What Is Authorized Capital?
Authorized capital (also called nominal capital) is the maximum amount of share capital that a company is authorized to issue to shareholders as per its Memorandum of Association (MoA). It represents the ceiling on the number of shares a company may issue.
For example, if a company’s authorized capital is ₹50,00,000 divided into 50,000 equity shares of ₹100 each, it cannot issue shares exceeding that limit unless the authorized capital is increased.
Key Points:
- Authorized capital is not the same as paid-up capital.
- Paid-up capital is the actual amount received from shareholders.
- Authorized capital sets the upper limit for share issuance.
Why Do Companies Increase Authorized Capital?
Companies increase their authorized capital for various business reasons:
- To Raise Funds
When a company plans to raise additional capital through new share issuance, it must ensure that there are enough unissued shares available within its authorized limit.
- To Issue Shares to Investors
Equity financing or preference share issuance requires availability of shares in the authorized capital.
- To Issue Bonus Shares
Bonus issues require an increase in authorized capital to accommodate the additional shares issued to existing shareholders.
- To Meet Strategic Growth Needs
Expansion, mergers, acquisitions, and diversification plans may require fresh equity infusion.
- For Employee Stock Option Plans (ESOPs)
Companies offering ESOPs may need additional share capital to fulfill employee stock option allocations.
Legal Framework — Companies Act, 2013
The process of increasing authorized capital is regulated under the following provisions of the Companies Act:
- Section 61 — Increase in Authorized Share Capital
Section 61(1) states that a company may alter its authorized capital by passing a special resolution and altering the Memorandum of Association (MoA) accordingly.
- Section 13 — Alteration of Memorandum
Section 13 requires that any change in authorized capital must be reflected in the MoA, since the authorized capital clause forms part of the MoA.
The provisions ensure that changes to a company’s capital structure are undertaken transparently and with shareholder approval.
Step-by-Step Procedure to Increase Authorized Capital
Increasing authorized capital involves a clear, multi-stage process:
Step 1: Board Meeting and Proposal
The first step is to convene a Board of Directors meeting to:
- Propose the increase in authorized capital
- Consider the amount of increase
- Decide the class of shares (equity, preference, etc.)
- Fix the date, time, and agenda for the Extraordinary General Meeting (EGM) or Annual General Meeting (AGM) to seek shareholder approval
- Draft the explanatory statement for shareholders
A Board Resolution is passed to initiate the process.
Step 2: Notice for Extraordinary General Meeting (EGM)
A special resolution is required to increase authorized capital. Hence, an EGM (or AGM, if within timelines) must be called.
In the meeting notice, the following must be clearly mentioned:
- Proposed increase in authorized capital
- Proposed alteration in MoA
- Reasons for increase
- Impact on shareholders
Notices must comply with statutory notice periods (at least 21 days unless shorter notice is consented).
Step 3: Passing a Special Resolution
At the EGM, members must pass a special resolution (75% approval) to:
- Increase the authorized capital
- Alter the Memorandum of Association, specifically the capital clause
Example wording:
“Resolved that the authorized share capital of the Company be increased from ₹X to ₹Y, by creating additional shares of ₹Z each, and clause ___ of the Memorandum of Association be accordingly altered.”
Once approved, the resolution empowers the company to proceed.
Step 4: Alteration of Memorandum of Association (MoA)
The capital clause in the company’s MoA must be altered to reflect the revised authorized capital.
For example:
Alter clause V of the Memorandum from “Authorized Capital ₹50,00,000 divided into 50,000 equity shares of ₹100 each” to “Authorized Capital ₹1,00,00,000 divided into 1,00,000 equity shares of ₹100 each”.
This alteration must be consistent with the special resolution passed by members.
Step 5: Filing with Registrar of Companies (RoC)
After the special resolution is passed, the company must file the necessary forms with the Registrar of Companies (RoC):
Form SH-7
- Required for recording the increase in authorized capital.
- Attachments:
- Copy of special resolution
- Altered MoA
- Explanatory statement
- Notice of EGM
- Board resolution
The form must be filed within 30 days of passing the special resolution.
Step 6: Payment of Fees and ROC Confirmation
Along with Form SH-7, the company must pay the prescribed RoC filing fees based on the increased authorized capital.
