Increase Authorized Capital of Company: Complete Guide

Every company incorporated in India starts with a specific authorized capital mentioned in its Memorandum of Association (MOA). This figure represents the maximum amount of share capital the company is legally permitted to issue. However, as your business grows, attracts investors, or plans to issue Employee Stock Options (ESOPs), there comes a point when you need to increase authorized capital beyond the original limit.

The authorized capital increase procedure is governed by the Companies Act, 2013, and involves a combination of board approval, shareholder consent, and filings with the Registrar of Companies (ROC). Whether you are a startup preparing for a funding round or an established firm planning expansion, understanding this process is essential for smooth compliance.

In this guide, we walk you through the complete process, documents required, government fees, and common scenarios where companies need to increase authorized share capital.

What is Authorized Capital?

Authorized capital, also referred to as nominal capital or registered capital, is the maximum value of shares a company can issue to its shareholders as stated in its MOA. It is declared at the time of private limited company registration or public company registration and forms the upper ceiling for the paid-up capital of the company.

For instance, if a company is registered with an authorized capital of Rs. 10 lakh, it cannot issue shares worth more than Rs. 10 lakh unless the authorized capital is increased first. The paid-up capital (the portion actually subscribed and paid by shareholders) must always remain within this ceiling.

It is important to note that authorized capital is not the same as paid-up capital. You can register a company with Rs. 10 lakh authorized capital but start with a paid-up capital of just Rs. 1 lakh. The gap between the two gives room for future share issuance without requiring an immediate amendment to the MOA.

Why Do Companies Increase Authorized Capital?

Several business situations make it necessary for companies to raise their authorized share capital ceiling. Here are the most common triggers:

• Fundraising from investors: When a company raises equity funding through angel investors, venture capitalists, or private equity firms, new shares must be allotted. If the existing authorized capital is insufficient to accommodate these shares, it must be increased before the allotment.
• Issuing ESOPs: Employee Stock Option Plans require a reserved pool of shares. Companies planning to attract and retain talent through ESOPs need adequate authorized capital to create this share pool.
• Bonus share issuance: When a company decides to reward existing shareholders through bonus shares, the total share capital post-issuance should not exceed the authorized limit.
• Business expansion and mergers: Scaling operations, entering new markets, or merging with another entity often demands fresh capital infusion through share issuance.
• Conversion of debt to equity: Some loan agreements include provisions for converting outstanding debt into equity shares. This conversion may push the total share capital beyond the authorized limit, necessitating an increase.

Each of these scenarios underscores the practical need for companies to proactively evaluate whether their existing authorized capital is adequate for future plans.

Authorized Capital Increase Procedure: Step-by-Step

The process to increase authorized capital of a company involves several stages. Each step carries specific legal requirements under the Companies Act, 2013. Below is a detailed breakdown.

Step 1: Check the Articles of Association (AOA)

Before initiating the process, verify whether the AOA of the company permits an increase in authorized capital. Most standard AOA formats include a clause that allows the company to alter its share capital through an ordinary resolution. If no such clause exists, you will first need to amend the AOA before proceeding.

Step 2: Convene a Board Meeting

The Board of Directors must convene a meeting to discuss and approve the proposal to increase the authorized capital. During this meeting, the board passes a resolution recommending the increase and authorizes the convening of an Extraordinary General Meeting (EGM) or includes the matter in the next Annual General Meeting (AGM) agenda. A proper notice must be issued to all directors at least seven days before the board meeting.

Step 3: Pass an Ordinary Resolution at EGM/AGM

The shareholders must approve the increase through an ordinary resolution. This means more than 50% of the members present and voting must vote in favour. A clear 21-day notice period must be observed for calling the EGM. The notice should specify the proposed increase, the new authorized capital figure, and the amendment to the MOA capital clause.

