A growing company may need fresh capital to expand operations, bring in investors, issue employee shares or fund a new project. But before issuing additional shares, it must check whether its authorised share capital is sufficient.
A company cannot issue shares beyond the limit mentioned in the capital clause of its Memorandum of Association. If the proposed share issue exceeds that limit, the company must first increase its authorised share capital.
The process usually involves reviewing the Articles of Association, obtaining board and shareholder approval, amending the Memorandum of Association and completing the SH-7 filing with the Registrar of Companies.
This guide explains when a company should consider increasing its authorised capital, how the process works and which documents are required.
Planning to issue new shares or raise funds? Contact E-Auditor for professional support with increasing authorised share capital.
What Is Authorised Share Capital?
Authorised share capital is the maximum amount of share capital that a company is permitted to issue under its Memorandum of Association.
Section 2(8) of the Companies Act, 2013 defines authorised or nominal capital as the capital authorised by the memorandum to be the maximum amount of share capital of the company.
For example, suppose a company has:
- Authorised share capital of ₹10 lakh
- Issued share capital of ₹8 lakh
- Paid-up share capital of ₹8 lakh
The company can issue shares worth another ₹2 lakh without increasing its authorised capital. If it wants to issue shares worth ₹5 lakh, it must first raise the authorised capital to at least ₹13 lakh.
Increasing authorised capital does not automatically bring money into the company. It only raises the legal ceiling within which the company may issue additional shares.
When Should a Company Increase Its Authorised Share Capital?
A company should begin the process before approving or allotting shares that would take its issued capital beyond the existing authorised limit. The need often arises in the following situations.
Before Raising Funds From Investors
Startups and growing businesses commonly issue equity shares or preference shares to angel investors, venture capital firms and strategic investors.
Before finalising the allotment, the company should compare the proposed issue with the unused portion of its authorised capital. If sufficient headroom is not available, the authorised capital must be increased first.
Waiting until the investment is ready to close can delay the transaction. It is better to review the capital structure while negotiating the investment documents.
During Business Expansion
A company may require additional capital to open new locations, purchase equipment, develop products, hire employees or enter new markets.
If promoters or existing shareholders plan to fund the expansion through a fresh share issue, the company may need to increase its authorised share capital before making the allotment.
Before Issuing Shares To Existing Shareholders
Companies may raise money from existing shareholders through a rights issue. Although the shares are offered to current members, the total issued capital must remain within the authorised limit.
The same principle applies when a company proposes a bonus issue. The company should first confirm that enough authorised capital is available for the new shares.
While Bringing In A New Promoter Or Strategic Partner
A business may introduce a new promoter, joint venture partner or strategic investor by issuing fresh shares. If the proposed issue exceeds the current capital ceiling, the company must complete the authorised share capital increase procedure beforehand.
This should be considered while deciding the investment amount, valuation and post-issue ownership structure.
Before Issuing Employee Stock Options
Granting employee stock options does not always result in an immediate share allotment. However, when employees exercise their options, the company must issue the corresponding shares.
Companies planning an ESOP scheme should check whether their authorised capital can support future allotments. Increasing it in advance can prevent avoidable compliance delays when employees exercise their options.
During A Merger, Conversion Or Restructuring
A merger, acquisition, share swap or other restructuring may require the issue of additional shares. The authorised capital should be reviewed as part of the transaction planning.
If the capital is insufficient, the increase should be completed before the company makes the relevant allotment.
To Maintain Room For Future Share Issues
A company does not have to wait until it has exhausted its entire authorised capital. It may keep a reasonable buffer if it expects another funding round or share issue soon.
However, setting an unnecessarily high limit can increase registration fees and stamp duty. The proposed capital should reflect the company’s expected needs rather than an arbitrary figure.
What Should Be Checked Before Starting The Process?
The first step is to review the company’s Memorandum of Association and Articles of Association.
The Memorandum states the current authorised capital and its division into shares. The Articles should contain authority for the company to alter its share capital.
Section 61 of the Companies Act, 2013 allows a limited company having share capital to alter its capital if authorised by its Articles. If the required authority is missing, the company must first amend its Articles by passing a special resolution.
The company should also check:
- Existing authorised, issued, subscribed and paid-up capital
- Proposed number, class and face value of new shares
- Availability of authorised capital within each share class
- Expected ROC fees and applicable stamp duty
- Whether the proposed transaction requires any additional approvals
- Whether the company’s statutory registers and earlier filings are up to date
This review helps the company choose the correct amount and avoid repeating the process soon after completion.
Authorised Share Capital Increase Procedure
The exact steps may vary if the Articles need amendment or the company has more than one class of shares. The standard process is as follows.
Step 1: Review The Articles Of Association
Check whether the Articles permit an increase in authorised share capital.
If the provision is already present, the company can proceed under Section 61. If it is absent, the Articles must first be altered in accordance with Section 14 by passing a special resolution.
Step 2: Hold A Board Meeting
A notice of the board meeting should be issued to the directors in accordance with the Companies Act and the company’s Articles.
At the meeting, the board may:
- Consider the proposed increase
- Approve the revised capital clause of the Memorandum
- Fix the date, time and venue or mode of the general meeting
- Approve the notice sent to shareholders
- Authorise a director or company secretary to complete the filings
The board meeting itself does not ordinarily complete the increase. Shareholder approval is required.
