What is Authorized Capital?
Authorized capital, also known as nominal capital or registered capital, is the maximum amount of share capital that a company is authorized to issue to its shareholders as per its Memorandum of Association (MoA). It is the upper limit of capital a company can raise through the issuance of shares without amending its MoA.
To issue shares beyond the authorized capital, the company must amend its MoA and file Form SH-7 with the Registrar of Companies (ROC). This process is called alteration of share capital or increase in authorized share capital.
Why Should a Company Increase Its Authorized Capital?
A company may need to increase its authorized capital for several strategic reasons:
- To Raise More Funds: When a company wants to get more money from investors by issuing new shares beyond its current limit.
- For Business Expansion: Expanding a business or starting new projects often requires significant capital infusion.
- To Convert Debt into Equity: Sometimes, companies convert their debt into equity shares to reduce interest costs and improve financial health.
- To Improve Borrowing Capacity: Increasing authorized capital and subsequently issuing shares increases the company's net worth, which can improve borrowing terms.
Documents Required for Increasing Authorized Capital
To successfully increase your authorized capital, the following documents must be prepared:
- Certified true copy of the Board Resolution.
- Certified true copy of the Ordinary Resolution passed at the EGM.
- An altered Memorandum of Association (MoA) reflecting the new authorized capital.
- Altered Articles of Association (AoA), if any amendment was required.
- Notice of the Extraordinary General Meeting (EGM) along with the explanatory statement.
How to Increase Authorized Share Capital: Step-by-Step Procedure
- Check Articles of Association (AoA): Ensure the AoA contains a clause permitting the increase of authorized share capital. If not, amend the AoA first.
- Conduct a Board Meeting: The Board of Directors must approve the proposal to increase capital and call for an EGM.
- Call an Extraordinary General Meeting (EGM): Send notices to shareholders to convene an EGM.
- Pass Ordinary Resolution: Shareholders must pass an ordinary resolution at the EGM to approve the increase.
- File Form SH-7: File e-Form SH-7 with the ROC within 30 days of passing the resolution, along with the required fees and documents.
ROC Fees and Stamp Duty
The cost involved in increasing authorized capital primarily includes ROC fees and stamp duty.
ROC Fees
The ROC fees are calculated based on the amount of increase in the authorized capital. The fee structure is slab-based, meaning you pay a certain fee for each slab of increased capital.
Stamp Duty
In addition to ROC fees, stamp duty is payable on the increased authorized capital. The rates vary from state to state (e.g., Maharashtra, Delhi, Karnataka) and are typically a small percentage of the increased amount.
How Long Does the Process Take?
The process to increase authorized capital usually takes about 7 to 15 working days if all documents are ready and there are no delays. This includes conducting meetings, passing resolutions, and filing forms with the ROC.
However, if the company needs to amend its Articles of Association (AoA) first, the process may take longer due to additional approvals and filings (Form MGT-14).
