, pass a special resolution, and file the necessary documents with the relevant regulatory authorities, such as the Registrar of Companies. These documents typically include an altered Memorandum of Association and Articles of Association.

What are the regulatory requirements for increasing authorized share capital?

The specific regulatory requirements can vary depending on the country and jurisdiction in which the company is registered. Generally, you need to follow the Companies Act or equivalent regulations in your country, and you may need approval from government agencies, like the Registrar of Companies. Consult with legal and financial professionals for guidance on your specific jurisdiction

Are there any drawbacks to increasing authorized share capital?

While increasing authorized share capital provides flexibility for raising more funds, it also dilutes the ownership of existing shareholders. When new shares are issued, the ownership percentage of current shareholders decreases, which can lead to a reduction in their control over the company.

Can authorized share capital be decreased after it has been increased?

In many jurisdictions, it is possible to decrease authorized share capital, but this process can be more complicated than increasing it. It often requires court approval, and shareholders may need to be consulted. Reducing authorized share capital should be carefully considered and handled with legal advice.

Do companies have to issue all the authorized share capital at once?

No, companies do not have to issue all authorized share capital at once. They can issue shares in tranches as needed, provided it does not exceed the authorized limit. This flexibility allows companies to raise capital in phases.

How does an increase in authorized share capital impact the stock market and investors?

An increase in authorized share capital may not immediately impact the stock market, but if the company decides to issue new shares, it can affect the stock price, earnings per share, and the ownership structure. Investors often monitor such changes closely to assess their potential impact on the company's value and prospects.