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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.

Trusted Process 100% Compliance

Requirements

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

In order to raise funds through equity, companies may issue new shares due to which they increase the authorized capital in the memorandum of association.

New Investors or Shareholders

There can be a change in authorized capital in order to introduce new investors or shareholders within the company.

Debt Conversion

In case of converting debt or loan into equity, companies may change their authorized capital.

Change in Business Structure

In case of mergers, business expansion, diversification, acquiring, etc, companies may increase its authorized capital

ESOPs Issuance

In case of issuing ESOPs or preference shares there can be change in company’s authorized capital

Compliance Requirement

In case of fulfilling regulatory requirement or contractual requirement, authorized capital may face change in Memorandum of Association.

Our Process

Procedure to Change Authorized Capital

STEP 1

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.

Check Article of Association 1

STEP 2

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.

Conduct Board Meeting 2

STEP 3

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.

Conducting Extraordinary General Meeting 3

STEP 4

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.

Filing with ROC 4

STEP 5

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.

Payment & Approval 5

Documents Required to Change Authorized Capital

Following are the documents required to change authorized capital of a company in the memorandum of association:

Required Documents

Certified copy of Board Resolution
Certified copy of Ordinary Resolution passed in EGM
Updated Memorandum of Association (MOA)
Update Articles of Association (if applicable)
Notice and explanatory statement of EGM
Form SH-7, MGT-14 and acknowledgment receipt
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.

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Frequently Asked Questions

Have a look at the answers to the most asked questions.

Yes, for a company it is mandatory to increase the authorized capital before issuing new shares beyond its existing limit.

An ordinary resolution is required to pass by shareholders in the board meeting to increase the authorized capital.

Yes, authorized capital can be reduced as well but it requires different procedures and approvals.

Yes, Form SH-7 is mandatory to file in order to increase the authorized capital as it is used to intimate the Registrar of Companies about the change in authorized capital.

No, LLP does not require any authorized capital as it follows a different concept.

A company can change or increase its authorized capital in case of raising funds, new shareholders or investors, debt conversion, change in business structure, ESOPs issuance, etc.