Once the RoC processes the form, a confirmation/order is issued, and the increase becomes legally effective.
Documents Required for Increasing Authorized Capital
To successfully complete the process, the following documents are typically required:
- Notice of Board Meeting
- Board Resolution for EGM
- Notice of EGM/AGM
- Special Resolution approving increase in capital
- Altered Memorandum of Association
- Board certified copies of MoA alteration
- Form SH-7
- Affidavits/Declarations by Directors as required
Proper preparation and authentication of these documents is essential to avoid rejection by RoC.
Authorized Capital vs Paid-Up Capital
- Board and Shareholder Alignment
Ensure that directors and shareholders agree on the capital increase amount, timing, and business purpose.
- Impact on Shareholding and Control
Issuance of new shares may dilute existing shareholders’ control; consider protections for promoters if necessary.
- Tax Implications
Issuance of shares for consideration may have tax implications; consult tax advisors accordingly.
- Regulatory Approvals
Certain regulated sectors may require sector-specific approvals before issuing additional shares.
Costs and Fees Involved
ROC Filing Fees
ROC fees for Form SH-7 depend on the amount of increased authorized capital. Larger increases attract higher filing fees.
Professional Fees
Companies often engage professional advisors such as:
- Company Secretaries
- Chartered Accountants
- Legal Counsel
These professionals assist with drafting resolutions, preparing documents, and filing with MCA.
Stamp Duty
Some states require stamp duty on the amended Memorandum of Association reflecting the increased capital. Stamp duty rates vary by state and must be factored into total costs.
Benefits of Increasing Authorized Capital
Increasing authorized capital brings several business advantages:
- Facilitates Fundraising
With a higher authorized capital, companies can issue new shares to investors, promoters, or institutions for equity fundraising.
- Enables Bonus Issues
Authorized capital must be sufficient to support any bonus share issuance.
- Supports ESOPs
Issuing shares under an Employee Stock Option Plan (ESOP) requires authorized capital headroom.
- Improves Growth Capacity
Expanding business operations, acquisitions, and market entry plans often require new capital; a higher authorized capital supports these goals.
Common Mistakes to Avoid
When planning an increase in authorized capital, companies should avoid:
- Insufficient Share Headroom
Increasing only marginally may not meet future capital needs; consider long-term plans before deciding the increase amount.
- Improper MoA Drafting
Errors in drafting the altered capital clause in the MoA can lead to RoC rejection.
- Missed Filing Deadlines
Form SH-7 must be filed within 30 days of passing the special resolution; delays lead to penalties.
- Ignoring Stamp Duty
Many companies overlook stamp duty requirements — leading to non-compliance and additional penalties.
- Improper Share Classification
Be clear whether the increase relates to equity shares, preference shares, or other classes to reflect this accurately in MoA and filings.
Practical Considerations Before Increasing Authorized Capital
- Board and Shareholder Alignment
Ensure that directors and shareholders agree on the capital increase amount, timing, and business purpose.
- Impact on Shareholding and Control
Issuance of new shares may dilute existing shareholders’ control; consider protections for promoters if necessary.
- Tax Implications
Issuance of shares for consideration may have tax implications; consult tax advisors accordingly.
- Regulatory Approvals
Certain regulated sectors may require sector-specific approvals before issuing additional shares.
Case Scenarios and Examples
- Case 1: Fundraising by Issue of Equity Shares
A technology startup has an authorized capital of ₹1 crore, but wants to raise ₹10 crore through equity investment. To issue the new equity, it must first increase authorized capital to at least ₹10 crore. This is done via an EGM special resolution and Form SH-7 filing.
- Case 2: Bonus Share Issue to Existing Shareholders
A profitable company decides to issue bonus shares worth ₹5 crore to existing shareholders. If the current authorized capital is insufficient, the company must increase its authorized capital before issuing bonus shares.
- Case 3: Employee Stock Options Plan (ESOP)
To implement an ESOP scheme, a company increases its authorized capital to create a pool of shares reserved for employee grants.
Related Compliance After Authorized Capital Increase
Once the authorized capital is increased:
- Update Statutory Registers
The company must update the Register of Members and related statutory documents.
- ROC Filings
Maintain copies of filed forms and ROC confirmations in compliance records.
- Board and Shareholder Communication
Communicate changes to stakeholders and regulatory bodies as required.
