In this article, Harshit Anand who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses How to increase authorised share capital of a company in India: Process, compliance, best practices and relevant law

Introduction

A company upon its incorporation records the foundation upon which it is built – its objectives, founding members and importantly its authorised share capital in its charter documents. The Companies Act, 2013 (Act) defines “authorised capital” or “nominal capital” to mean the maximum amount of share capital, as authorised by the company’s memorandum i.e. the maximum value of shares the company may issue. What this denotes is the maximum value of securities that the company can issue in a legal manner.

Now, as the business grows and expands, its natural needs foremost include getting funding. This can be in the nature of either debt or equity. Whenever a company chooses to go for the equity route to raise money, it is then supposed to first check the value of share capital already issued and subscribed against the authorised share capital of the company.

Generally, in all cases of share subscription fresh shares are issued to a new investor in the company and in all such cases where the ceiling of the authorised capital has already been reached, the company has to first undertake an increase in its authorized share capital.

For a better understanding, please see below sample language in the Articles and Memorandum of a company related to the authorized share capital:

Articles

Definition of “Authorised Equity Share Capital”

Authorised Share Capital shall mean Rs. 10,00,00,000 (Rupees Ten Crores) divided into 1,00,00,000 (One Crores) equity shares of Rs. 10 (Rupees Ten).

Capital

• The Authorised Share Capital of the Company is Rs. 10,00,00,000 (Rupees Ten Crores) divided into 1,00,00,000 (One Crores) equity shares of Rs. 10 (Rupees Ten). Subject to other provisions of these Articles, the Company has the power from time to time to increase or reduce its capital or divide the shares in the capital for the time being into other classes, and to attach thereto respectively such preferential, deferred, or other special rights, privileges, conditions or restrictions, as may be determined by the Directors in accordance with these Articles and to vary, modify or abrogate any such right, privilege, condition or restriction in such manner as may for the time being be permitted by these Articles or the legislative provisions for time being in force in that behalf.
• If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to the provision of the Act, and whether or not the Company is being wound up may not be varied except as provided in these Articles and with the consent in writing of the holders of three-fourths of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.

• The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
• Subject to the provisions of the Act, the Company shall have power to issue preference shares and the resolution authorizing such issue shall prescribe the manner, terms and conditions of such preference shares.
• The Company may subject to the provisions of the Act, from time to time by special resolution reduce its capital and any capital redemption reserve account or any share premium account in any manner for the time being authorised by applicable law, and in particular, capital may be paid off on the footing that it may be called up again or otherwise.

Memorandum

The Share Capital of the Company is Rs. 10,00,00,000 (Rupees Ten Crores) divided into 1,00,00,000 (One Crores) equity shares of Rs. 10 (Rupees Ten).

So now that we have a basic idea of what is the authorised capital of a company and the related provisions under the Articles of Association of the company and its Memorandum of Association, we can proceed to look at the procedure that a company has to follow whenever it proposes to increase its share capital.

Procedure for increase of share capital

Before we delve into what is the procedure, we may briefly look into the relevant provisions of law which govern the increase of share capital of a company:

Section 61 of The Companies Act, 2013 – Power of limited company to alter its share capital

The key feature of the section is:

A limited company which is authorised by its Articles of Association to do so, may at a general meeting of its shareholders alter its memorandum to, “S. 61 (1)(a) increase its authorised share capital by such amount as it thinks expedient”

“61. Power of limited company to alter its share capital

(1) A limited company having a share capital may, if so authorised by its articles,

alter its memorandum in its general meeting to—

(a) increase its authorised share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger

amount than its existing shares:

Provided that no consolidation and division which results in changes in the

voting percentage of shareholders shall take effect unless it is approved by the Tribunal

on an application made in the prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that

stock into fully paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is

fixed by the memorandum, so, however, that in the sub-division the proportion between

the amount paid and the amount, if any, unpaid on each reduced share shall be the

same as it was in the case of the share from which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution in that

behalf, have not been taken or agreed to be taken by any person, and diminish the

amount of its share capital by the amount of the shares so cancelled.

(2) The cancellation of shares under sub-section (1) shall not be deemed to be a

reduction of share capital.”