Step 3: Issue Notice Of The General Meeting
The company must send a notice to its members containing the meeting details and the proposed resolution.
A general meeting normally requires at least 21 clear days’ notice. A meeting may be called at shorter notice when the consent requirements prescribed under the Companies Act are satisfied.
Step 4: Obtain Shareholder Approval
If the Articles already authorise the alteration, an ordinary resolution is generally passed under Section 61 to increase company share capital and amend the capital clause of the Memorandum.
If the Articles must also be amended, a special resolution is required for that alteration. The wording of the resolutions should match the proposed capital structure and the revised constitutional documents.
Step 5: Complete The SH-7 Filing
Under Section 64, the company must notify the Registrar about the alteration of share capital within 30 days.
This MCA authorised capital filing is completed through Form SH-7. The form records details such as:
- Existing authorised capital
- Revised authorised capital
- Increase under each class of shares
- Date and type of resolution
- Applicable filing fees and stamp duty
- Details of the authorised signatory
The filing should be supported by the required resolution and altered Memorandum.
Step 6: File MGT-14 Where Applicable
MGT-14 is not automatically required merely because an ordinary resolution has been passed under Section 61.
It is generally relevant when the Articles are amended through a special resolution or when another resolution covered by Section 117 must be registered with the ROC.
Therefore, companies should not treat MGT-14 as a compulsory form in every authorised capital increase. The requirement must be checked against the resolutions actually passed and the company’s circumstances.
Step 7: Update Company Records
After the filing is completed, the company should update its records with the revised authorised capital.
The company may then proceed with the proposed issue or allotment of shares by following the separate legal process applicable to that transaction. An approved increase in authorised capital does not replace the compliance requirements for a rights issue, private placement, preferential issue, bonus issue or ESOP allotment.
Documents Required To Increase Authorised Capital
The documents required to increase authorised capital usually include:
- Certificate of Incorporation
- Existing Memorandum of Association
- Existing Articles of Association
- Draft altered capital clause of the Memorandum
- Board meeting notice and agenda
- Certified copy of the board resolution
- General meeting notice
- Explanatory statement, where applicable
- Certified copy of the shareholder resolution
- Altered Articles, if the Articles are amended
- Digital Signature Certificate of the authorised signatory
- Director Identification Number of the concerned director
- Details of the existing and revised capital structure
- Supporting documents required for the relevant MCA filing
Additional records may be required depending on the company’s Articles, class of shares and proposed transaction.
How Much Does It Cost To Increase Authorised Share Capital?
The cost is not a single fixed amount. It may include:
- ROC filing fee
- Additional registration fee calculated on the revised capital
- Stamp duty based on the applicable state rules
- Professional charges for preparing resolutions, documents and forms
- Additional fees if the filing is delayed
The amount depends mainly on the company’s existing authorised capital, proposed increase and registered office state. Companies should calculate the government charges before deciding how much authorised capital to add.
Common Mistakes To Avoid
One frequent mistake is issuing or allotting shares before increasing the authorised limit. This can create defects in the allotment and related filings.
Other common errors include:
- Failing to check whether the Articles permit the increase
- Using inconsistent capital figures in the resolution, SH-7 and amended Memorandum
- Assuming MGT-14 is compulsory in every case
- Missing the 30-day SH-7 filing period
- Selecting an incorrect share class or face value
- Paying the wrong stamp duty
- Treating an increase in authorised capital as an actual share allotment
- Failing to update the company’s statutory records
A careful review before filing can prevent resubmission, additional fees and delays in a funding transaction.
Get Professional Support From E-Auditor
Increasing authorised share capital requires accurate resolutions, consistent capital figures and timely ROC filing. A small error in the amended Memorandum or SH-7 form can hold up a funding round or proposed allotment.
E-Auditor can assist with the complete increase authorised share capital process, including document preparation, board and shareholder resolutions, SH-7 filing and related MCA compliance. Get professional support to complete the alteration correctly and proceed with your proposed share issue without unnecessary delays.
Frequently Asked Questions
Can A Company Issue Shares Beyond Its Authorised Capital?
No. A company must first increase its authorised share capital if the proposed allotment would exceed the limit stated in its Memorandum of Association.
Is An Ordinary Resolution Enough To Increase Authorised Capital?
An ordinary resolution is generally sufficient under Section 61 when the Articles already authorise the alteration. If the Articles need to be amended, a special resolution is required for that amendment.
What Is The Time Limit For SH-7 Filing?
Form SH-7 must generally be filed with the Registrar within 30 days of the alteration of the company’s share capital.
Is MGT-14 Required For Increasing Authorised Share Capital?
It is not generally required for the ordinary resolution passed under Section 61 alone. It may be required when the Articles are altered by special resolution or another resolution covered by Section 117 is passed.
Does Increasing Authorised Capital Increase Paid-Up Capital?
No. The increase only raises the maximum amount of capital the company may issue. Paid-up capital changes when shares are issued, subscribed to and paid for.
Can Authorised Capital Be Increased Before A Funding Round?
Yes. In fact, completing the process before the investment closes can help prevent delays during the share allotment.