Increase Authorised Capital

1. When Does a Company Need to Increase Authorised Capital?

Authorised capital must be increased before a company can issue new shares that would take the paid-up capital beyond the existing authorised limit. Common scenarios include:

• Fresh equity raise: A startup raising Series A, B, or later rounds needs to issue new shares, which often exceeds the initial authorised capital (typically Rs 1 lakh to Rs 10 lakh at incorporation)
• ESOP pool creation: Employee stock option plans require shares to be set aside from authorised capital
• Conversion of convertible instruments: Compulsorily Convertible Debentures (CCDs) or Compulsorily Convertible Preference Shares (CCPS) converting into equity require headroom in authorised capital
• Rights issue / bonus issue: Issuance to existing shareholders on a proportionate basis
• Merger or amalgamation: The surviving company may need increased authorised capital to issue shares to shareholders of the transferor company

At Virtual Auditor, we routinely advise startups to increase authorised capital before executing the share subscription agreement — not after. If you issue shares without sufficient authorised capital, the allotment is void, and the regulatory consequences are severe.

2. Statutory Framework — Section 61

Section 61 of the Companies Act, 2013 deals with the power of a limited company to alter its share capital. The relevant sub-sections are:

2.1 Section 61(1) — Powers of Alteration

A limited company having a share capital may, if so authorised by its Articles, alter its Memorandum in its general meeting to:

1. Increase its authorised capital by such amount as it thinks fit by issuing new shares — Section 61(1)(a)
2. Consolidate and divide all or any of its share capital into shares of larger amount — Section 61(1)(b)
3. Convert all or any of its fully paid-up shares into stock, and reconvert stock into shares — Section 61(1)(c)
4. Sub-divide its shares into shares of smaller amount — Section 61(1)(d)
5. Cancel shares which have not been taken up by any person — Section 61(1)(e)

For the purpose of increasing authorised capital, we focus on Section 61(1)(a).

2.2 Pre-Condition: Articles Must Authorise

Section 61(1) begins with the words “if so authorised by its articles.” This means the Articles of Association must contain a clause permitting alteration of share capital. Table F of Schedule I to the Act (which applies to companies limited by shares if they have not adopted custom articles) contains this authorisation by default in Regulation 40. If your AoA does not contain such authorisation, you must first alter the AoA by special resolution under Section 14 before proceeding with the capital increase.

2.3 Type of Resolution Required

An ordinary resolution is sufficient for increasing authorised capital under Section 61(1)(a). This means a simple majority of members present and voting at the general meeting. There is no requirement for a special resolution (75% majority) unless the AoA specifically requires one.

3. Step-by-Step Procedure to Increase Authorised Capital

Here is the exact procedure we follow at Virtual Auditor:

4. Board Meeting — Resolution and EGM Notice

4.1 Board Resolution

The board resolution at this stage covers three items:

1. Approval of the proposal to increase authorised capital from Rs [existing] to Rs [proposed]
2. Approval of the consequent amendment to Clause V of the Memorandum of Association
3. Convening of an Extraordinary General Meeting (EGM) and approval of the EGM notice and explanatory statement

For board resolution templates, refer to our Board Resolution Templates for Startup India guide.

4.2 Notice of EGM

Under Section 101, the notice must be sent to every member, every director, and the auditor of the company at least 21 clear days before the meeting. Under Section 101(1), shorter notice is permitted if consent is given by members holding at least 95% of the paid-up share capital (for a company having share capital). The notice must include:

• Date, time, and venue of the EGM (or video conference details)
• The text of the ordinary resolution proposed
• Explanatory statement under Section 102 setting out the material facts regarding the increase, including the quantum of increase, the purpose (funding round, ESOP pool, etc.), and the impact on existing shareholders

5. EGM and the Ordinary Resolution

5.1 Quorum

Under Section 103(1)(b), the quorum for a general meeting of a private company is 2 members personally present. For a public company, it varies: 5 members for up to 1,000 members; 15 members for 1,001 to 5,000; 30 members for above 5,000.