Section 64 of The Companies Act, 2013– Notice to be given to Registrar for alteration of share capital

The key feature of the section is:

Notice is to be given to the Registrar of Companies, “1) Where— (a) a company alters its share capital in any manner specified in sub-section (1) of section 61;”

“64. Notice to be given to Registrar for alteration of share capital

(1) Where—

(a) a company alters its share capital in any manner specified in sub-section (1)

of section 61;

(b) an order made by the Government under sub-section (4) read with

sub-section (6) of section 62 has the effect of increasing authorised capital of a

company; or

(c) a company redeems any redeemable preference shares,

the company shall file a notice in the prescribed form with the Registrar within a period of

thirty days of such alteration or increase or redemption, as the case may be, along with an

altered memorandum.

(2) If a company and any officer of the company who is in default contravenes the

provisions of sub-section (1), it or he shall be punishable with fine which may extend to one

thousand rupees for each day during which such default continues, or five lakh rupees,

whichever is less.”

Procedure

Authorisation in Articles of Association

To increase the authorised share capital, the company’s Articles of Association must authorise it to increase the authorized share capital of the company. It is important to note here that Section 61 of the Companies Act, 2013, mandatorily requires that to increase the authorised share capital of the company, there must always be such an authorization in the Articles of Association of the company.

Basically, the company’s Articles of Association must always contain a provision authorising it to increase its authorised share capital. This is also very important to note while drafting the Articles of Association of a company, thereby, keeping in mind the potential future needs of a company.

Now, in case there is an enabling provision in the Articles of Association of the company for increasing the authorised share capital of the company, we may move to the next step, otherwise, in case there is no such provision in the Articles of Association of the company, then the company has carry on the alteration of its Articles of Association as per Section 14 of the Companies Act, 2013, with the objective of inserting a clause which allows an increase in the authorised share capital of the Company.

Board Meeting of the Company

A notice has to be issued as per Section 173(3) of the Companies Act, 2013 so as to convene a meeting of the board of directors of the company. The agenda for such a board meeting of the company should among other things (as applicable) for the purposes of increase in the share capital of the company include the following items:

1. Obtaining an in-principal approval of the directors of the company to increase the authorised share capital of the company;
2. Fixing of the date and time and the place for holding an extraordinary general meeting of the company so as to get the approval of the shareholders of the company for increase in the share capital of the company, by passing an ordinary resolution for increase in the authorised share capital of the company. This increase in the authorised share capital of the company has to be in accordance with and as per the requirement of Section 61 of the Companies Act, 2013;
3. The board of directors will have to approve the notice of the extraordinary general meeting of the company along with the agenda and the explanatory statement to be annexed to the notice of the extraordinary general meeting of the company as per the requirement of Section 102(1) of the Companies Act, 2013;
4. The board of directors will have to authorise a director or the company secretary of the company to issue the notice for the extraordinary general meeting of the company to authorise the increase in share capital of the company.

A notice of the extraordinary general meeting of the company to authorise the increase in share capital of the company has to be issued to all members, directors and the auditors of the company in accordance with Section 101 of the Companies Act, 2013 read with the mandatory provisions of the Secretarial Standard – 2 issued by the Institute of Company Secretaries of India;

Extraordinary general meeting of the company

At the extraordinary general meeting of the company held on the due date and time, the shareholder of the company have to pass the necessary ordinary resolution under Section 61(1)(a) of the Companies Act, 2013, and thereby approve an increase in the authorised share capital of the Company.

Form filing with the Registrar of Companies

The company is mandatorily required to file form SH-7 (within 30 days of the resolution passed at point 4 above, with the concerned Registrar of Companies, and Form SH-7 has to be accompanied with the following attachments as per the requirement of Section 64 of the Companies Act, 2013:

1. notice of the extraordinary general meeting of the company to authorise the increase in share capital of the company;
2. certified true copy of the resolution passed at the extraordinary general meeting of the company to authorise the increase in share capital of the company; and
3. the altered memorandum of association of the company

The Registrar of Companies will thereon first verify the form and the attachments thereto and thereafter the Registrar of Companies will approve the increase in the authorize share capital of the company.

Stamp duty is also required to be paid for increase in the authorised share capital of the company which can be paid electronically.

Form MGT-14 is also required to be filed along with a certified true copy of the resolution, notice of the extraordinary general meeting of the company to authorise the increase in share capital of the company, and explanatory statement thereto within 30 days from the passing of resolution along with the amended memorandum of association of the company and the articles of association of the company along with the requisite fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. It is important to note here that unlike in the case of form SH 7 the date of filing of form MGT-14 would not be the effective date regarding the increase in the authorised share capital of the company.