Step 4: Amend the Memorandum of Association

Once the resolution is passed, the capital clause (Clause V) of the Memorandum of Association is amended to reflect the new authorized capital. This is a critical step because the MOA serves as the constitutional document of the company, and any discrepancy can lead to compliance issues down the line.

Step 5: File Form SH-7 with the ROC

Within 30 days of passing the ordinary resolution, the company must file Form SH-7 (Notice of alteration of share capital) with the ROC. This form is filed electronically through the MCA portal and must be accompanied by supporting documents and the prescribed government fees and stamp duty.

Step 6: Pay the Applicable Fees and Stamp Duty

The government fees for filing SH-7 depend on the existing and proposed authorized capital. Additionally, stamp duty is payable on the increase in authorized capital, and the rate varies from state to state. For example, stamp duty in Maharashtra is different from that in Delhi or Karnataka. You should factor in both the ROC filing fees and state stamp duty when budgeting for this process.

Documents Required to Increase Authorized Capital

You will need the following documents to complete the authorized capital increase procedure:

• Certified copy of the Board Resolution approving the proposal
• Notice of the EGM or AGM along with the explanatory statement
• Certified copy of the Ordinary Resolution passed at the general meeting
• Amended Memorandum of Association reflecting the new capital clause
• Form SH-7 duly filled and digitally signed
• Proof of payment of stamp duty (e-stamp or challan)
• Altered Articles of Association, if applicable

Keeping these documents organized and ready before initiating the filing saves time and helps avoid rejection or resubmission requests from the ROC.

Government Fees for Increasing Authorized Capital

The ROC charges a fee based on the nominal share capital of the company. Here is a summary of the applicable fee structure under the Companies (Registration Offices and Fees) Rules, 2014:

These fees are in addition to the state-specific stamp duty. The stamp duty on increase of authorized capital differs across Indian states, so it is advisable to check the current applicable rate for your state before filing. Companies incorporated in multiple jurisdictions should consult with their secretarial compliance advisors for accurate calculations.

Timeline for Completing the Process

The entire process of increasing authorized capital typically takes 15 to 25 working days, depending on how quickly the company completes internal approvals and gathers documentation. Here is a rough breakdown:

• Board meeting and resolution: 1 to 3 days
• EGM notice period: 21 days (mandatory under the Companies Act)
• EGM and passing of ordinary resolution: 1 day
• Filing SH-7 with ROC: within 30 days of passing the resolution
• ROC processing and approval: 3 to 7 working days

Delays often arise when companies fail to maintain updated statutory records or when the stamp duty payment process is not completed on time. Working with an experienced professional ensures the process moves without hitches.

Common Mistakes to Avoid

Even though the authorized capital increase procedure is relatively straightforward, companies frequently stumble over avoidable errors. Here are a few worth noting:

• Not checking AOA provisions: Proceeding without confirming that the AOA permits alteration of share capital leads to wasted effort. Always verify the relevant clause first.
• Missing the 30-day filing deadline: Form SH-7 must be filed within 30 days of the resolution. Late filing attracts additional fees that increase progressively with the delay.
• Incorrect stamp duty payment: Stamp duty rates vary by state, and paying the wrong amount results in rejection of the filing. Double-check the applicable rate for your state.
• Incomplete documentation: Submitting the SH-7 without proper attachments such as the amended MOA or certified resolution copies leads to resubmission requests from the ROC.

A systematic approach, paired with professional guidance, helps companies avoid these pitfalls and complete the process efficiently.

Conclusion

Increasing authorized capital is a fundamental compliance requirement for growing companies in India. Whether you are raising funds, issuing ESOPs, or planning a merger, ensuring your authorized capital is adequate protects you from regulatory complications. The process involves verifying your AOA, passing a board and shareholder resolution, amending the MOA, and filing SH-7 with the ROC within the prescribed timeline.

If you are planning to increase your company's authorized capital, working with experienced professionals can simplify the process and help you stay compliant. Reach out to Patron Accounting for end-to-end assistance with capital restructuring, ROC filings, and all related secretarial services.