5.2 Passing the Resolution

An ordinary resolution under Section 114(1) is passed by a simple majority — more than 50% of the votes cast by members present in person or by proxy. The resolution should specifically state:

• The existing authorised capital of the company
• The amount by which the authorised capital is being increased
• The new authorised capital (existing + increase)
• The class of shares comprising the increase (equity shares, preference shares, or both)
• That Clause V of the Memorandum of Association stands altered accordingly

5.3 Alternatives to a Physical EGM

Private companies have flexibility:

• Video Conference EGM: Permitted under Section 173(2). All EGM procedures (notice, quorum, voting, minutes) apply
• Postal Ballot: Under Section 110, any resolution that can be passed at a general meeting can be passed by postal ballot. For private companies, this is a practical alternative
• Resolution by Circulation: Under Section 175, a private company may pass a resolution by circulation if the resolution is circulated to all members with a request for approval. The resolution must be approved by a majority of members entitled to vote on the resolution

6. Form SH-7 — Filing with ROC

6.1 What is SH-7?

Form SH-7 is the notice to the Registrar of Companies regarding alteration of share capital, prescribed under Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014. It is filed on the MCA portal (V3).

6.2 SH-7 Contents

The form requires:

• CIN of the company
• Type of alteration (increase, consolidation, sub-division, cancellation, conversion)
• Existing authorised capital — broken down by class (equity, preference)
• Increased authorised capital — broken down by class
• Date of resolution (the EGM date)
• Type of resolution (ordinary resolution)

6.3 Attachments to SH-7

• Certified true copy of the ordinary resolution passed at the EGM
• Altered Memorandum of Association (showing the new Clause V)
• Proof of stamp duty payment (e-stamp certificate)
• Optional: minutes of the EGM (if the ROC raises a query)

6.4 Filing Timeline

SH-7 must be filed within 30 days of passing the ordinary resolution. Late filing attracts additional fees as per the MCA fee schedule:

7. Government Fee for SH-7

The government fee for filing SH-7 is based on the amount of increase in authorised capital, as prescribed in the Companies (Registration Offices and Fees) Rules, 2014. The fee structure is:

Example: A company increasing authorised capital from Rs 10 lakh to Rs 1 crore (increase of Rs 90 lakh) pays Rs 25,000 as government fee for SH-7.

8. Stamp Duty on Increase of Authorised Capital

Stamp duty is payable on the increase in authorised capital under the Indian Stamp Act, 1899 and respective state stamp legislation. The rate varies by state:

The stamp duty is applicable based on the state of the registered office of the company. E-stamping is available in most states through the SHCIL platform. At Virtual Auditor, we handle stamp duty procurement for all states across India.

9. Practical Scenarios and Worked Examples

9.1 Startup Raising Series A

Situation: A startup incorporated with Rs 1 lakh authorised capital (10,000 equity shares of Rs 10 each). The founders hold 10,000 shares (100% paid-up). A Series A investor is investing Rs 5 crore for 20% stake on a post-money basis. The investor will be allotted shares at a premium.

Calculation:

• Post-money valuation: Rs 25 crore
• Investor stake: 20% = new shares to be issued
• If 2,500 new shares of Rs 10 each are issued at a premium of Rs 19,990 per share (totalling Rs 5 crore), authorised capital needs to be at least Rs 1,25,000 (12,500 shares x Rs 10 face value)
• We recommend increasing to at least Rs 5 lakh to accommodate ESOP pool and future rounds
• Increase amount: Rs 4 lakh (from Rs 1 lakh to Rs 5 lakh)
• Government fee: Rs 10,000
• Stamp duty (Tamil Nadu): Rs 600 (0.15% of Rs 4 lakh)

9.2 Company Creating an ESOP Pool

Situation: A company with Rs 10 lakh authorised capital (1,00,000 shares of Rs 10), fully paid up. The board wants to create an ESOP pool of 15,000 shares (15% of expanded capital).

Calculation:

• ESOP pool: 15,000 shares x Rs 10 = Rs 1,50,000 additional authorised capital needed
• Increase to Rs 11,50,000 (or round up to Rs 15 lakh for headroom)
• Increase amount: Rs 5 lakh
• Government fee: Rs 10,000
• Stamp duty (Karnataka): Rs 500 (0.1% of Rs 5 lakh)

10. Common Mistakes to Avoid

• Allotting shares before increasing authorised capital: The allotment is void. The ROC will reject the PAS-3 (return of allotment) filing. This creates a compliance crisis mid-funding
• Filing SH-7 beyond 30 days: Additional fees escalate rapidly. A delay of 6 months can cost 10x the normal fee
• Not paying stamp duty: The ROC may reject the SH-7 filing. Even if processed, the alteration may be challenged later
• Passing special resolution instead of ordinary resolution: While not fatal (a special resolution encompasses an ordinary resolution), it creates unnecessary procedural overhead
• Not checking AoA authorisation: If the AoA does not authorise alteration of share capital, the ordinary resolution under Section 61 is ineffective. You must first amend the AoA by special resolution under Section 14
• Incorrect class of shares: If you need to issue preference shares, ensure the authorised capital includes preference share capital specifically. Equity authorised capital cannot be used for preference share issuance

