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Introduction

A corporation may discover that its permitted capital is insufficient when it plans on future growth, expansion, or acquisitions. Under such circumstances, the business may change its Memorandum of Agreement to enhance its authorized capital. This makes it possible for the business to raise more equity capital in the future by issuing more shares. The maximum number of equity shares that a business is legally allowed to issue in accordance with its Memorandum of Association (MoA) is known as authorized capital. It acts as a cap on the equity capital of the business.

Documents Required

• For both public and private companies:

1. Notice of Extraordinary General Meeting (EGM)

2. Explanatory Statement (Section 102)  

3. Certified Copy of EGM Resolution  

4. Updated Memorandum of Association (MoA)  

5. Updated Articles of Association (AoA)

• For private companies only:

1. Form SH-7

• Additional documents:

1. Stamp Duty Fees  

2. Digital Signatures and Director Identification Numbers (DINs)

Eligibility Criteria

• Who can apply for Increased Authorized Capital?

Any company, public or private, may request an increase in the amount of capital that is permitted. When a business plans on growing, expanding, or making acquisitions in the future, this is a standard procedure.

In India, the requirements for raising approved capital typically vary depending on the kind of business (private or public) and the clauses in its articles of association (AoA). Nonetheless, both public and private businesses must comply with the following common requirements:

• General specifications:

1. Board Resolution: A resolution recommending the raise must be approved by the company board of directors.

2. Approval by Shareholders: At a general meeting, the company shareholders must approve the increase.

3. ROC filing: The business needs to submit the required paperwork to the Registrar of Companies (ROC).

4. Modification of the Memorandum of Association (MoA): In order to reflect the higher allowed capital, the company MoA needs to be modified.

• Public Company:

1. Minimum Subscription: Before expanding its authorized capital, a publicly traded company may be obliged to have a minimum subscription to its shares.

2. Listing standards: The company might have extra standards to meet if it is listed on a stock exchange.

• Private Company:

1. No Minimum Subscription: In most cases, private companies don have to meet a minimum subscription threshold.

2. Less Regulatory Oversight: In comparison to public enterprises, private companies could be subject to less regulations.

• Additional Consideration:

1. AoA Provisions: Specific clauses, such as limitations or restrictions, pertaining to the increase of authorized capital may be found in the company AoA.

2. Regulatory Changes: To guarantee compliance with the most recent regulations, it crucial to confer with legal professionals or experts as regulatory standards are subject to alter over time.

Step by Step Procedure for Increase Authorized Capital

1. Board Resolution

• The resolution recommending the increase in authorized capital must be approved by the board of directors of the company.

• The proposed increase, the justification for it, and the suggested changes to the Memorandum of Association (MoA) should all be made explicit in the resolution.

2. The Extraordinary General Meeting (EGM) notification:

• In order to get shareholder approval for the planned increase, the corporation needs to call an EGM.

• All shareholders must receive a notice of the EGM at least 21 days prior to the gathering.

3. Clarifying Remark:

• It is necessary to draft an explanation and send it to shareholders with the notification of the EGM.

• A thorough explanation of the proposed increase, its effects on the business, and its justifications should all be included in the statement.

4. Approval by Shareholders:

• At the EGM, the permitted capital increase needs to be approved by the shareholders. Usually, a special resolution is needed for this.

5. Registrar of Companies (ROC) filing:

• Within 30 days of the EGM resolution, the documents mentioned at the start of the article must be submitted by the corporation to the ROC

6. Stamp Duty Payment:

• Stamp duty on the increased permitted capital may be owed by the corporation. State laws will determine the precise amount.

7. Issuance of Share:

• Up to the increased authorized capital, the company may issue new shares if the increase is approved and the required paperwork is submitted to the ROC.

Additional Considerations:

• Listing standards: The company might have extra standards to meet if it is listed on a stock exchange.
• Regulatory Changes: To guarantee compliance with the most recent regulations, it's crucial to confer with legal professionals or experts as regulatory standards are subject to alter over time.

Penalties for Non-Compliance with the Procedure

1. Fines: If a company violates any of the terms of the Companies Act of 2013, the Registrar of Companies (ROC) has the authority to impose penalties on it.

2. Director Disqualification: The directors of the company may be barred from holding office in any company for a predetermined amount of time in the event of severe non-compliance or deliberate default.

3. Legal Action: If the non-compliance is judged to be deliberate or fraudulent, the ROC may file a lawsuit against the business or its directors.

4. Regulatory Scrutiny: The ROC or other regulatory bodies may investigate the company and subject it to more regulatory scrutiny.

5. Loss of Investor Confidence: Failure to comply with regulations may harm a company's standing with investors and reduce their trust, which may make it more difficult to raise money or draw in new clients.

Strict adherence to the protocols for increasing authorized capital is essential to avoiding these fines and preserving the reputation and financial stability of the business. It is best to speak with a certified company secretary or a legal expert regarding this procedure and its compliance.

Post Compliance Procedure

Following an increase in authorized capital, there are post-registration compliances that must be followed. The main goals of these compliances are to guarantee accountability and openness.

1. The AGM, or annual general meeting:

• Within 30 days of the fiscal year's conclusion, the company is required to have an AGM.

• The annual accounts, which include the balance sheet, profit and loss account, and auditor's report, must be approved by the AGM.

• At the AGM, shareholders are entitled to voice any queries or issues they may have.

2. The audit and financial statements:

• Accurate financial statements must be created and kept up to date by the company.

• One certified chartered accountant is required to audit the financial statements.

• Within 30 days of the AGM , the audited financial statements must be submitted to the Registrar of Companies (ROC).

