Change in Authorized Capital of a Company
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Change in Authorise Capital of a Company
Authorized Capital plays a crucial role in issuing share capital of a company to its shareholders. However, once this limit is reached, the company cannot issue further shares unless the authorized capital is increased. Therefore, increasing authorized capital becomes essential before issuing new shares. It is important to note that this is not only one reason to change the authorized capital of a company, there are multiple reasons. In this article, we will discuss these reasons along with the procedure to change authorized capital of a company, documentation, consequences, and many more.
What is Authorized Capital?
As per the section 2 (8) of the Companies Act, 2013, the authorized capital is the maximum amount of the share capital of the company authorized in the Memorandum of Association. The authorized capital is distinct from the Issued Capital (amount issued to shareholders) and paid up capital (amount paid by the shareholders). Companies can expand their business to the level of authorized capital. In case if the business crosses the fund limit then they have to increase their authorized capital first to begin with its operations again. It is important to note companies cannot issue shares without exceeding their authorized capital in MOA. The change in authorized capital helps companies to issue new shares.
Reasons to Change in Authorized Capital
There are certain reasons due to which companies need to change their authorized capital in the Memorandum of Association.These reasons includes:
Raise Funds
New Investors or Shareholders
Debt Conversion
Change in Business Structure
ESOPs Issuance
Compliance Requirement
Procedure to Change Authorized Capital
Check Article of Association
In order to change authorized capital of a company, it is important to check and assure if the change in authorized capital is allowed or not. As per Section 61 of the Companies Act, 2013, if the AOA does not consist of any provision to allow change in authorized capital then first amend the article of association.
Conduct Board Meeting
Next, conduct a board meeting to pass a board resolution for the next extraordinary general meeting. It is important to note that the notice of conducting the board meeting must be sent to directors at least 7 days prior in advance. In the board meeting, the shareholders’ approval will be taken to alter the memorandum of association. Also, notice including the date, time and place of the meeting will be given to each shareholder.
Conducting Extraordinary General Meeting
In this EGM, the approval to increase the authorized capital will be taken by each shareholder. Once the approval is obtained, the ordinary resolution will be passed along with its explanatory statement and the increased authorized capital.
Filing with ROC
Once the resolution has been passed, start filing with the Registrar of Companies including MGT-14 and SH-7. Both the forms have to be filed within 30 days of passing the respective resolution with the ROC on MCA portal. Form SH-7 is used to inform the Registrar of Companies about the details of increased authorized capital.
Payment & Approval
After filing both the forms, pay ROC filing fees along with the applicable stamp duty on the basis of increased authorized capital. After completion of the process, ROC will approve the final increased authorized capital and companies can later issue new shares if required.
Documents Required to Change Authorized Capital
Following are the documents required to change authorized capital of a company in the memorandum of association:
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Certified copy of Board Resolution
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Certified copy of Ordinary Resolution passed in EGM
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Updated Memorandum of Association (MOA)
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Update Articles of Association (if applicable)
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Notice and explanatory statement of EGM
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Form SH-7, MGT-14 and acknowledgment receipt
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Updated capital structure details
Penalties for Non-Compliance with Authorized Capital Procedure
Failure to comply with the required procedure may result in certain consequences including penalties and the following:
- Penalties imposed by the Registrar of Companies
- Invalid share allotment which can lead to legal disputes
- Rejection of future share capital filings
- Loss of investor confidence & trust
- Regulatory consequences and compliance notices
Conclusion
Changing Authorized capital is a vital concept that allows companies to raise funds and issue new shares. This procedure involves various steps including checking articles of association, conducting board meetings, arranging extraordinary general meetings, filing MGT-14 & SH-7, payment and final approval. In case of issuing shares beyond the limit or before changing authorized capital can lead to penalties and multiple consequences including rejection of future share capital, loss of investor’ confidence and trust, legal disputes, etc. Thus, it is advised to take expert guidance to change a company’s authorized capital without making an error in the procedure.
Frequently Asked Questions
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