What is Authorized Capital?

Authorized capital refers to the maximum amount of capital that a company is legally permitted to raise through the issuance of shares. This capital is defined in the company’s Memorandum of Association (MOA) and represents the total value of the shares a company can issue to its shareholders.

The authorized capital sets the limit on the amount of equity a company can issue. It does not necessarily mean the company has raised or will raise the full amount, but it’s the maximum limit on the company's share capital.

If a company wants to expand its capital base, increase its operational capacity, or issue more shares, it needs to increase its authorized capital.

Why Increase Authorized Capital?

There are several reasons why a company may want to increase its authorized capital:

1. Expansion of Business: As a company grows and requires additional resources to fund new projects, increasing the authorized capital allows it to issue more shares and raise funds.
2. Attracting Investors: Companies looking to attract new investors or offer equity shares need an increased capital base to offer shares to potential stakeholders.
3. Mergers and Acquisitions: During mergers or acquisitions, a company may need to increase its authorized capital to accommodate the new structure and issue shares to the shareholders of the acquired company.
4. Debt-to-Equity Ratio: To balance the debt-to-equity ratio or avoid taking on more debt, a company may prefer to increase authorized capital and raise funds through equity.
5. Improving Financial Position: A higher capital base reflects a stronger financial position and can improve the company's standing in the market, helping with credibility and attracting more business.

Process for Increasing Authorized Capital

Increasing the authorized capital of a company is a legal process and must follow certain steps under the Companies Act, 2013. Below are the steps to increase authorized capital:

1. Hold a Board Meeting

To initiate the process of increasing authorized capital, the company’s Board of Directors must convene a meeting. During this meeting, the directors will:

• Approve the proposal to increase authorized capital.
• Propose changes to the Memorandum of Association (MOA).
• Recommend the issuance of additional shares, if applicable.

A Board Resolution should be passed to officially approve the increase.

2. Special Resolution by Shareholders

Once the Board passes the resolution, a special resolution needs to be approved by the shareholders of the company. A special resolution requires a three-fourths majority vote by the shareholders in an Extraordinary General Meeting (EGM) or Annual General Meeting (AGM).

The special resolution will cover:

• The new proposed authorized capital.
• The amount by which the capital will increase.
• The number of new shares to be issued (if applicable).

3. Filing with the Registrar of Companies (ROC)

Once the special resolution is passed, the company must file the necessary forms with the Registrar of Companies (ROC). The following forms are required for filing:

• Form SH-7: This form is used to notify the ROC about the alteration in the authorized share capital.
• Form MGT-14: This form is used to file the special resolution passed by the shareholders.

These forms must be filed within 30 days of passing the special resolution.

4. Alteration of Memorandum of Association (MOA)

The next step involves altering the company’s MOA to reflect the new authorized capital. The MOA must be updated to reflect:

• The revised authorized share capital.
• The division of authorized capital into shares of a certain value (if applicable).

The company will submit the updated MOA to the ROC along with the forms mentioned above.

5. Issuance of Certificate of Incorporation

Once the documents are reviewed and approved, the ROC will issue a Certificate of Incorporation with the updated authorized capital. The company can now legally issue more shares up to the newly authorized limit.

Documents Required for Increasing Authorized Capital

1. Board Resolution: A resolution passed by the Board of Directors authorizing the increase of authorized capital.
2. Special Resolution: A resolution passed by the shareholders in an EGM or AGM approving the increase in authorized capital.
3. Form SH-7: To notify the ROC about the alteration in authorized capital.
4. Form MGT-14: For filing the special resolution with the ROC.
5. Amended MOA: A copy of the updated Memorandum of Association reflecting the new authorized capital.
6. Certificate of Incorporation: The updated certificate issued by the ROC after the changes are approved.