11. Reduction vs Increase — Key Distinction

While increase of authorised capital requires only an ordinary resolution and SH-7 filing, reduction of share capital is governed by Section 66 and requires:

• Special resolution
• Application to the NCLT
• Publication in newspapers
• NCLT order confirming the reduction
• Filing of the NCLT order with the ROC

This is a fundamentally different (and far more onerous) process. If you are merely cancelling unissued authorised capital (rather than reducing paid-up capital), Section 61(1)(e) permits cancellation by ordinary resolution without NCLT involvement.

12. How Virtual Auditor Helps

Our Company Secretary practice handles authorised capital increases end-to-end:

• AoA Review: Verify that the articles authorise alteration of share capital
• Capital Planning: Calculate the optimal authorised capital considering current funding, ESOP pool, and future rounds
• Board Resolution Drafting: Ready-to-execute resolutions for the board meeting — see our resolution templates
• EGM Notice and Resolution: Compliant notice with explanatory statement under Section 102
• Stamp Duty Procurement: E-stamping across all states
• SH-7 Filing: Same-day filing on MCA V3 portal after the EGM
• Post-Increase Actions: If the capital increase is part of a funding round, we handle PAS-3 (return of allotment), PAS-4 (private placement offer letter), and valuation reports for pricing the shares
• FEMA Compliance: If foreign investors are involved, we handle FDI reporting including FC-GPR filing

Our lead, CA V. Viswanathan (FCA, ACS, CFE, IBBI/RV/03/2019/12333), supervises every capital restructuring engagement. For companies registered under the Companies Act, 2013, we ensure full compliance with ICAI standards and SEBI regulations where applicable.

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Frequently Asked Questions

1. What is authorised share capital?

Authorised share capital (also called nominal or registered capital) is the maximum amount of share capital that a company is authorised to issue, as stated in the capital clause of its Memorandum of Association. Under Section 2(8) of the Companies Act, 2013, it includes capital of such classes of shares as may be specified in the MoA. A company cannot issue shares beyond its authorised capital without first increasing it.

2. How to increase authorised capital of a company?

To increase authorised capital: (1) Hold a board meeting to approve the proposal and convene an EGM; (2) Pass an ordinary resolution at the EGM approving the increase; (3) Alter the capital clause of the Memorandum of Association; (4) File Form SH-7 with the ROC within 30 days of passing the resolution, along with the altered MoA and the ordinary resolution. Government fee and stamp duty on the increased capital must be paid.

3. What is the government fee for increasing authorised capital?

The government fee for SH-7 filing is based on the increase in authorised capital, as per the Companies (Registration Offices and Fees) Rules, 2014. It ranges from Rs 5,000 (for increase up to Rs 1 lakh) to Rs 35,000 plus Rs 2,500 for every Rs 5 lakh or part thereof above Rs 5 crore.

4. Is stamp duty payable on increase of authorised capital?

Yes. Stamp duty is payable on the increase in authorised capital under the Indian Stamp Act, 1899 and the respective state stamp act. The rate varies by state — for example, 0.15% in Tamil Nadu, 0.1% in Karnataka, and 0.1% in Maharashtra (up to Rs 5 crore). E-stamping is available in most states.

5. Can authorised capital be increased without holding a physical EGM?

Yes. Private companies can pass the ordinary resolution through a video conference-based EGM, by postal ballot under Section 110, or by resolution by circulation under Section 175 (for companies with up to 200 members), provided the requisite majority is obtained.

6. What is the difference between authorised capital and paid-up capital?

Authorised capital is the maximum share capital a company is allowed to issue as per its MoA. Paid-up capital is the portion of authorised capital that has actually been issued to shareholders and for which payment has been received. Paid-up capital can never exceed authorised capital.

7. What is the timeline for filing SH-7 with ROC?

Form SH-7 must be filed with the ROC within 30 days of passing the ordinary resolution. Late filing attracts additional fees ranging from 2x (up to 30 days delay) to 12x (beyond 180 days) the normal filing fee on the MCA portal.

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Valuer: V. VISWANATHAN, FCA, ACS, CFE, IBBI/RV/03/2019/12333
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