In the realm of business, the need for additional funds often arises, whether for short-term exigencies or long-term strategic expansions. While short-term financial requirements can be met through loans and advances, sustaining and growing a company demands more substantial financial resources. For a Private Limited Company, one effective means of accessing additional funds is by increasing its authorized share capital. However, this process necessitates adherence to the regulatory framework outlined in the Companies Act.
I. Understanding Authorized Capital
What is authorized capital?
Authorized capital, as defined by Section 2(8) of the Companies Act, 2013, represents the maximum amount of share capital sanctioned by a company's memorandum. Essentially, it delineates the ceiling to which a company can extend its business operations.
II. Rationale Behind Increasing Authorized Share Capital
Why does a company need to increase its authorized share capital?
A company may seek to augment its authorized share capital before issuing new equity shares or expanding its paid-up capital. Authorized share capital denotes the total value of shares a company is permitted to issue, whereas paid-up capital signifies the value of shares that have already been issued.
III. The Process of Increasing Authorized Share Capital
1. Verifying Articles of Association (AOA)
Before initiating the procedures for augmenting authorized share capital, it is imperative to scrutinize the company's Articles of Association. This step ensures the existence of provisions pertaining to the increase of authorized share capital.
2. Convening a Board Meeting
The next step entails convening a Board meeting, where directors deliberate upon and approve the proposed increase in authorized share capital. Following board approval, an Extraordinary General Meeting (EGM) is scheduled to secure shareholders' consent.
3. Conducting Extraordinary General Meeting
During the EGM, shareholders' approval for increasing authorized share capital is sought through an ordinary resolution. The meeting must adhere to the specified time, date, and venue outlined in the notice.
4. Filing ROC Forms
Post the approval obtained at the EGM, the company is required to file Form SH7 with the Registrar of Companies (ROC) within 30 days. Alongside the form, necessary documents such as the notice of EGM, the ordinary resolution, and the amended Memorandum of Association (MOA) reflecting the enhanced authorized capital must be submitted.
5. Allotment of Shares
Upon successful completion of the aforementioned steps and approval from the ROC, the company can proceed with the allotment of fresh equity shares. This process effectively increases the paid-up share capital of the company.
FAQs (Frequently Asked Questions)
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Can a Private Limited Company issue shares beyond its authorized capital?
No, a company cannot issue shares exceeding its authorized capital without amending its MOA.
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What are the repercussions of non-compliance with the Companies Act regarding authorized capital?
Non-compliance may lead to penalties, legal implications, and potential hurdles in business operations.
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Is there a statutory limit to the authorized capital a company can stipulate?
While there's no prescribed limit, the authorized capital should align with the company's operational requirements and future growth prospects.
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Can existing shareholders block the proposal to increase authorized share capital?
Existing shareholders can express dissent, but ultimately, the decision rests with the majority consensus obtained through a vote.
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Is it mandatory to convene an Extraordinary General Meeting (EGM) for increasing authorized share capital?
Yes, an EGM is essential to obtain shareholders' approval through an ordinary resolution.