Running Out of Authorised Capital? How to Increase It and Issue Fresh Shares
How a limited company increases authorised share capital under s.61, offers new shares under s.62, and files notice with the Registrar under s.64.
CA Harun Raaj
makeitlegit.in
A company that wants to bring in a new investor often meets the same blocker: the authorised capital in its memorandum is already fully used. New shares cannot be issued past that ceiling, so the ceiling has to move first. The Companies Act, 2013 sets out a three-step sequence. Check the articles and alter the memorandum in general meeting (s.61). Offer the new shares through one of three routes (s.62). File notice of the alteration with the Registrar within thirty days, along with the altered memorandum (s.64).
Legal basis: Companies Act 2013, ss.13, 61, 62(1)-(4), 64 and 117; rule 15, Companies (Share Capital and Debentures) Rules 2014.
What to do now
- Next step: read your articles. If they authorise an increase in authorised share capital, hold a general meeting to alter the memorandum (s.61(1)). If they do not, the articles come first: a company may alter its articles by a special resolution (s.14(1), Companies Act 2013).
- Deadline: notice of the increase goes to the Registrar within thirty days of the alteration (s.64(1)), in Form SH-7 along with the fee (rule 15, Share Capital and Debentures Rules 2014). If a resolution you passed is one that s.117(3) lists, a copy is separately due within thirty days of its passing (s.117(1)).
- Consequence of delay: a penalty of five hundred rupees for each day the default continues, capped at five lakh rupees for the company and one lakh rupees for an officer in default (s.64(2)). A late resolution copy under s.117 carries its own penalty (s.117(2)).
Have a CA review your facts before you act or file.
Step 1: check the articles, then alter the memorandum (s.61)
Section 61(1) reads: "A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to" do five things, the first being to "increase its authorised share capital by such amount as it thinks expedient". The articles come first. If they are silent or restrictive, they must be altered before the memorandum can move.
Section 13(1) opens with the words "Save as provided in section 61", so the general memorandum-alteration rule gives way to the specific power in s.61 when what you are doing is a capital alteration. Name changes and moves of the registered office between States follow different rules (s.13(2) and (4)) and are not part of this article.
The five things a general meeting can do under s.61(1) are:
- increase authorised share capital;
- consolidate and divide shares into shares of a larger amount;
- convert fully paid-up shares into stock and reconvert them;
- sub-divide shares into smaller amounts; and
- cancel shares not taken or agreed to be taken by anyone.
Two provisos matter if you restructure at the same time. A consolidation and division "which results in changes in the voting percentage of shareholders" does not take effect "unless it is approved by the Tribunal on an application made in the prescribed manner". A sub-division must keep "the proportion between the amount paid and the amount, if any, unpaid on each reduced share" the same as in the original share. For a plain increase in authorised capital neither proviso applies.
Cancelling untaken shares has its own clarification: "The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital" (s.61(2)).
Step 2: offer the new shares through the right route (s.62)
Raising the ceiling issues nothing. When a company "proposes to increase its subscribed capital by the issue of further shares", s.62(1) says the shares "shall be offered" in one of three ways.
(a) Rights issue to existing equity holders. The offer goes to persons who are equity holders at the date of the offer, "in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares", by a letter of offer. Three conditions apply:
- The notice must specify the number of shares offered and give a time "not being less than fifteen days or such lesser number of days as may be prescribed and not exceeding thirty days from the date of the offer", after which an unaccepted offer is deemed declined (s.62(1)(a)(i)).
- Unless the articles say otherwise, the offer includes a right to renounce the shares in favour of any other person, and the notice must state that right (s.62(1)(a)(ii)).
- After the period expires, or on earlier intimation of declination, the Board of Directors "may dispose of them in such manner which is not disadvantageous to the share holders and the company" (s.62(1)(a)(iii)).
(b) Employees under a stock option scheme. The offer is made "to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed" (s.62(1)(b)).
(c) Preferential offer to any persons. The shares may go "to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed" (s.62(1)(c)).
How the rights notice must be sent
The s.62(1)(a)(i) notice "shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue" (s.62(2)). The test is proof of delivery. Keep the courier slip, speed-post receipt or email delivery record on the company's file.
