Share capital is the cornerstone of any Private Limited Company’s financial structure. It not only reflects the amount of money invested by the shareholders but also influences a company’s ability to raise additional funds, attract investors, and expand operations. In this comprehensive guide, we will delve into the key concepts of Authorized Share Capital and Paid-up Share Capital, and outline the procedures for increasing your company’s share capital—whether by amending the Memorandum of Association (MOA) or issuing new shares.
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1. Understanding Share Capital
Share capital refers to the total amount of funds that shareholders have contributed to the company in exchange for ownership shares. The Companies Act, 2013, provides the legal framework for a Private Limited Company’s share capital structure and modifications thereof.
(a) Authorized Share Capital
Authorized Share Capital is the maximum capital amount a company is permitted to raise from shareholders. This limit is specified in the Memorandum of Association (MOA). A company cannot issue shares beyond the authorized capital without formally increasing it.
(b) Paid-up Share Capital
Paid-up Share Capital is the actual amount of money that the company has received from shareholders against the shares issued to them. It is the part of the authorized capital that has been “paid up” by the investors. Over time, a company may wish to issue additional shares to raise more funds, thereby increasing its paid-up capital.
2. Types of Share Capital Increase
Depending on your strategic and financial goals, you can opt to increase the authorized share capital (to allow for more shares to be issued in the future) or issue additional shares under the existing authorized limit, which increases your paid-up capital. Here’s an overview of both routes:
- Increasing Authorized Share Capital: Requires amending the capital clause in the MOA through a shareholder resolution and filing Form SH-7 with the Registrar of Companies (ROC).
- Increasing Paid-up Share Capital: Achieved by issuing new shares to existing or new investors, provided there is sufficient authorized capital available.
3. Procedure to Increase Authorized Share Capital
If your company’s existing authorized share capital does not accommodate your expansion or funding requirements, you’ll need to legally increase the limit. Below are the key steps.
(a) Board Meeting to Propose Increase
- Board Resolution: The board of directors meets to propose an increase in authorized share capital. They review the financial projections and decide on the extent of the increase.
- Fixing Date for EGM: An Extra-Ordinary General Meeting (EGM) may be scheduled to obtain shareholder approval for amending the MOA.
(b) Shareholder Approval
- Notice for EGM: Circulate the notice to all shareholders, specifying the agenda to increase authorized capital.
- Ordinary Resolution: The shareholders pass an ordinary resolution to amend the capital clause of the MOA.
(c) Amendments to MOA (Form SH-7)
Once the resolution is approved, the company must file Form SH-7 with the ROC within 30 days of passing the resolution. Key requirements:
- Certified True Copy of the Resolution passed at the EGM.
- Altered MOA highlighting the revised authorized share capital.
- Payment of Fee based on the revised authorized capital slab.
4. Issuance of New Shares to Increase Paid-up Capital
Increasing Paid-up Share Capital can be done through various methods, such as a rights issue, private placement, or preferential allotment. Regardless of the method, it is crucial to ensure your authorized capital is sufficient.
(a) Board and Shareholder Resolutions
- Board Meeting: Decide on the issue price, number of shares, type of securities, and draft an offer letter (if required).
- Shareholder Approval: In many cases, an ordinary or special resolution is required in a general meeting to authorize new share issuance.
(b) Allotment & Share Certificates
- Allotment of Shares: After receiving subscription money from the investors, the board allots the shares to the applicants.
- Issuance of Share Certificates: The company must issue share certificates to the new shareholders within two months from the date of allotment.
5. Filing Necessary Forms with ROC
Issuing new shares often involves filing additional forms, depending on the mode of allotment. Some common filings include:
- Form PAS-3: For allotment of shares through private placement, rights issue, or bonus issue.
- Form MGT-14: For filing special resolutions passed by shareholders (if required, depending on the issue type).
- Stamp Duty: Pay applicable stamp duty for the issuance of share certificates based on state-specific rates.
Timely submission of these forms is essential to remain compliant with the Companies Act, 2013 and to avoid penalties.
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6. Board and Shareholder Resolutions
Resolutions are the official record of decisions made by the board and shareholders. They form the legal basis for any capital restructuring.
- Draft Resolutions Carefully: Ensure the language is clear, references to sections of the Companies Act are accurate, and the action items (e.g., “RESOLVED THAT the authorized share capital of the company is hereby increased from…”) are explicitly stated.
- Maintain Proper Records: Keep signed minutes of the meeting and copies of the resolutions in the company’s records, as these are subject to inspection by regulators.
Best Practices & Compliance Tips
- Plan Ahead: Anticipate your future capital requirements and ensure your authorized share capital is adequate for upcoming funding rounds.
- Consult Professionals: Increasing share capital can have legal and tax implications. Engage a chartered accountant or company secretary for proper guidance.
- Stay Within Timelines: File all relevant forms (SH-7, PAS-3, etc.) with the ROC within the prescribed deadlines to avoid penalties.
- Verify Stamp Duty: Different states have varying stamp duty rates for share certificates. Confirm rates to ensure correct payment.
Conclusion
Successfully increasing a Private Limited Company’s share capital—whether authorized or paid-up—can significantly bolster your business’s financial health and ability to grow. By understanding the requirements, preparing thorough board and shareholder resolutions, and filing the requisite forms (such as Form SH-7, PAS-3), you ensure compliance with the Companies Act, 2013 while safeguarding your company’s interests.
PEAK Business Consultancy Services is committed to guiding you every step of the way. From reviewing your capital structure and drafting essential documents to filing the required forms with the ROC, our team of experts ensures a seamless and legally sound process for increasing your share capital.
