Change in Authorized Capital
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Change in Authorized Capital – An Overview
Every business requires additional funds over time to sustain and grow. These funds may be needed for both short-term and long-term purposes. While short-term needs can often be met through loans and advances, long-term growth usually requires a company to raise more capital. For a Private Limited Company, this is achieved by increasing its authorized capital.
Since a private limited company is governed by the Companies Act, any change in its capital structure must be carried out in compliance with the provisions and rules under the Act.
At the time of incorporation, the authorized and paid-up capital is mentioned in the company’s Memorandum of Association (MOA). The company is allowed to issue shares only up to the limit of its authorized capital stated in the MOA. If it intends to issue shares beyond this limit, the MOA must be amended to reflect the increased authorized capital.
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Guidelines for Increasing Authorized Share Capital
When choosing a company name, certain words or phrases require a minimum level of authorized share capital. Below are the key guidelines:
₹5 lakhs – Required if the company name includes the words Hindustan, Bharat, or India.
₹10 lakhs – Required if the name contains words like Enterprise, Products, Business, or Manufacturing.
₹50 lakhs – Required for using words such as Global, Intercontinental, Continental, Asian, or International.
₹50 lakhs – Also required if Bharat, Hindustan, or India appear as the first word in the company’s name.
₹1 crore – Required if the name includes words like International, Global, Universal, Continental, Intercontinental, Asiatic, Industry, or Udhyog.
₹5 crores – Required if the company name uses the word Corporation.
Documents Required for Increasing Authorized Capital
Once shareholders approve the increase in authorized share capital, the necessary documents must be filed with the MCA (Ministry of Corporate Affairs) within 30 days. For private companies, only Form SH-7 is required; filing of Form MGT-14 is not applicable.
The key documents include:
Digital Signature Certificate (DSC): A valid DSC of any authorized director of the company.
Memorandum of Association (MoA): A copy of the updated or amended MoA.
Articles of Association (AoA): A copy of the updated or amended AoA.
Certificate of Incorporation: A copy of the company’s incorporation certificate.
PAN Card: A copy of the company’s Permanent Account Number (PAN) card.
Post-Compliance Steps for Changing Authorized Capital
Review the Articles of Association (AoA): Verify whether the AoA allows an increase in authorized share capital.
Amend the AoA if required: If the AoA does not permit such an increase, it must be amended in accordance with Section 14 of the Companies Act, 2013.
Call a Board Meeting: Issue a notice to hold a board meeting for approving the amendment of the AoA and the increase in authorized share capital.
Call an Extraordinary General Meeting (EGM): Issue a notice for conducting an EGM to obtain shareholder approval for the same.
Adhere to notice periods: Ensure the board meeting notice is sent at least 7 days in advance, and the EGM notice at least 21 days in advance.
Rules for Changing Authorized Capital
The following rules must be followed when increasing a company’s authorized share capital:
Review the Articles of Association (AoA): Ensure the AoA permits an increase in authorized capital and outlines the process for passing a special resolution.
Hold a Board Meeting: Convene a meeting of the board of directors to propose and approve the increase in authorized share capital.
Pass a Special Resolution: Shareholders must approve the proposal through a special resolution. This resolution must be filed with the Registrar of Companies (ROC) within 30 days.
File with the ROC: Submit the required documents, including the special resolution and the amended AoA, to obtain ROC approval.
Issue New Shares: After receiving approval, the company can issue new shares to raise additional capital.
How Is Authorized Share Capital Determined?
Authorized share capital refers to the maximum number of shares a company is legally allowed to issue to its shareholders. This limit is specified in the Memorandum of Association (MoA) at the time of incorporation.
The amount of authorized share capital is usually decided based on factors such as:
The company’s future growth and expansion plans
Estimated capital requirements
Financial projections and funding needs
Promoters and directors determine the initial authorized capital considering the company’s long-term capital needs.
If additional funds are required in the future, the authorized share capital can be increased by:
Passing a special resolution, and
Filing the necessary documents with the Registrar of Companies (ROC).
Once approved, the company can issue additional shares to raise more funds.
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Frequently Asked Questions…
What is accounting, and why does it matter for businesses?
Accounting is the process of recording, classifying, and analyzing financial transactions. It is essential for tracking performance, ensuring compliance, managing cash flow, and guiding business decisions.
How is bookkeeping different from accounting?
Bookkeeping is the basic task of recording financial transactions, while accounting involves interpreting that data, preparing reports, and offering financial insights.
Which financial statements are part of accounting services?
The key financial statements include the balance sheet, profit and loss statement, and cash flow statement.
Who can benefit from outsourcing accounting services?
Startups, small and medium-sized businesses, and even growing companies often outsource accounting to save time, reduce costs, and gain expert support.
How frequently should financial statements be reviewed?
Most businesses review them monthly or quarterly to keep track of finances and prevent issues.
Which accounting software do businesses commonly use?
Popular choices include Tally, QuickBooks, Zoho Books, Xero, and SAP depending on business needs.
What’s the difference between cash-basis and accrual-basis accounting?
Cash-basis: Records income/expenses when cash changes hands.
Accrual-basis: Records income/expenses when they are earned or incurred, regardless of payment.
What common mistakes should businesses avoid in accounting?
Typical mistakes include not maintaining proper records, mixing personal and business expenses, missing tax deadlines, and not reconciling bank statements.
How does an accountant help with taxes?
An accountant prepares accurate tax returns, ensures legal compliance, helps reduce tax liability, and supports long-term tax planning.
How do accounting services help businesses save money and improve decisions?
They provide clear financial insights, identify cost-saving opportunities, improve budgeting, minimize risks, and support better investments.