Two carve-outs
Section 62 does not apply to an increase in subscribed capital caused by exercising an option, attached to debentures or a loan, to convert them into shares (s.62(3)). The proviso requires that the terms of that issue, including the option, were approved before the debentures were issued or the loan raised, by a special resolution in general meeting.
Separately, where debentures or loans were obtained from a Government and that Government considers it necessary in the public interest, it may by order direct conversion into shares, even if the original terms had no conversion option (s.62(4)). The proviso to s.62(4) gives the company sixty days from communication of the order to appeal to the Tribunal if the terms are not acceptable. Such an order can itself raise authorised capital (s.62(6)), and s.64(1)(b) then requires the same notice to the Registrar.
Which route fits which round
Route (a) suits a pro-rata round among existing equity holders. A new investor holds nothing "at the date of the offer", so a rights letter cannot reach them. For a first outside cheque, route (c) is the one that fits: a special resolution, a price fixed by a registered valuer's report, and cash or other consideration. An employee option pool goes through (b), again by special resolution and subject to the prescribed conditions. Decide the route before drafting the resolutions, because each route needs different approvals. Offering shares to named investors may also bring in the private-placement rules (s.42); ask your CA before you draft.
A practical point on the rights route. Once the offer period ends, or a holder declines early, the Board may place the unsubscribed balance, provided the manner "is not disadvantageous to the share holders and the company" (s.62(1)(a)(iii)). That is the clause that lets leftover shares move to a waiting incoming investor without starting a new round, but the Board must be able to show the placing was not to the holders' disadvantage.
Step 3: notice to the Registrar (s.64)
Section 64(1) requires that where a company "alters its share capital in any manner specified in sub-section (1) of section 61", it "shall file a notice in the prescribed form with the Registrar within a period of thirty days of such alteration or increase or redemption, as the case may be, along with an altered memorandum". Rule 15 of the Companies (Share Capital and Debentures) Rules 2014 prescribes Form SH-7, filed "along with the fee". The altered memorandum travels with the notice so the Registrar's record shows the new ceiling.
The thirty days run from the alteration, not from the later allotment of shares. A company that raises the ceiling in January and allots in March still counts from January.
On default, "such company and every officer who is in default shall be liable to a penalty of five hundred rupees for each day during which such default continues, subject to a maximum of five lakh rupees in case of a company and one lakh rupees in case of an officer who is in default" (s.64(2)).
The amount of the filing fee is not stated here because it depends on the fee table in force when you file. Check the current fee table in the Registration Offices and Fees Rules before paying.
Filing the resolution itself (s.117)
A copy of every resolution, or agreement, on the matters s.117(3) specifies, with any explanatory statement annexed to the meeting notice, must be filed "within thirty days of the passing or making thereof in such manner and with such fees as may be prescribed" (s.117(1)). Whether your resolutions fall within s.117(3) depends on their kind, so confirm that with your CA. This is a separate filing from SH-7. A resolution altering the articles must also be embodied in or annexed to every copy of the articles issued afterwards (proviso to s.117(1)).
The sequence in one place
- Check the articles; if they do not authorise an increase, alter them first by special resolution (s.14(1)).
- Hold a general meeting and alter the memorandum under s.61(1)(a).
- Within thirty days of that alteration, file Form SH-7 with the altered memorandum (s.64(1); rule 15).
- Issue the new shares through the correct s.62(1) route, with the rights notice sent at least three days before the issue opens if you use route (a).
- File copies of resolutions that fall within s.117(3) within thirty days of passing.
FAQ
Can the Board increase authorised capital on its own?
No. A limited company may do so "if so authorised by its articles", and the alteration is made "in its general meeting" (s.61(1)).
How long do existing shareholders get to accept a rights offer?
Not less than fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days from the date of the offer (s.62(1)(a)(i)).
Can a shareholder transfer the right to subscribe?
Yes, unless the articles otherwise provide. The offer is deemed to include a right to renounce the shares in favour of any other person, and the notice must state it (s.62(1)(a)(ii)).
How are shares offered to a new investor who holds nothing yet?
Under clause (c): a special resolution, with the price determined by a registered valuer's report, for cash or other consideration (s.62(1)(c)).
What must reach the Registrar after the alteration?
A notice in the prescribed form, Form SH-7, within thirty days of the alteration, along with the altered memorandum (s.64(1); rule 15, Companies (Share Capital and Debentures) Rules 2014).
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