3 MAJOR POINTS TO KEEP IN MIND WHILE INCREASING AUTHORIZED SHARE CAPITAL OF YOUR COMPANY (2024)

Introduction:

What do you mean by increase in authorized share capital of company?

Increasing the authorized share capital of a company refers to the process of obtaining approval from the company's shareholders to raise the maximum limit of shares that the company is allowed to issue. Authorized share capital is the maximum number of shares that a company is legally permitted to issue, as specified in its Memorandum and Articles of Association.

Definition as Per Companies Act, 2013

As per section 2(8) of the Companies Act, 2013, authorized capital means such capital as is authorized by thememorandumof acompanyto be the maximum amount of share capital of the company.

Why do we Increase Authorized Share capital of Company?

Companies increase authorized share capital for various strategic reasons. Primarily, it provides flexibility for future growth initiatives, enabling the company to raise additional capital when needed.

Let’s Get Started with the 3 major points to be kept in mind while increasing authorized share capital of your company

No. 1: Avoid unnecessary Professional costs:

Considering the potential need for another increase in authorized share capital in the near future, it is advisable to undertake the process now to save on recurring professional costs and government fees.

While there won't be any alterations to the stamp duty, it's important to note that there will still be consistent professional and government form costs associated with each subsequent increase in authorized share capital.

By proactively addressing the company's current and anticipated capital requirements, you can streamline the regulatory procedures and minimize the financial burden associated with multiple filings. This approach not only demonstrates strategic foresight but also ensures that the company remains well-prepared for future growth initiatives. Additionally, consolidating these changes at once promotes efficiency, reducing administrative complexities and potential disruptions to ongoing business activities.

Introduction: For instance, currently, your authorised share capital is Rs. 1 Lakh, and you are set to inject an additional Rs. 50 Lakhs shortly. However, a comprehensive examination of your future financial landscape prompts you to consider a more forward-thinking approach.

Scenario: Immediate Capital Infusion: Your immediate plan involves injecting Rs. 50 Lakhs into the company. With a fair value assessment pegged at Rs. 10 per share, this capital injection will lead to a considerable increase in your financial capacity. However, to avoid potential complications and costs associated with future expansions, it becomes necessary to anticipate and plan for additional capital requirements.

Strategic Vision: Future Investment from Mr. X: One potential scenario in your strategic vision involves Mr. X, an Angel Investor, expressing interest in infusing Rs. 2 Crores into your company one year from now. Given our fair value per share at Rs. 10, accommodating Mr. X's investment would require a substantial increase in your company’s authorised share capital.

Proposal: Proactive Increase in Authorised Share Capital: To align your financial structure with your long-term vision, we propose a proactive increase in your authorised share capital to Rs. 2 Crores or above. This strategic move not only positions you favorably for Mr. X's potential investment but also sets the stage for accommodating future investors and financial requirements seamlessly.

Benefits of Proactive Approach:

Cost Efficiency: By anticipating future capital needs, you avoid unnecessary costs associated with multiple increments in authorised share capital.

Strategic Positioning: A higher authorised share capital enhances your company's appeal to potential investors, reflecting a robust and scalable financial structure.

Flexibility: Increased authorised share capital provides the flexibility to accommodate varying investment amounts and multiple investors in the future.

No. 2: Calculate your Projected share value and Fund requirements

In determining the number of shares to be issued in the near future, a careful consideration of the company's financial projections and anticipated funding requirements is crucial.

Begin by calculating the projected share value, taking into account factors such as the company's current valuation, expected growth, and industry benchmarks. This calculated share value serves as a foundation for estimating the infusion requirement, providing a clear picture of the capital needed for upcoming initiatives.

Whether the company expects external funding in the near future or plans to bootstrap, it's essential to align the issuance of shares with realistic financial goals. Balancing the need for capital infusion with a practical assessment of the company's valuation ensures that funding objectives are achievable and sustainable.

The determination of the number of shares to be issued is closely correlated with the decision to increase authorized share capital. When contemplating an increase in authorized share capital, a key consideration is the company's future funding requirements, which are inherently linked to the fair value of shares. By expanding the authorized share capital, the company is essentially creating the flexibility to issue additional shares in response to evolving financial needs.

