Types of Share Capital| A Quick Guide

In order to run a business, each business needs more and more funds. These funds may also be required either on a short-term or long-term basis. In order to cover up the short-term need, a company can take loans and advances. However, to continue working, the company needs even more funds. In case of a private limited company, the funds can be gained by increasing the company’s authorised capital. Also, a company is monitored and regulated by the Company Act, therefore in order to make any structural changes in the company, the company must follow the acts and rules that have been stated.

At the time of registration, the private limited company, the paid-up and the authorised capital of the company are listed in the company’s MoA. Hence, the company can issue new shares within the authorised capital’s limits as per the MoA of the company. In case the company needs to issue additional shares than the specified limit in the MoA of the company, then amendments will need to be made to the MoA.

Authorised Capital

As per Section 2(8) of the income tax act, 2013 , authorised capital is defined as the capital that has been authorised under the MoA of the company as the largest amount of share capital of the concerned company.

The company is free to expand its business to the limit of the authorised capital. If the company wants to expand the business of the company by getting more funds, then the company will first have to increase its authorised capital by following the steps that have been listed in the article.

Increase in the Authorised Share Capital

At some point of time a company may need to get more funds, in order to do this, the company will have to increase its authorised share capital before trying to issue new equity shares and increasing the paid up capital. This is due to the fact that authorised share capital is the complete value of the company’s shares that can be issued. The total value of the company’s shares that have been issued are known as the paid up capital.

The authorised capital is always more than the paid up capital. Therefore, in case the company with the authorised and paid up capital equal to Rs. 10 Lakhs wishes to formally give authority to new shareholders, then in order to do so the company must do the following:

1. Increase the authorised share capital and issue new shares.
2. Transfer the shares to the new shareholders from the existing shareholders.

In most of the cases, when the new shares are issued, the authorised capital of the company increases.

Increasing the authorised capital of a company

Verifying the AoA of the company:

Prior to starting the process to increase the authorised share capital, the company has to necessarily certify the AoA in order to make sure that there is a guideline in the AoA which refers to the increment of authorised share capital. If no such guidelines have been mentioned in the AoA, then the company has to make amendments in the AoA of the company firstly.

Hold a board meeting:

It is also compulsory to hold a board meeting by availing a notice to the director in order to increase the company’s authorised share capital. It is also necessary to acquire the approval from the board of directors in order to increase the authorised share capital.

Once this process has been completed, a date to conduct an extra-ordinary general meeting must be fixed in order to obtain the approval from the shareholders to increase the authorised share capital and to make amends to the MoA of the company.

Lastly, to obtain approval from the Board of Directors, the company secretary has to present the notice to the shareholders for an extra-ordinary general meeting. On the basis of the approval, the notice of the extraordinary general meeting will be given out to all the shareholders, auditors and directors of the company.

Extra-ordinary general meeting:

In the extraordinary general meeting, it is important that the company acquires approval from its shareholders for expanding the authorised share capital on the specified  date, time and place as per the notice. This approval must be in an ordinary resolution form.

Filing ROC Forms:

Once the ordinary resolution has been passed at the extraordinary general meeting, the company will have to file Form SH7 within 30 days of passing the ordinary resolution. The fee specified by the government for authorised share capital needs to be paid along with some documents. The required documents are listed below:

1. A notice that is related to the extraordinary general meeting
2. A true copy of the ordinary resolution that has been authorised
3. The amended MoA

 The registrar will approve the filing if adequate processes to increase the authorised share capital of the company have been followed as per the company act and the companies rules. This increased authorised share capital will be shown on the MCA portal.

Allotting the Shares:

After increasing the authorised share capital of the company, a fresh equity share of the company can be issued in order to increase the paid up share capital of the company.

Conclusion

In this blog, we discussed in detail the various types of shares, authorised share capital, increasing the authorised share capital,  and the ways to increase the authorised share capital.