This article has been written by Swetha Sethuraman, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.

Introduction

The term “Authorised Capital” or “Nominal Capital” has been defined under Section 2(8) of   the Companies Act, 2013 means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company. It is the maximum amount of capital that a company can raise through the issue of shares to the shareholders. In other words, the capital amount with which a company is registered with the registrar of the company. Thus, authorised capital is the limit to which the companies can raise shares to the shareholders and not beyond it. Therefore, the companies have the minimum capital mentioned and can raise the amount whenever the finances are required by the Company. 

The Article of Association (“AOA”) defines articles as under Section 2(5) of the Companies Act, 2013 (“the Act”) meaning the AOA of a company originally framed or altered or applied keeping in mind any previous company law or of this Act that was in force. Section 5 of the Act clearly states that the Articles of company shall contain regulations for management of the company. The company while drafting the Articles must shall follow the forms specified in Tables F for limited by shares company, G for company limited by guarantee and having a share capital, H for a company limited by guarantee and not having share capital, I for unlimited company and having a share capital, and J for an unlimited company not having share capital in Schedule I, based on the applicability for the respective company. 

The AOA of the company has to be meticulously drafted while incorporation of the company taking into consideration that the provisions of the articles are binding on the company as well as its members. The AOA of the company should be in harmony with the MOA of the company and the Act, meaning that the AOA cannot prescribe rules that are ultra vires or beyond the scope of the MOA and the Act. Section 6 of the Act clearly states that the provisions of the Act will have an overriding effect in contrary to anything contained in the articles, to the extent that the same shall become or be declared void.

The AOA of the company as aforestated includes the interpretation clause, share capital and variation of rights, lien, calls on shares, transfer of shares, transmission of shares, forfeiture of shares, alteration of capital, capitalisation of profits, buy-back of shares, general meetings, proceedings at general meetings, adjournment of meeting, voting rights, proxy, board of directors, proceedings of the board, CEO, Manager or CFO or CS appointment, the seal, dividends and reserve, accounts, indemnity and winding up. The Companies shall have to ensure for compliance of these articles in accordance with the Act.

Alteration  of share capital of the company

The company under Section 61 of the Act have the power to alter the capital, if so authorised by its article or can do so by alteration of the memorandum after receiving the approval of the members in its general meeting. The company can alter its share capital for varied reasons and as stated above, one of the major reasons is to increase capital growth. It can be altered in the following manner:

1. Increase its authorised share capital by such amount as it thinks expedient;
2. Consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
3. Convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
4. Sub-divide its shares, or any of them, into smaller number of shares than fixed in the memorandum; and
5. Cancel shares which have not been taken or agreed to be taken by any person, on the date of passing the resolution and diminish the amount of share capital by the number of shares cancelled.

All of the above should be done in a manner without causing reduction in the share capital of the company. If the company wants to reduce the share capital then it would require the approval of the Tribunal as under Section 66 of the Act.

Alteration of articles of a company

The Company which intends to alter the AOA/MOA for the purpose of increasing the authorised share capital shall have to comply and abide by the law as stated under the provisions of Section 14 of the Act and any other applicable provisions of the Act and rules. Section 14(1) states a company, by passing special resolution can alter the articles including giving effect to any conversion. Also, the Company has a duty to file the required documents for approval with the Registrar along with the altered AoA, within a period of 15 days. According to Section 15(1) of the Act, every alteration made in the Articles shall be noted in every copy of the articles.

The Company is required to convey a board meeting as under Section 173 of the Act, to pass a resolution for approval and shall pass the Notice along with an explanatory statement for recommendation to the members of the company after fixing the date, time, and venue of the extraordinary general meeting (“EGM”) and authorizing a director or any other person to send the notice for the same to the members. 

The notice of the EGM accompanied with an explanatory statement shall be as under Section 101 of the Act, at least 21 days before the actual date of EGM. The EGM can be called on shorter notice only with the consent of at least the majority of the members present at the meeting and a right to vote at such a meeting to all the directors, members and auditors of the company. The EGM held shall have the proper quorum before passing the resolution for approval for alteration of AOA, modification of the MOA for alteration of authorised share capital of the company by increasing the same. 

The Company after taking its approval in the EGM shall draft the altered MOA to increase the authorized share capital. The Company shall be liable to intimate about the alteration with the filing of e-Form SH-7 with the Registrar of Companies within 30 days from the date of passing of the resolutions. The documents required to be provided in the form is a certified true copy of the Board resolution for alteration in AOA; a certified true copy of the Board resolution for alteration in the MOA, Notice of EGM; a certified true copy of the Special resolution passed in the EGM; Altered copy of the AOA and MOA.

Filing of e-form with the registrar of companies 

The Company according to Section 117 of the Act is required to file Form MGT-14 with the Registrar along with the requisite filing within 30 days of passing the special resolution, along with a certified true copy of the special resolution with the explanatory statement; copy of the Notice of meeting send to the members; a copy of the Altered AOA. 

If, the Company fails to file the e-Form MFT-14 within 30 days, according to the amendment in 2018, the company shall have to apply for condonation of delay within 300 days from the date of passing of such resolution in Form CG-1 with the Registrar of Companies. The Registrar shall impose the applicable penalty in the condonation order. The Company shall file a copy of order and receipt in Form 1INC-28. Further, the Company shall file the Form MGT-14 by mentioning the SRN of filed Form INC-28 with the Registrar of Companies. 

Penalties for non-compliance

Failure to comply with Section 15(1) to note the alterations in every copy of the memorandum or article, then the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the memorandum or articles issued without such alteration.

Failure to comply with the procedure laid down under Section 102 with respect to explanatory statement annexed to the Notice, every promoter, director, manager or other key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees or five times the amount of benefit accruing to the promoter, director, manager or other key managerial personnel or any of his relatives, whichever is higher.

Section 65 of the Act, in case of any default, the company and every officer in default shall be punishable with a fine up to ten thousand rupees. In case of continuous default one thousand rupees per day, till such default continues.

Failure to comply with the filing of Form SH-7 within the period of 30 days, the company and every officer in default shall be punishable with a fine one thousand rupees per day or twenty fix lakhs rupees, whichever is less, as stated under Section 64 of the Act.

Conclusion

The Company is required to fall the procedure laid down under the companies act in accordance with the rules and regulations to prevent any non-compliance which would hold both the company and the key personnel liable for any wrong. To sum up, it all boils down to the Company that shall ensure to get the required approval and accordingly comply with the process of filing the required forms with the Registrar of Companies within the due dates to avoid penalties for non-compliance. 

Checklist

References

1. https://taxguru.in/company-law/increase-authorised-share-capital-company.html
2. https://cleartax.in/s/change-authorised-capital-company
3. https://taxguru.in/company-law/alteration-authorized-capital-companies-act-2013.html

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