Unlocking Growth by Having Optimum
Feb 23, 2023
05 min read
Have you ever wondered? How much capital a company can raise? That is not likely unless you are a legal nerd like me. The answer to this question can be found in the concept of authorised share capital! Read along for a fun ride on one of the most boring topics of corporate law!
At Amto AI, we firmly believe that having sufficient authorised capital for your business is not just a regulatory requirement but a strategic decision that can unlock numerous opportunities and benefits for your company's growth and success. I have faced some situations where insufficient authorised share capital caused us an important investment deal.
Under the provisions of Section 61 of the Companies Act, 2013 https://www.mca.gov.in/content/dam/mca/pdf/CompaniesAct2013.pdf, a company can increase or decrease its authorised share capital. It empowers companies to raise additional capital by issuing more shares. In this article, we will explore the benefits and the statutory procedure of increasing authorised capital.
What is Authorised Capital?
Before I bore you with a long list of advantages, let's discuss what the term authorised share capital means under the Indian corporate regime. It refers to the maximum amount of capital a company can issue to its shareholders. It is stated in the company's memorandum of association (“MOA”) and is an integral part of its legal structure.
Imagine you have a big cake that you can share with your friends. The cake is your company, and the slices are the shares. You can decide how many portions you want to cut, and how many you want to give away but the size of the cake is fixed and is called authorised share capital. As the size of the cake is decided at the time you order it, similarly, the authorised share capital is determined when you incorporate the company. However, it can be changed as long as all the friends at the table agree.
This article will explore the advantages of maintaining adequate authorised capital and how it can positively impact your business in the long run.
Advantages of Optimum Authorised Share Capital
While it is not mandatory to issue the entire authorised capital at once, having an appropriate level of authorised capital is vital for the following reasons:
Enhanced Borrowing Capacity
Maintaining a higher level of authorised capital showcases your company's financial strength and stability. When potential lenders or financial institutions evaluate your business for a loan, they often look at the company's authorised capital to measure its capacity to repay debts. A substantial authorised capital instills confidence in creditors, leading to increased borrowing capacity and access to funds when your business needs them the most.
Attracting Investors and Stakeholders
Investors are naturally drawn to companies with adequate authorised capital as it indicates a potential for growth and expansion. With a solid financial foundation, your company becomes attractive to venture capitalists, angel investors, and other stakeholders. A well-structured authorised capital can also facilitate equity financing, allowing you to raise funds by issuing new shares without significantly diluting existing shareholders' ownership.
Flexibility in Business Operations
Having sufficient authorised capital offers flexibility in making critical business decisions. It enables your company to pursue opportunities for mergers, acquisitions, and strategic partnerships, as you have the financial capacity to undertake such ventures. Additionally, with ample authorised capital, your business can quickly respond to market changes and invest in research and development to stay competitive.
Compliance with Legal Requirements
One of the primary advantages of maintaining adequate authorised capital is compliance with the regulatory authorities. Failure to meet the minimum authorised capital requirements can lead to legal consequences, fines, or even the company's dissolution. Ensuring you have the prescribed amount of authorised capital safeguards your business's existence and keeps it in good standing with the authorities.
Building Credibility and Reputation
Credibility is paramount in the business world. Clients, suppliers, and partners perceive A well-capitalized company as more reliable and trustworthy. It reinforces your reputation in the market and can open doors to new business opportunities. Moreover, a positive reputation attracts top talent to your organization, fostering a skilled and dedicated workforce.
Smooth Share Transfer Process
Incorporating your business with an appropriate authorised capital helps streamline the share transfer process. If you plan to expand your company or bring in new investors, a higher authorised capital can simplify the share issuance and transfer procedures, saving time and effort.
With sufficient authorised capital, your business gains a competitive edge over smaller, undercapitalized competitors. It allows you to invest in the latest technology, infrastructure, and marketing strategies, enabling you to provide better products or services to your customers. This, in turn, enhances your market position and distinguishes your company from the competition.
How to increase the authorised share capital of the company?
Step 1: Verify the Articles of Association (“AOA”)
Before commencing the procedures to increase the authorised share capital, it is imperative to scrutinise the AOA of the company in question, to ascertain the existence of a provision that pertains to the increase of the authorised share capital. Should such a provision be absent, the company must first amend its AOA.
The majority of AOA's we have seen usually have the provision for increasing the company's authorised share capital, making this step more or less a formality.
Step 2: Convene a Board Meeting
The next step involves convening a Board meeting and notifying the Directors, inviting them to discuss and approve the augmentation of the authorised share capital. Obtaining the Board of Directors' approval is a crucial prerequisite at this stage.
After this is done, a date should be fixed to hold an Extra-ordinary General Meeting (“EGM”) to obtain the approval of the shareholders for increasing the authorised share capital and make changes to the MOA of the Company.
Step 3: Conducting the EGM
The EGM should be conducted on the scheduled date, time, and venue mentioned in the notice. During the meeting, shareholders' approval for increasing the authorised share capital can be obtained through an ordinary resolution.
Step 4: Notifying Registrar of Companies (“ROC”)
After the ordinary resolution is successfully passed at the EGM, the company must file Form SH7 within 30 days. The prescribed government fee for the authorised capital increase must be remitted to ROC, along with the following documents:
- Notice related to the Extraordinary General Meeting
- Authorised True copy of the ordinary resolution
- Amended Memorandum of Association (Which depicts the higher authorised capital)
By diligently adhering to the procedure mentioned above mostly ROC would approve the filing and increase the authorised share capital of the company. The new authorised share capital can be checked on the MCA portal.
Step 5: Allotment of Shares
Once the above approval from ROC is received, the company gains the ability to increase its paid-up share capital by issuing fresh equity shares.
In conclusion, maintaining optimum authorised capital is more than just a regulatory requirement, but can be a competitive advantage - if used right. Increasing your company's authorised capital in India is a significant step that should be taken carefully. By following the steps mentioned above, you can ensure that your company's authorised capital in India has been increased successfully and legally, allowing you to confidently move forward with your business objectives.