In the context of an anticipated increase in authorized share capital, a fluctuation in the fair value of shares becomes particularly relevant. If the fair value increases, the company may find that it can achieve its funding goals with a more conservative issuance of shares, leveraging the higher valuation to attract the necessary capital. Conversely, a decrease in fair value may necessitate a more strategic issuance of shares to meet financial targets without diluting shareholder value excessively.

Overall, a thoughtful evaluation of share issuance plans, grounded in realistic financial assessments, sets the stage for a prudent and effective capital strategy.

Say Your Company name is X

Introduction: This case study explores the considerations and steps involved in determining the necessary increase in authorized share capital for Company X, emphasizing the alignment of share issuance with financial projections and funding requirements.

Scenario: X’s Financial Projections: Understanding the pivotal role of authorized share capital, the leadership seeks to assess and potentially increase the authorized share capital to meet upcoming financial requirements.

Step 1: Calculating Projected Share Value: To ascertain the required increase in authorized share capital, Company X initiates the process by calculating the projected share value. This involves a meticulous analysis of the company's current valuation, expected growth trajectory, and industry benchmarks.

Step 2: Aligning Share Issuance with Financial Goals: Recognizing the correlation between authorized share capital and funding goals, Company X aligns the issuance of shares with realistic financial objectives. Whether seeking external funding or opting for bootstrapping, this step ensures that the authorized share capital increase is directly tied to the company's strategic financial goals.

Step 3: Increasing Authorized Share Capital: With the projected share value in hand, Company X assesses the potential increase needed in authorized share capital. This evaluation involves a careful consideration of the anticipated funding requirements, taking into account both immediate and future financial needs.

Step 4: Considering Fair Value Fluctuations: In anticipation of an increase in authorized share capital, Company X acknowledges the significance of fair value fluctuations. A thorough analysis is conducted to understand how changes in fair value may impact the required increase. This insight allows the company to make informed decisions on the magnitude of the increase in authorized share capital.

Conclusion: In conclusion, Company X's strategic evaluation of share issuance plans, rooted in realistic financial assessments, leads to the determination of the required increase in authorized share capital. By calculating projected share values, aligning with financial goals, and considering fair value fluctuations, the company ensures a robust approach to securing the necessary capital for future initiatives.

No. 3: Proper Compliance to tackle a significant corporate Event:

Ensuring a meticulous and compliant process during an increase in authorized share capital is paramount. Issuing proper notices and agendas, including Board meeting notices and Extraordinary General Meeting (EGM) notices, carefully drafted minutes of meetings, attendance sheets, authentic fair value reports, authentic vote count and noting is a procedural necessity. This stringent adherence to formalities is especially crucial when dealing with an increase in authorized share capital, which can be considered a significant corporate event.

The nature of an authorized share capital increase heightens scrutiny from ROC (regulatory department). Therefore, it is imperative to dot the i's and cross the t's when preparing and submitting relevant forms. ROC may pay closer attention to such events, emphasizing the need for accuracy and completeness in the documentation.

Proactive and transparent communication through the issuance of notices not only complies with legal requirements but also serves to inform and involve stakeholders in the decision-making process. Timely notifications, clear agendas, and comprehensive documentation enhance the credibility of the company's actions and contribute to a smooth and legally sound increase in authorized share capital.

By being diligent in these procedural aspects, a company can mitigate the risk of regulatory issues and ensure that the authorized share capital increase is conducted seamlessly, demonstrating a commitment to governance and compliance.

Instances of non-compliance during the issuance of authorized share capital have, unfortunately, resulted in severe penalties for companies and their directors. These penalties are not merely financial burdens but also cast a shadow on the reputation and standing of the affected entities. Failure to adhere to regulatory requirements, such as issuing proper notices, maintaining accurate documentation, and submitting relevant forms with precision, can lead to legal consequences.

The ROC, in particular, has levied heavy fines and sanctions in response to such lapses. Beyond the financial implications, the integrity and governance credibility of the company and its directors come under scrutiny. These instances underscore the critical importance of a meticulous and compliant approach during significant corporate events like an increase in authorized share capital. Proactive measures and due diligence in adherence to regulatory formalities are imperative to safeguard the company's interests and prevent the potentially detrimental consequences of non-compliance.

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