What is Authorized Capital?

Authorized Capital, also called nominal or registered capital, is the maximum amount of share capital that a company is permitted to issue to its shareholders as specified in its Memorandum of Association (MoA). It sets the upper limit on how much capital the company can raise through share issuance without needing to amend its MoA.

If the company wants to issue shares beyond this limit, it must first amend its MoA and file Form SH-7 with the Registrar of Companies (ROC).

Classification of Share Capital

Share capital is categorized based on what has been offered and paid by investors. The main types are:

• Authorized Capital: The maximum share capital a company can legally issue.

• Issued Capital: The portion of authorized capital offered to investors.

• Subscribed Capital: The part of issued capital that investors have agreed to buy.

• Paid-Up Capital: The actual amount paid by shareholders for their subscribed shares.

• Called-Up Capital: The amount the company has requested shareholders to pay.

• Uncalled Capital: Subscribed capital not yet called for payment.

Where is Authorized Capital Mentioned?

Authorized capital is defined in the capital clause of the company’s MoA, which:

• Specifies the maximum number of shares the company can issue.

• Defines the nominal value of each share.

• Sets the ceiling of capital the company can raise without amending the MoA.

Any change to authorized capital requires:

• Approval by shareholders.

• Amendment of the MoA.

• A board meeting to approve the change.

• Filing of Form SH-7 with the ROC along with resolutions and fees.

Note: This may affect registration fees and stamp duty.

Why Should a Company Increase Its Authorized Capital?

Increasing authorized capital allows a company to raise more funds and meet evolving business needs. Common reasons include:

1. Raising More Funds:
   To issue new shares and attract fresh investment without incurring debt, companies must increase their authorized capital first.

2. Business Expansion:
   Expanding operations or launching new projects requires additional capital, which may necessitate increasing authorized capital.

3. Debt to Equity Conversion:
   Companies may convert loans into equity shares to reduce liabilities, requiring sufficient authorized capital to issue these shares.

4. Improving Borrowing Capacity:
   Higher net worth through increased capital can help secure better loan terms and boost investor confidence.

Documents and Forms Required for Increasing Authorized Capital

• Board Resolution (certified true copy).

• Ordinary Resolution passed at the EGM.

• Altered MoA reflecting new authorized capital.

• Altered AoA if applicable.

• Notice of the EGM with explanatory statement.

Filing Requirements:

• Form SH-7: Must be filed within 30 days of passing the resolution to notify ROC.

• Form MGT-14: Required if AoA is amended or a special resolution is passed.

Step-by-Step Procedure to Increase Authorized Capital

1. Check Articles of Association (AoA):
   Confirm if AoA allows increasing authorized capital. If not, amend AoA with a special resolution and file Form MGT-14.

2. Board Meeting:
   Approve proposal and schedule EGM. Approve draft notice and explanatory statement.

3. Call EGM:
   Send formal notices to shareholders with at least 21 clear days’ notice.

4. Pass Ordinary Resolution at EGM:
   Shareholders approve the capital increase by a simple majority.

5. File Forms with ROC:
   Submit Form SH-7 and MGT-14 (if required) within prescribed timelines.

Cost of Increasing Authorized Capital

ROC Fees:
Calculated on a slab basis depending on the amount of increase. Example:
Increasing capital by ₹95,00,000 can cost around ₹78,750 in ROC fees.

Stamp Duty:
Varies by state, usually a small percentage of the increased capital (e.g., Maharashtra approx. 0.005%).

Timeline for the Process

Typically, 7 to 15 working days, assuming all documents are ready and filings are timely. Time may increase if AoA amendments are required.

Penalties for Non-Compliance

• Failure to file Form SH-7 within 30 days leads to a penalty of up to ₹1,00,000.

• Continued delay attracts a daily fine of ₹5,000 until compliance.

• Similar penalties apply for late filing of Form MGT-14.