While incorporating any Company, one of the major decisions to be taken is to decide the amount of investment for running the Company. At the initial stage of company incorporation, Owner sets a maximum capital to invest and then the amount is invested in the form of share capital by subscribing to the shares of the Company.
This maximum amount is to be mentioned in the Memorandum of Association of the Company as Capital Clause the maximum number of shares are known as “Authorised share capital” or “Nominal Capital”.
For example, while incorporation, Company can register itself with a fixed number of shares like 20,000 equity share of Rs. 10/- each amounting to authorised capital of the Company as Rs.2,00,000/-. In such case Company cannot made investment above Rs.2,00,000/- or issue share beyond 20,000 unless specific requirements in respect of increase in authorised share capital as given in Companies Act, 2013 are met.
Changes in authorised share capital
After incorporation, Companies goes through ups and downs and accordingly it plans for expansion or division of its business. Company doing well generally go for expansion by increasing the investment in the Company to meet the working capital requirement and to expand business operations to new heights.
Companies having share capital have to check whether such investment is permitted as per their capital clause, if the amount of further investment is exceeding the existing pre decided investment limit than Company can increase the amount of investment by altering the authorised capital as prescribed in their Memorandum of Association at the time of incorporation.
Such alteration in capital is permitted under Companies Act, 2013 only after adhering certain regulation as penned down in this Article.
Companies Act, 2013 (“Act”) describes share and share capital in the manner given below:
As per section 2(84) of the Act, “share” means a share in the share capital of a company and includes stock.
As per section 2(8) of the Act, “Authorised share capital” or “nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company;
As per section 3(2) of the Act, A company can be formed in either ways:
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company. ]
In case of Company limited by shares, Company has to mention a Capital clause in its Memorandum of Association, the fundamental document of the Company.
In accordance with Section 4 (e) of the Act, in case of a Company having share capital, every memorandum shall state:
(i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
It means Capital Clause must mention below:
Maximum amount of share capital like Rs. 10,00,000 or Rs. 20,00,000
Their bifurcation in number of shares like 1,00,000 shares of Rs. 10 each or 20,000 shares of Rs. 100 each.
Section 13 and section 61 of the Act deals with the alteration in Memorandum of Association. As per section 61 of the Act, to proceed for alteration, Company must have to check for the authority for the same in the article of associations. If article prohibits the Company to increase its authorised capital than Company is required to alter its Article of Association first to vest the authority to the Company.
Further Board do not have power to alter its Memorandum of Association, only members of the Company can alter its memorandum in its general meeting and increase its authorised share capital by such amount as it thinks expedient.
Process to Increase in Authorised Capital of the Company
Below given is a summarised procedure for changing capital clause of the Company.
- Any director or person authorised by the Board will dispatch a notice to call for Board Meeting.
- Notice shall be given as per section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
- Conduct Board Meeting to consider the increase in authorised share capital of the Company.
- After assent of the board members, call for a general meeting for approval of members to alter capital clause inter alia alteration in Memorandum of Association
- Dispatch notices for calling an Extra Ordinary General Meeting (EGM)/Annual General Meeting (AGM) to all the members in accordance with provisions section 101 of Companies Act,2013 read with secretarial standard 2 on General Meetings
- Accord approval of Members through Ordinary Resolution at Extra Ordinary General Meeting (EGM)/Annual General Meeting (AGM) for alteration in Memorandum of Association.
- File E form SH-7 with the Registrar of Companies to submit the notice of such alteration.
Some of the details as filled in SH 7 are given below:
- Additional Capital
- Conditions on which new shares are issued
- Revised capital structure etc.
- The Registrar shall register the alteration of the memorandum and after approval authorised capital will get increased and the same is reflected on the master data of the Company at MCA portal.
- Post approval Company should ensure to arrange print for new copies of Memorandum of Association to give effect to the increased capital clause.
It is pertinent to note that the above stated regulatory framework are as per Companies Act, 2013 only, If any Company is registered with other any regulatory bodies like SEBI, RBI, MSME, IRDA , Companies have to follow additional compliance as prescribed by different regulators under which Company is registered.