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Authorized Capital Increase

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Overview

What is a Authorized Capital Increase?

The Authorised Share Capital of a company is the maximum amount of share capital that the company is permitted to issue to its shareholders, as stated in the Capital Clause of its Memorandum of Association. A company cannot issue shares beyond its authorised capital at any point in time; if it wishes to raise further equity funding, bring in new investors, or issue additional shares (including bonus shares) beyond the existing limit, it must first increase its authorised share capital.

NOTE ON INCREASE IN AUTHORISED CAPITAL

Procedure for Increase of Authorised Share Capital under Section 61 of the Companies Act, 2013

1. Introduction

The Authorised Share Capital of a company is the maximum amount of share capital that the company is permitted to issue to its shareholders, as stated in the Capital Clause of its Memorandum of Association. A company cannot issue shares beyond its authorised capital at any point in time; if it wishes to raise further equity funding, bring in new investors, or issue additional shares (including bonus shares) beyond the existing limit, it must first increase its authorised share capital.

Increase in authorised capital is governed by Section 61 of the Companies Act, 2013 read with Section 13 (alteration of Capital Clause of the Memorandum) and the Companies (Share Capital and Debentures) Rules, 2014. The process requires shareholder approval and is completed by filing the prescribed forms with the Registrar of Companies (ROC), along with payment of the applicable stamp duty and government fee on the enhanced capital.

2. Salient Features of Increase in Authorised Capital

  • Prerequisite for further share issuance: A company must have sufficient authorised capital before it can allot new shares; issuing shares beyond the authorised limit without first increasing it is not permitted under the Act.
  • Ordinary Resolution generally sufficient: Where the Articles of Association permit, an increase in authorised capital can be approved by an Ordinary Resolution (simple majority) of the shareholders in a General Meeting; a Special Resolution is required only if the Articles specifically mandate it.
  • Articles must empower the increase: Before proposing the increase at a General Meeting, the company's Articles of Association must contain a provision empowering it to increase capital; if the Articles do not contain such a power, they must first be amended (by Special Resolution) to include it.
  • Consequential alteration of the Capital Clause: Increasing authorised capital requires a corresponding alteration of the Capital Clause of the Memorandum of Association, reflecting the new authorised capital and the number/value of shares.
  • Mandatory ROC filing – Form SH-7: The increase must be intimated to the ROC by filing Form SH-7 within 30 days of passing the resolution, along with the altered Memorandum of Association and payment of the differential government fee (calculated on the increased portion of capital) and applicable stamp duty.
  • Fee and stamp duty on the incremental capital: Government fee and stamp duty payable on increase of authorised capital are calculated on a slab basis (and vary by state for stamp duty), based on the incremental capital being added, not the entire enhanced capital.
  • Does not itself result in allotment or fresh funds: Merely increasing the authorised capital does not by itself allot any new shares to shareholders or bring any fresh funds into the company; it only enhances the ceiling within which further shares can subsequently be issued through a separate allotment process (e.g., rights issue, private placement, bonus issue).
  • Related filings triggered later at allotment stage: Where a company increases its share capital after the increase, it must also file Form PAS-3 (Return of Allotment) separately at the time it actually allots new shares under the enhanced authorised capital, and file MGT-14 if the company is a public company or where a Special Resolution/Board Resolution requiring filing is passed for related decisions.

3. Documents Required

The following documents/details are generally required to complete the process of increasing authorised share capital:

S. No. Document / Detail Purpose
1 Existing Memorandum of Association and Articles of Association Reference for current authorised capital and enabling provision
2 Notice of General Meeting with Explanatory Statement Convening the meeting to consider the increase
3 Certified true copy of the Ordinary/Special Resolution approving the increase Evidence of shareholders' approval
4 Altered Memorandum of Association reflecting the new authorised capital Updated Capital Clause
5 Minutes of the General Meeting Supporting record of the resolution passed
6 Board Resolution recommending the increase to shareholders Corporate approval preceding the General Meeting
7 Form SH-7 with prescribed government fee and stamp duty Statutory intimation of the increase to the ROC

4. Complete Process of Increasing Authorised Capital

The process for increasing the authorised share capital of a company generally follows the sequence below:

