The authorized capital of a company regulates a number of shares a company can issue to its shareholders. Authorized capital is the most important part of the share capital of the company. It represents the total amount of capital that is written in the MOA of a company. An increase in the share capital might be required for issuing new shares and inducting more capital into the company. The initial authorized capital of a company is mentioned in the MOA (Memorandum of association) of a company which is usually 1 lakh. It can be increased by the company at any time with the approval of shareholders and by paying extra fee as prescribed to the registrar of the companies.
Share capital is referred to that part of a company's equity which is raised by selling them to the stockholders in exchange for the capital or cash. To maintain financial stability, the government states that no company can randomly issue shares to raise the capital. Therefore, Authorized share capital is the maximum value of share capital that a particular company can legally be authorized to issue to the shareholders.
Why there is a need for authorized capital? As each and every term in the books of accounts reflects more to the investors and consumers the same goes with the authorized capital too. Authorized capital also gives a very well-versed description vision and objective of company, firm or organization. In fact, higher the amount of the authorized capital, higher the expectations of the investors. Therefore, you must be careful while deciding your authorized capital as it represents something very important and also the concerned authorities might also keep an eye on your financing. Just like every other step in business is given proper thought, deciding the authorized capital is also given proper thought and understanding.
To initiate the process of increase in authorized capital a resolution must be passed by the BOD (Board of directors). In the board of resolution, authorization to increase the authorized capital of a company and to make the necessary changes to the MOA and AOA of the company must be provided. As for the changes in the authorized capital, you can change it but it is recommended not to do it too often unless and until the current needs of your company or business are not satisfied by your current amount of authorized capital. Also, you must not just put a number randomly in the MOA (Memorandum of association), it must be given a proper thought before doing it.
A company is required to increase its authorized capital before increasing paid-up capital and issuing new equity shares. Paid-up capital is the total value of shares a company has issued whereas authorized capital is the total value of shares a company can issue. Paid-up capital can never exceed the authorized capital. Let us look at the procedure for increasing the authorized share capital.
1. Verify AOA of the company
Before beginning the procedure for increasing authorized share capital, verify the AOA to make sure that there is a provision in the AOA (Article of association) with reference to the increase authorized share capital. In case there is no provision like that the company first needs to make changes to the AOA of the company.
2. Call a board meeting
In order to increase the authorized share capital, a board meeting is called by providing notice to the director. At a meeting, an approval from the board of directors is obtained for increasing the authorized share capital. After that, obtain the approval from the board of directors present at the meeting to present a notice of an extra-ordinary general meeting to the shareholders.
3. Extra-Ordinary general meeting
After the meeting of the board of directors, an extraordinary general meeting is conducted to obtain the approval of shareholders to increase the authorized capital. Approval from the shareholders must be in the form of an ordinary resolution.
4. Filling ROC Form
Within the period of 30 days of passing the ordinary resolution, Form SH-7 must be filed with the concerned ROC (Registrar of a company) along with the necessary attachments and fees as prescribed by section 64. The following are the attachments required to be submitted along with the form SH-7.
Board resolution for the increase in authorized share capital
Resolution for the modification in MOA (Memorandum of association)
Shareholder’s resolution passed in the EGM
After that, the registrar of the company will check the form as well as the attached documents. On successful reviewing the documents, ROC will approve the Increase authorized share capital.
1. What is Authorized capital?
Authorized capital is the maximum number of shares a company can allot to its shareholders. It is the most important part of the share capital of the company and represents the total amount of capital that is written in the MOA of a company.
2. What is paid-up capital?
Paid-up capital refers to the amount of money received by a company through the issue of shares to the shareholders.
3. When authorized capital can be increased?
The authorized capital of a company can be increased with the approval of shareholders and by paying an additional fee to the ROC (Registrar of companies). To initiate this process for increasing authorized capital a resolution must be passed by the BOD (Board of directors).
4. How a company can increase authorized capital?
Obtain the approval of directors to increase the authorized capital through a board meeting. Then fix the time and date to conduct an extra-ordinary general meeting to obtain the approval of shareholders.
5. What is the maximum authorized capital?
Authorized capital is the maximum amount of capital for which shares can be issued by a company. Initial share capital is mentioned in MOA (Memorandum of association) and is usually 1 lakh.
6. What are the situations under which MOA needs to be altered?
Change of registered office
Change in the name of the company
Alteration in the authorized capital of a company
Change in liability of the members of the company
7. Can paid-up capital be more than authorized capital?
No, paid-up capital can never be more than authorized capital as a company cannot issue shares above its authorized capital. Earlier it was mandated that all the private limited companies have a minimum paid-up capital of Rs 1 lakh as per the companies act, 2013.
8. Does the minimum requirement of paid-up capital mandatory?
No, the companies’ amendment act of 2015 has relaxed the requirement of minimum paid-up capital. But it was not made up to zero paid-up capital and also the submission of stamp duty was necessary.
9. What is the procedure to increase the authorized capital?
Verify AOA (Articles of association) of the company
Call a board meeting for the approval of directors
Extra-ordinary general meeting for the approval of shareholders
Filing ROC form
10. How can equity increase?
When there is an increase in the company’s earnings and capital, this overall result in an increase in the company's stockholder's equity balance. Shareholder’s equity may increase due to the following reasons from raising the company's revenue, selling shares of stock and decreasing its operating expenses.