As a matter of best practice it is always advisable that the company while passing the relevant board resolution and shareholder resolution authorises two or more – directors and/or company secretary of the company for the purposes of carrying on relevant actions to give final effect to the increase in the share capital of the company, and also, more importantly, to ensure that all legal compliances have been carried on properly and in due time.

Further, it must always be kept in mind that there should be a complete compliance of any sectoral laws that may be applicable to the company, thereby requiring additional compliance to be undertaken by the company – these may depending on the nature of the business undertaken by the company, include filing and consent requirements with respect to the relevant sectoral regulators.

To supplement the practical knowledge, the relevant minutes of the resolution to be passed by the company for the above process is provided below, the language of the shareholder resolution may be seen therein.

MINUTES OF THE EXTRA-ORDINARY GENERAL MEETING OF___HELD ON ___ FROM ____ To ____ AT ____

Present
____	Authorized Representative of ___
____	Authorized Representative of____

_______ was unanimously elected as the Chairman of the meeting. The Chairman took the Chair and welcomed the members present to the Extra-Ordinary General Meeting of the Company.

After ascertaining the presence of proper quorum, and taking note of the consents received from both the shareholders of the Company for holding the Extra Ordinary General Meeting on a shorter notice, the Chairman declared the meeting to be duly constituted and commenced the proceedings.

Due to certain prior commitments, ____ and _____, Directors of the Company were unable to attend the meeting. Further, the Chairman informed the members present that ____, the statutory auditors of the Company have been exempted from attending the meeting.

The notice of the meeting already circulated amongst the Members was taken as read.

Special Business

1. Authorizing increase in the authorized share capital of the Company, and the consequent amendment of the Memorandum of Association of the Company

The Chairman informed the meeting that the authorized share capital of the Company was proposed to be increased from the existing Rs. __ to ___ and accordingly appropriate amendments would be required to be made to the memorandum of association of the Company to record the proposed increase in the authorized capital. The Chairman accordingly proposed the resolution in relation to increase in the authorized share capital of the Company, and the consequent amendment of the memorandum of association of the Company, in accordance with the applicable provisions of the Companies Act, 2013. The said resolution was put to vote as an ordinary resolution and the following resolutions were passed unanimously by the shareholders authorized to vote on the same, by way of show of hands as an ordinary resolution:

“RESOLVED THAT in accordance with the provisions of Section 61 and other applicable provisions of the Companies Act, 2013 and applicable provisions of the Articles of Association of the Company, the authorised share capital of the Company be and is hereby increased from the existing_____consisting of ___ equity shares having a face value of Rs. 10/- (Rupees Ten) each to ___ equity shares having a face value of Rs. 10/- (Rupees Ten) each by creation of additional ____ equity shares having a face value of Rs. 10/- (Rupees Ten)  each.

RESOLVED FURTHER THAT the existing Clause ____ of the Memorandum of Association of the Company be substituted with the following new clause:

“V. The authorized share capital of the Company is___divided into ___ equity shares of Rs. 10/- each.”

RESOLVED FURTHER THAT each of the Directors of the Company be and are hereby authorised, jointly and/ or severally, to take all necessary steps that may be required to give effect to the aforesaid resolution including but not limited to filing of relevant forms with the Registrar of Companies.”

2. Vote of Thanks

There being no other business to discuss, the meeting ended with a vote of thanks to the chair.

____________

Chairman

Place: ____

Date:____

To further supplement practical knowledge a sample clause of a share subscription agreement whereby share subscription is undertaken and the company is thereafter required to increase its share capital is provided below:

Subscription of allotment of shares

• Subscription of Equity Shares

Subject to and in accordance with the terms and conditions contained in this Agreement, and in reliance of the representations, warranties, covenants and undertakings of the Company and [],_____ agrees to subscribe to the Subscription Shares at a price of INR ____ per Subscription Share and agrees to pay the Company an aggregate sum of Subscription Amount on the Closing Date. The Company agrees to, issue and allot the Subscription Shares, free and clear of all Encumbrances, to_____, in lieu of the Subscription Amount.

• As on the Closing Date, the Subscription Shares shall represent such percentage of Shareholding in the Company on a Fully Diluted Basis, as stated in Schedule ____ of this Agreement.
• The Subscription Amount for the Subscription Shares shall be paid on the Closing Date by wire transfer of funds into a designated account of the Company simultaneously against the allotment and issue of the Subscription Shares, provided that details required to make the wire transfer are delivered to [] at least three (3) Business Days prior to the Closing Date by the Company.