Each company is comprised of shares. An authorised share capital is the maximum number of shares which a company is authorised to issue. A company in India is empowered to increase its authorised capital prior to issuing shares to retail investors. It is also called nominal capital. In other words, authorised capital is essentially the limit to which an enterprise could be expanded. While, authorised share capital is the upper limit of the number shares a company may issue, its paid-up capital is the sum total of shares it has already issued. Therefore, paid-up capital can never exceed the authorised capital.
Following steps may be taken to increase the authorised share capital of a company:
Step 1: Verification of Articles of Association: The first step towards increasing an enterprise’s authorised capital is the verification of Articles of Association (AoA) to check if there is necessary authority to increase the authorised share capital, if not then the Articles of Association are to be accordingly changed which can be done by passing a Special Resolution as per Section 14 of the Companies Act.
Step2: Convening a Board Meeting: The next step is to convene a Board Meeting which can be done by providing of the notice of the same to the Director at least 7 days prior to the meeting and at the Board Meeting itself, approval is to be obtained the Board of Directors in order to increase the authorised share capital. Following this an Extraordinary General Meeting (EGM) is to be conducted and the date, time and venue of such meeting is to be fixed at the Board meeting. Other things that are required to be done during the Board meeting include issuing the notice of Extraordinary General Meeting to all the shareholders, auditors and directors of the enterprise.
The purpose of holding an EGM in this process is to obtain the assent of the shareholders. The approval of the shareholders is required to be in the form of an ordinary resolution authorising increasing of authorised share capital. It is to be noted here that if the Annual General Meeting (AGM) is to be conducted in the near future then this issue can be present before the shareholders under ‘Special Business’ and their assent can be obtained for the purpose of increasing share capital. The notice of a general meeting is to be issued at least 21 days prior to the meeting along with an Explanatory Statement as per Section 102 of the Companies Act. If there is a need to amend the Articles of Association then the company must file the form MGT-14 within 30 days after passing the Special Resolution at the General Meeting. Filing of form MGT-14 is a necessary step is Article of Association does not allow increasing of authorised share capital.
Step 3: Filing of Form SH-7: After conducting the EGM and obtaining the consent of shareholders the company is required to file form SH-7 within 30 days of passing the ordinary resolution at the general meeting. A certain amount of fee is to be paid while filing form SH-7 and along with filing the form, the company is required to attach and submit a copy of the Board Resolution, the notice concerning the EGM along with the explanatory statement, an authorised true copy of the ordinary resolution passed in the general meeting and an altered version of Memorandum of Association which has the new higher limit of authorised share capital.
Step 4: Increase in the Authorised Share Capital: if the procedure for increasing the authorised share capital is followed properly then the Registrar would authorise the request to increase the authorised share capital and the updated authorised share capital will be reflected on the Ministry of Corporate Affairs’ online portal. Following this, the company can increase its paid-up capital by attracting more investors to purchase their equity shares.
As the company grows and expands, or for the purposes of raising capital through an IPO, or to attract investors, an increase in the authorised share capital becomes essential. It is pertinent to know the procedure by which the same can be done. It is always preferable to obtain legal advice before you decide to increase the authorised share capital of your company.
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