  1. Verification of Articles of Association: The company checks whether its Articles of Association contain a provision empowering it to increase its authorised share capital; if not, the Articles are first amended by a Special Resolution to include such a provision.
  2. Board Meeting: The Board of Directors considers the proposal to increase the authorised capital, decides the new authorised capital amount and share structure, and approves convening a General Meeting for shareholder approval.
  3. Notice of General Meeting: The company issues notice of the General Meeting to all members, along with an Explanatory Statement (where required) setting out the reasons for the proposed increase.
  4. Passing of the Resolution: The shareholders pass an Ordinary Resolution (or Special Resolution, if required by the Articles) approving the increase in authorised capital and the consequential alteration of the Capital Clause of the Memorandum of Association.
  5. Preparation of Altered Memorandum: The company prepares the altered Memorandum of Association reflecting the new authorised capital, the number of shares, and their nominal value.
  6. Filing of Form SH-7: The company files Form SH-7 with the ROC within 30 days of passing the resolution, attaching the notice, explanatory statement, certified copy of the resolution, and the altered Memorandum of Association.
  7. Payment of Government Fee and Stamp Duty: At the time of filing Form SH-7, the company pays the differential government fee based on the incremental authorised capital, along with applicable stamp duty as per the rates prescribed by the state in which the registered office is situated.
  8. Examination by the ROC: The ROC examines Form SH-7 and, if satisfied that all requirements have been complied with, approves and records the increase in its records.
  9. Updating of MCA Master Data: On approval, the company's authorised capital is updated on the MCA master data, reflecting the new capital structure.
  10. Consequential Steps for Allotment, if Intended: Where the increase in authorised capital is intended to facilitate a fresh issue of shares, the company separately undertakes the share allotment process (rights issue, private placement, bonus issue, etc.) and files Form PAS-3 upon actual allotment.

5. Frequently Asked Questions (FAQs)

Q. What is the difference between authorised capital and paid-up capital? +
Ans. Authorised capital is the maximum amount of share capital that a company is permitted to issue, as stated in its Memorandum of Association, while paid-up capital is the actual amount of capital that has been issued to and paid by shareholders; paid-up capital can never exceed the authorised capital at any point in time.
Q. Is a Special Resolution mandatory for increasing authorised capital? +
Ans. Not necessarily. Where the Articles of Association permit, an increase in authorised capital can be approved by an Ordinary Resolution (simple majority); a Special Resolution is required only if the company's Articles specifically mandate it for this purpose.
Q. What happens if the Articles of Association do not empower the company to increase its capital? +
Ans. If the Articles do not contain a provision authorising an increase in share capital, the company must first amend its Articles by passing a Special Resolution to include such a power, before it can proceed to increase the authorised capital.
Q. What is the time limit for filing Form SH-7 after passing the resolution? +
Ans. Form SH-7 must be filed with the ROC within 30 days of passing the resolution approving the increase in authorised capital, along with the altered Memorandum of Association and the requisite fee and stamp duty.
Q. Does increasing the authorised capital automatically bring new funds into the company? +
Ans. No. Increasing the authorised capital only raises the ceiling within which the company can subsequently issue new shares; it does not, by itself, result in allotment of shares or infusion of funds. A separate share allotment process must be undertaken to actually raise capital.
Q. How is the government fee for increasing authorised capital calculated? +
Ans. The government fee is calculated on a slab basis on the incremental amount of authorised capital being added (i.e., the difference between the new and the existing authorised capital), not on the entire enhanced capital amount.
Q. Is stamp duty payable on an increase in authorised capital? +
Ans. Yes. Stamp duty is payable on the increase in authorised capital, and the applicable rate varies from state to state based on where the company's registered office is situated; this is generally paid along with the government fee at the time of filing Form SH-7.
Q. Can authorised capital be increased more than once in a financial year? +
Ans. Yes, there is no statutory restriction on the number of times a company can increase its authorised capital in a financial year, provided the requisite resolution is passed and the corresponding Form SH-7 is filed for each such increase.
Q. Is filing of Form MGT-14 required in addition to Form SH-7 for increase of authorised capital? +
Ans. A private company is generally exempt from filing Form MGT-14 for an Ordinary Resolution passed to increase authorised capital; however, a public company (or where the resolution is a Special Resolution) is required to file Form MGT-14 in addition to Form SH-7, and companies should verify the applicable requirement based on their specific facts and the resolution type.
Q. What is the next step after the authorised capital is increased, if the company wants to issue new shares? +
Ans. Once the authorised capital is increased and updated on the MCA master data, the company can proceed to issue new shares (through a rights issue, private placement, preferential allotment, or bonus issue, as applicable) within the enhanced limit, followed by filing of Form PAS-3 to record the allotment with the ROC.


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