3. Director's Report:

• A director's report, which includes details on the company’s operations, finances, and future goals, must be prepared by the organization.

• The director's report needs to be submitted to the ROC together with the annual accounts.

4. Required Reports:

• The business is required to submit a number of statutory returns to the ROC, including the form PAS-3 (for private firms), the form ADT-1 (for listed companies), and the annual return.

• The nature and scale of the business may affect the precise returns and deadlines.

5. Adherence to Regulations:

• Other regulations that the business might have to abide by include those pertaining to taxes, environmental protection, or labor laws.

Why should one consider consulting a Legal Professional during this Process?

For the purpose of increasing authorized capital, you should consider consulting with a legal expert for the following reasons:

1. Regulatory Compliance: Attorneys are knowledgeable about the intricate legal system and the rules governing business decisions such as raising permitted capital. They can make sure that your business abides by all relevant rules and laws, helping you stay out of trouble and out of trouble with the law.

2. Drafting of Legal Documents: The procedure includes writing and submitting a number of legal documents, including the modified MoA, the explanatory statement, and the notice of EGM. These documents can be prepared precisely and quickly by legal experts, which lowers the possibility of mistakes or omissions.

3. Advice on Best Practices: Taking into account the company financial status, growth objectives, and market conditions, they can offer insightful recommendations on the best ways to raise approved capital.

4. Negotiation and Representation: A legal expert can represent your company interests and guarantee a successful resolution if there are any legal issues or negotiations during the procedure.

5. Risk Mitigation: You can reduce possible risks related to the procedure, like challenges from shareholders or regulatory bodies, by working with a legal expert.

6. Time and Cost Efficiency: Seeking expert advice will help you navigate the intricate procedure more quickly and efficiently, even though there may be associated legal fees. They can simplify the process and assist in preventing expensive errors.

Advantages of Increased Authorized Capital
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A corporation might gain from increasing authorized capital in a number of ways. The following are some of the main benefits:

1. Future Growth: It gives the business the freedom to acquire more equity money as necessary, for things like acquisitions, expansion, or R&D.

2. Debt Reduction: A corporation can improve its financial health and cut interest costs by issuing additional shares in order to lower its debt-to-equity ratio.

3. Future chances: A rise in permitted capital may indicate to potential investors that the business is optimistic about its chances for future expansion.

4. Dividend Potential: It may also portend increased dividend disbursements down the road.

5. Mergers and Acquisitions: Increased authorized capital can help in mergers, acquisitions, and strategic alliances by giving corporations the equity they need to buy other companies.

6. Joint Ventures: It can be useful to form partnerships with other businesses.

7. Shareholders Dilution: A business might lessen the shareholding of current shareholders by issuing new shares. In certain cases, particularly when there is a sizable controlling stakeholder, this may be a desired result.

8. Tax Deductions: Increasing allowed capital may be eligible for tax breaks or incentives in some jurisdictions.

Disadvantages of Increased Authorized Capital
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1. Dilution: There is dilution of existing shareholder ownership. However, in certain cases, dilution can be a desired result, particularly when there is a sizable controlling stakeholder. It can aid in lessening the concentration of power and more fairly distributing ownership.

2. Legal Fees and Stamp Duty: The company expenses may rise as a result of paying legal fees and stamp duty as part of the process of raising authorized capital. Nevertheless, this gives rise to more financial freedom and possible future expansion may outweigh these expenses.

3. Market Perception: Investor conjecture on the company future goals or financial stability might occasionally result in market volatility following the announcement of an increase in authorized capital. But the market volatility may be curbed if the company can clearly explain the reasons for the increase and highlight its promising future.

4. Complicated Rules: Complying with the intricate regulatory procedures that may be involved in the process of growing permitted capital can be expensive and time-consuming. Nonetheless, by collaborating with legal experts and adhering to best practices, businesses can reduce the risks related to regulatory compliance.

5. Dilution of Voting Power: Current shareholders may get unhappy if they believe that the increase in authorized capital has considerably diminished their ability to vote. This can be resolved by facilitating open and honest communication by addressing shareholder concerns and retaining their support.

Interesting Facts

Bharat Heavy Electricals Limited v. Union of India

A significant Public Sector Undertaking (PSU) in India, Bharat Heavy Electricals Limited (BHEL), aimed to increase its authorized capital. As the controlling stakeholder, the Union of India objected to the increase, claiming that neither the public nor the corporation would benefit from it. The decision by BHEL to expand its permitted capital was upheld by the court. According to the ruling, PSUs are free to decide in this way as long as they stay within the bounds of the Companies Act and their articles of association. The court further noted that the government does not have complete veto power over these decisions, despite its position as a controlling stakeholder.

Gopalakrishnan v. Tata Iron & Steel Company Limited

Tata Iron & Steel Company (TISCO) suggested raising the amount of capital it was allowed. Gopalakrishnan, a shareholder, opposed the increase on the grounds that it was not in the company best interests and that there was little information provided to shareholders and no chance for them to participate in the decision-making process. The court ruled that shareholders had a right to information about and input into decisions pertaining to higher permitted capital. It stressed how important it is to give shareholders accurate and transparent information. The court further determined that the corporation had met all applicable legal criteria, upholding the legality of the increase in authorized capital.

Ramco Industries Limited v. Union of India

Ramco Industries Limited tried to raise the amount of capital that was permitted. But the Union of India, a regulatory body, objected to the hike, pointing to specific clauses in the Companies Act. The court offered clarification regarding the interpretation of the pertinent sections of the Companies Act. It concluded that the company had complied with all relevant rules and regulations, upholding the legality of the increase in authorized capital. The court further expounded upon the regulatory authorities jurisdiction to examine and sanction said increases.