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Every business experiences the need for additional funds to sustain its operations, whether in the short term or long term. Short-term financial needs can be addressed through loans and advances. However, for the continued operation of a Private Limited Company, substantial funds may be required. To cater to this requirement, the authorized capital of the company can be increased. Private Limited Companies are subject to the regulations of the Companies Act, and any alterations in the capital structure must adhere to the stipulated legal provisions and rules.
During the registration of a Private Limited Company, the authorized and paid-up capital is specified in the Memorandum of Association (MOA). Within the limits of the authorized capital mentioned in the MOA, the company can issue new shares. If the company intends to issue shares beyond the predetermined limit, it is imperative to make amendments to the MOA in accordance with the legal procedures.
What is Authorized Capital Increase?
As per Section 2 (8) of the Companies Act, 2013, "Authorized Capital" signifies the capital amount, as specified in the company's memorandum, which represents the maximum share capital limit of the company.
The extent to which a company can expand its business operations is determined by its authorized capital. Should the company intend to infuse more capital into its operations beyond the initially authorized limit, it becomes necessary to enhance the authorized capital. This adjustment often precedes the issuance of new equity shares and an increase in paid-up capital. Authorized share capital denotes the overall worth of shares that a company is permitted to issue, while paid-up capital signifies the total value of shares that have already been issued.
In cases where the paid-up capital does not surpass the authorized capital, a company with, for instance, an authorized capital of Rs. 10 lakhs and a paid-up capital of Rs. 10 lakhs may choose to:
Increase the authorized share capital and subsequently issue new shares.
Transfer shares from existing shareholders to new shareholders.
Following the issuance of new shares, the authorized capital is commonly adjusted to accommodate this expansion.
Securing Additional Funds: A significant advantage of expanding the authorized capital under the Companies Act, 2013, is the ability to secure additional funds. By increasing authorized capital, a company can issue new shares to its shareholders, raising more capital for activities such as expansion, research, and development.
Enhancing Financial Flexibility: An increase in authorized capital can enhance a company's financial flexibility. With a larger authorized stock, a company can issue new shares or debt instruments to raise capital without the need to repeatedly increase authorized capital. This flexibility enables rapid responses to market opportunities, such as acquisitions or investments, and acts as a buffer for future financial requirements. It reduces the need for frequent and time-consuming alterations to authorized capital.
Attracting New Investors: An increased authorized capital can make a company more appealing to potential investors. It showcases the company's dedication to growth and expansion, drawing investors seeking opportunities. Furthermore, the expanded authorized capital allows the company to issue new shares to investors, offering them a chance to invest in the company's progress. This broadens the investor base and elevates the company's market visibility.
Meeting Regulatory Requirements: Compliance with certain regulatory standards, including stock exchange listing requirements, often demands a minimum authorized capital. Expanding the authorized stock ensures a company's eligibility for listing and ongoing compliance obligations. This facilitates access to capital markets for fundraising and bolsters the company's public presence.
Reducing the Need for Frequent Adjustments: Increasing authorized capital to a higher level minimizes the necessity for recurrent adjustments. It establishes a substantial capital base, capable of accommodating future financing needs without repeated approvals from shareholders or regulatory authorities. This streamlined approach simplifies administrative procedures and mitigates disruptions caused by frequent alterations in authorized capital.
Increasing authorized capital carries various financial implications for a company. One significant aspect is the valuation of shares and the potential dilution of equity. The issuance of additional shares may result in the dilution of ownership and control for existing shareholders. The pricing of these new shares is determined using valuation methods such as discounted cash flow or market multiples.
Another financial consequence pertains to the impact on the company's balance sheet and financial statements. The increase in authorized capital is reflected in the shareholders' equity section of the balance sheet, while the issuance of new shares affects the share capital and reserves.
Additionally, it's crucial for companies to consider the tax implications associated with increasing authorized capital. Capital gains tax may come into play if the new shares are issued at a premiu
Form MGT-14: To complete Form MGT-14 on the MCA portal, you will need to provide the following information:
Form SH-7: Form SH-7 is submitted to inform the Registrar of Companies (RoC) about the changes in the authorized capital. When filing this form on the MCA website, ensure that you attach the following details:
Review the Articles of Association (AOA): Begin by examining the company's AOA to ensure it contains a provision related to the expansion of authorized share capital. If no such provision exists, the AOA must be amended before proceeding.
Schedule a Board Meeting: To increase the authorized share capital, convene a Board meeting, and provide notice to the directors. The Board of Directors must grant their approval during this meeting.
Conduct an Extraordinary General Meeting (EGM): Hold the EGM on the date, time, and location specified in the notice, and secure shareholders' consent to increase the authorized share capital.
File ROC Forms: Within 30 days of passing the ordinary resolution at the EGM, submit Form SH7 to the Registrar of Companies. Along with this form, include the following documents and the prescribed government fee for the authorized capital increase:
Allotment of Shares: Once the authorized share capital is raised, increase the company's paid-up share capital by issuing additional equity shares.
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