How To Increase Authorised Share Capital Of A Private Limited Company: Complete Guide To Form SH-7 A

How to Increase Authorised Share Capital of a Private Limited Company: Complete Guide to Form SH-7 and ROC Process

A lot of business owners face a situation where they have investors who're ready to invest new shareholders are coming on board or they need to issue additional shares but there is one big problem: the company does not have sufficient authorised share capital. This is one of the common compliance issues that startups, growing businesses and private limited companies face.

The good news is that increasing authorised share capital is a process if you follow the correct procedure. In this article we will understand what authorised share capital means, when it should be increased and the complete process of filing Form SH-7 with the Registrar of Companies.

 What is Authorised Share Capital?

Authorised Share Capital is the amount of share capital that a company is legally permitted to issue to its shareholders. It is like a ceiling beyond which the company cannot issue shares unless the authorised capital is increased. For example, suppose a company is incorporated with a capital of ?10,00,000 and a face value per share of ?10. The company can issue a maximum of 1,00,000 equity shares. If the company wants to issue shares to investors, promoters or employees beyond this limit it must first increase its authorised share capital.

 Why Do Companies Increase Authorised Share Capital?

There are reasons why companies increase their authorised share capital. These include:

 1. Fund Raising

When a company plans to raise funds from investors it may require shares to be issued. This is because investors typically invest in exchange for shares in the company.

 2. Issue of Bonus Shares

A company that wants to issue bonus shares may need to increase its share capital. Bonus shares are shares that are issued to existing shareholders.

 3. ESOP Implementation

Startups often increase their authorised capital before implementing Employee Stock Option Plans. This is because ESOPs involve issuing shares to employees and the company needs to have authorised share capital to do this.

 4. Rights Issue

A company may need to increase its share capital if it wants to offer shares to its existing shareholders. This is known as a rights issue.

 5. Business Expansion

Growing companies often keep an authorised capital to accommodate future funding requirements. This is because they may need to issue shares to investors or promoters in the future.

 Check the Articles of Association First

Before increasing authorised share capital, the company must verify whether its Articles of Association permit alteration of authorised share capital. If the Articles of Association do not contain such a provision it must first be amended through shareholder approval before increasing authorised capital. Many companies overlook this step. Face unnecessary ROC resubmissions.

 Step-by-Step Process for Increasing Authorised Share Capital

 Step 1: Convene a Board Meeting

The Board of Directors should hold a meeting. Approve the proposal for increasing authorised share capital, alteration of the Capital Clause of the Memorandum of Association calling of an Extraordinary General Meeting and draft notice for shareholders. The Board Resolution authorizes management to initiate the process.

 Step 2: Issue Notice of EGM

A notice should be sent to shareholders specifying the existing authorised capital proposed authorised capital, reason for increase and proposed alteration of the Memorandum of Association. The explanatory statement should clearly explain why additional capital is required.

 Step 3: Pass Shareholders Resolution

In the Extraordinary General Meeting shareholders approve the increase in authorised share capital. Generally, an Ordinary Resolution under Section 61 of the Companies Act 2013 is passed for increasing authorised capital. For example, if the existing authorised capital is ?10,00,000 divided into 1,00,000 equity shares of ?10 each the proposed authorised capital could be ?50,00,000 divided into 5,00,000 equity shares of ?10 each.

 Step 4: Prepare Altered MOA

After shareholder approval the Capital Clause of the Memorandum of Association must be updated to reflect the revised capital. This is one of the documents required for ROC filing.

 Step 5: File Form SH-7 with ROC

After approval from shareholders the company must file Form SH-7 with the Registrar of Companies. Form SH-7 is the form used to intimate ROC regarding alteration of authorised share capital. It is required under Section 64 of the Companies Act 2013. The form must be filed within 30 days from the date of passing the resolution. Failure to file within the period may attract additional fees and penalties.

 Documents Required for SH-7 Filing

The following documents are generally attached:

 copy of Board Resolution

 Certified copy of Shareholders Resolution

 Notice of EGM

 Altered Memorandum of Association

 Altered Articles of Association (if amended)

Any other supporting documents as required

The attachment requirements may vary depending upon the facts of the case and MCA filing requirements.

 ROC Fees and Stamp Duty

One aspect that often surprises promoters is that increasing authorised share capital involves payment of ROC filing fees and stamp duty. ROC fees are calculated based on the amount of revised capital. Stamp duty is state-specific. Differs from state to state. Therefore, the total cost of increasing authorised capital can vary significantly depending upon the existing capital, revised capital and state of incorporation.

 Example

Let’s assume a company has an authorised capital of ?10,00,000. An investor proposes an investment against the issue of shares worth ?30,00,000. Since the company can issue shares up to the authorised capital limit it first increases its authorised capital from ?10,00,000 to ?50,00,000. After ROC approval of SH-7 the company can proceed with the allotment of shares.

 Common Mistakes Companies Make

 Filing SH-7 After the Deadline

Many companies complete the shareholder approval. Forget the ROC filing deadline. This can result in fees and penalties.

 Ignoring Articles of Association Provisions

If the Articles of Association do not permit capital alteration amendment must be carried out first. Many companies overlook this step. Face unnecessary ROC resubmissions.

 Incorrect Capital Clause

Errors in the Capital Clause often result in ROC resubmissions. This can delay the process. Increase costs.

 Wrong Calculation of Fees

Incorrect fee calculations may delay approval. This is why it is essential to ensure that the correct fees are paid.

 Issuing Shares Before Capital Increase

A company cannot issue shares beyond its capital limit. This is one of the common compliance errors observed during due diligence exercises.

 What Happens After SH-7 Approval?

Once the ROC takes the filing on record the authorised capital stands increased. The company becomes eligible to issue shares. Investors can be allotted shares. Rights issues, bonus issues and ESOP allotments can be implemented within the revised limit.

 Final Thoughts

Increasing authorised share capital is a extremely important corporate compliance. Whether you are raising investment bringing in shareholders implementing ESOPs or planning future expansion the process must be completed correctly before any additional shares are issued. The key points to remember are simple: check Articles of Association provisions obtain Board and Shareholder approval alter the Capital Clause of the Memorandum of Association file Form SH-7 within 30 days and pay ROC fees and stamp duty. A properly executed SH-7 filing ensures that future share allotments are legally valid and free from compliance risks. At CA Dhiraj Ostwal & Associates we assist limited companies, startups and growing businesses with authorised capital increase ROC filings, SH-7 compliance, share allotments, investor documentation and end-, to-end corporate compliance support.