What is authorized share capital?
Authorized share capital is the maximum amount of capital that a company is authorized to raise by issuing shares. It is fixed by the company’s Articles of Association (AOA).
Types of authorized share capital
There are two types of authorized share capital:
- Nominal capital: Nominal capital is the face value of all the shares that a company is authorized to issue. It is also known as registered capital or nominal share capital.
- Issued capital: Issued capital is the part of the authorized capital that has been issued to shareholders. It is also known as paid-up capital or subscribed capital.
Significance of authorized share capital
Authorized share capital is significant because it:
- Determines the maximum amount of capital that a company can raise from the sale of its shares.
- Affects the company’s borrowing capacity.
- Determines the number of shares that a company can issue.
- Affects the voting rights of shareholders.
Why might a company want to increase its authorized share capital?
There are a few reasons why a company might want to increase its authorized share capital:
- To raise additional capital for expansion or diversification.
- To comply with regulatory requirements. For example, the Companies Act, 2013 requires private limited companies to have a minimum authorized share capital of ₹1 lakh.
- To create more headroom for future fundraising. This can be useful if the company plans to raise capital through an initial public offering (IPO) or a rights issue in the future.
Steps involved in increasing authorized share capital
The steps involved in increasing authorized share capital are as follows:
- Pass a special resolution at an Extraordinary General Meeting (EGM): A special resolution is a resolution that is passed with the support of at least 75% of the members who vote at the EGM. The EGM must be convened in accordance with the company’s AOA.
- File Form MGT-14 with the Registrar of Companies (ROC): Form MGT-14 is a form that must be filed with the ROC within 30 days of passing the resolution to increase authorized share capital. It is used to notify the ROC of the increase in authorized share capital.
- File Form SH-7 with the ROC: Form SH-7 is a form that must be filed with the ROC within 30 days of passing the resolution to increase authorized share capital. It is used to provide details of the increase in authorized share capital, such as the type of resolution passed, the number of shares issued, and the amount of share capital issued.
Documents required to increase authorized share capital
The following documents are required to increase authorized share capital:
- A copy of the special resolution passed at the EGM to increase authorized share capital
- A copy of the amended AOA
- The prescribed fee
Timeline for increasing authorized share capital
The timeline for increasing authorized share capital varies depending on the complexity of the process. However, it typically takes around 4-6 weeks to complete the process.
Cost of increasing authorized share capital
The cost of increasing authorized share capital depends on a number of factors, such as the company’s size and the complexity of the process. However, it typically costs around ₹10,000-₹20,000 to increase authorized share capital.
Considerations when increasing authorized share capital
There are a few things to keep in mind when increasing authorized share capital:
- The company’s AOA must be amended to increase the authorized share capital. This can only be done by passing a special resolution at an EGM.
- The company must comply with all of the applicable laws and regulations. For example, the Companies Act, 2013 requires companies to file certain forms with the ROC when they increase their authorized share capital.
- The company should seek professional advice to ensure that the process is completed correctly.
Conclusion
Increasing authorized share capital is a relatively straightforward process. However, it is important to comply with all of the applicable laws and regulations. It is also important to seek professional advice to ensure that the process is completed correctly.
