Advantages of Authorised Capital
A company’s share capital is one of the most important decisions its promoters, who conceived the idea of the company, must make during its incorporation process. The company will raise capital throughout its life, which may extend to perpetuity. It is important to know how to increase the authorised share capital. Since a company may operate for as many years as well as grow in size and scale their operations, they will certainly need funding to do so. It may be their first preference to raise funds through the issuance of company shares. It is possible, however, that the company’s paid-up capital may be equal to its authorised share capital; therefore, it must raise its authorised share capital. By increasing your authorized share capital, you can raise more funds. A legal perspective on authorised share capital is important to understand:
A company’s Memorandum of Association and Articles of Association are its charter documents. The Memorandum of Association outlines the important clauses of a company, such as its name, object, capital, liability, domicile, and subscription, while the Articles of Association specify the company’s rules and regulations, and they also stipulate the powers and authority granted to the company’s stakeholders, essentially defining its bylaws. A company’s capital clause specifies its authorised share capital.
From this definition alone, we can conclude that amending the company’s memorandum will be necessary in order to change the authorised share capital.
The procedure for increasing the company’s authorized share capital
Checking articles of association – Before moving forward, we must examine the Memorandum of Association and Articles of Association to make sure all the articles allow enhancing the authorized share capital and if the necessary powers or authority have been provided. According to the articles, the company has the authority to make decisions. If the articles of association do not authorise the increase of the authorised share capital, then amendments must be made to the articles of association in accordance with section 14 of the Companies Act, 2013 to include provisions authorizing the company to increase its share capital, which can be done by passing a special resolution.
Board of directors meeting:
- Calling Board of Directors for Board Meeting: At least seven (7) days prior to the date of the meeting, a notice must be sent to the Board of Directors.
- Holding the Board Meeting: At the Board Meeting, the Board of Directors will discuss and approve the following items:
Increases in the authorised capital of the company are subject to approval by the shareholders
Setting the date, time, and place for the Extraordinary General Meeting (“EGM”) of all shareholders of the company to approve an increase in authorised capital
Notice of the EGM and agenda along with an explanation statement will be issued to all members, directors, and auditors.
Board resolutions must be passed for an EGM to take effect
The EGM notice must specify the method of voting
An Extraordinary General Meeting Notice must be sent to all stakeholders at their registered addresses at least 21 days before the date of the meeting.
Notice of the EGM must be issued by the company’s authorised director or company secretary.
Holding EGM – The EGM will be held on the date, day, time, and location specified by the board of directors. An ordinary resolution will be passed by the shareholders approving the decision to increase the authorised share capital, with the approval of at least 50% of the shareholders required.
The registrar of companies needs to be complied with – Following forms must be filed with the registrar of companies:
- Filing of Form MGT-14 – This form must be submitted to the company’s registrar within 30 days of the EGM passing the special resolution altering the articles of association. The following documents must be submitted:
- Ordinary resolution passed
- The amended capital clause has been incorporated into the new MOA.
- AOA (with changed provisions for authorizing share capital enhancements)
- Filing of Form SH-7 – This form must be filed with the registrar of the company within 30 days of the ordinary resolution being passed at the EGM. The following documents should be provided:
- Ordinary resolution passed
- Amendments to the capital clause in the new MOA.
- The new AOA (with updated provisions for approving share capital enhancements, if applicable)
- While filing Form SH-7, MCA will require the Service Request Number (SRN) of the form MGT-14, so be sure to submit MGT-14 before SH-7 if the articles of association need to be updated as well.
- The specified stamp duty must be paid online.
Under the company profile on the MCA site, you can check the status of the changed authorised share capital after completing the procedure.
Is an Ordinary Resolution sufficient, or do we need a Special Resolution?
Ordinary resolutions are required for Increasing the Authorized Share Capital, whereas special resolutions are required when modifying the Articles as well.
Procedures for Authorised Capital Changes
The procedure for changing the authorised capital has not changed.
The following link can be used to increase the authorised share capital
This article should have helped you understand a very important aspect of a company’s growth, which is the Capital Clause. We can conclude that authorised capital is the maximum amount that a company is permitted to issue and to increase its funding by issuing shares over and above its existing authorised share capital, a company must follow the same procedure as above when increasing its authorised share capital.