Understanding the basics: Increasing Authorized Share Capital

In today’s dynamic era of business, companies generally find themselves in the requirement of financial flexibility. For enhancing growth, adapt to change market situations, or seize opportunities. By increasing authorized share capital, it will be easy to accomplish that. This article will guide you about Increasing authorized share capital, its process, and why, when and how the company decides to increase it. 

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Overlook of Authorized Share Capital

The Authorized Share Capital is also known asauthorized capital, nominal capital or registered capital. It means to maximum number of share capital, which a company is legally allowed to issue to its shareholders. Authorized capital presents the upper limit of the total value of shares, which a company can sell to investors. 

At the time of the company’s incorporation or subsequent amendments to its articles. Then, they play a crucial role in a company’s memorandum of association or articles of association. This capital does not reflect the appropriate number of shares issued by the company or the number of capitals increased. The part of authorized share capital, which is sold and issued to shareholders is called “issued and outstanding shares” or “issued share capital”. 

When to Increase in Authorized Share Capital?

Here are certain periods to increase inauthorized share capital:

• Shareholders demand: Existing shareholders or new investors are demanded to buy more shares, and the present authorized capital is insufficient to accommodate their investments.
• Development and expansion: At the time company experiences sufficient development and requires further capital to fund expansion initiatives. Like obtaining other business, entering new markets, or investing in R&D.
• Stock Options: If a company needs more authorized shares to allocate, then they wish to expand employee stock option plans for employees. 
• Fundraising: The company plans to increase equity capital by issuing more shares to investors. Either by public offerings, or private placements, to finance its performance or decrease debt. 

Why to Increase in Authorized Share Capital?

Here are certain reasons to increase authorized share capital are as:

• Debt Reduction: By issuing additional shares, the company can raise funds to pay down debt, reducing interest expenses and improving its financial position.
• Avoiding Delays: Having sufficient authorized capital in place can prevent delays in fundraising or expansion plans, as the company won’t need to seek shareholder approval for each issuance.
• Financial Flexibility: Increasing authorized share capital provides financial flexibility, allowing the company to respond to opportunities and challenges promptly.
• Attracting Investment: A larger authorized capital can make the company more attractive to investors, as it demonstrates the company’s capacity for growth.
• Capital Buffer: It provides a buffer for future needs, reducing the frequency of amending corporate documents to increase authorized capital.

The procedure of Increase Authorized Share Capital 

Here is a process of increasing authorized share capital includes various steps such as:

• Board Resolution: The process usually begins with a meeting of the company’s board of directors. They discuss and pass a resolution to increase the authorized share capital. This resolution should specify the new authorized capital amount and any changes to the company’s articles of association or memorandum of association, if necessary. It is done as per section 173 (3) of the Companies Act, 2013.
• Shareholder Approval: In most jurisdictions, increasing authorized share capital requires approval from the company’s shareholders. The board of directors calls a general meeting (such as an annual general meeting or a special meeting) to seek shareholder consent. Shareholders vote on the proposed increase.
• Regulatory Filings: After obtaining shareholder approval, the company needs to file the necessary documents with the relevant government authorities or regulatory bodies. These filings often include:
• Amendments to the company’s articles of association or memorandum of association (mandatory requirement as per section 61 of the Companies Act, 2013)
• A notice of resolution for the increase in authorized share capital.
• Payment of prescribed fees and submission of required forms.
• Government Approval: Depending on the jurisdiction, the government authority may need to review and approve the increase in authorized share capital. This approval process may involve a waiting period(as per section 64 of the Companies Act, 2013). 

• Issuing New Shares: Once the increase in authorized share capital is approved and recorded, the company can issue new shares up to the newly authorized limit. The company can sell these shares to existing shareholders, new investors, or as part of mergers and acquisitions.

• • Share Certificate Issuance: After selling new shares, the company issues share certificates to the shareholders who purchased them. These certificates serve as proof of ownership.
  • Reporting and Documentation: The Company should maintain thorough records of the entire process, including board resolutions, shareholder approvals, regulatory filings, and share issuances. These records are crucial for legal compliance and financial transparency.
  • Compliance with Taxation Laws: Depending on the jurisdiction, there may be tax implications associated with an increase in authorized share capital. The company should ensure compliance with tax laws and regulations.
  • Updating Corporate Records: The Company must update its corporate records, including its shareholder register and any public records, to reflect the change in authorized share capital.

• Communication with Stakeholders: Communication is a significant thing to increase in authorized share capital and the reason is the shareholders and stakeholders must be transparent with each other. 

Benefits of Increasing Authorized Share Capital

There are several benefits to increasing the Authorized Share Capital:

• Attracts Investors: An increase in authorized share capital will attract investorsto the company. It means that the company is ready for growth and expansion which can motivate both existing shareholders and potential investors to involve in fundraising. 

• Financial Flexibility: An increased authorized share capital allows companies to react to market opportunities or unexpected challenges without any requirement of shareholder’s approval for issuing new shares.

• Helps in Mergers & Acquisitions: A larger authorized capital permits for issuance of new shares as part of the purchase. This situation arises whena company intends to obtain other businesses. It encourages M&Atransactions, for companies to participate in strategic opportunities. 

• Supports employee stock plans: It helps in the execution and expansion of employeestock option plans or equity-based compensation schemes. These schemes help attract and retain top talent.

• Facilities Equity Financing: One of the significant benefits is to increase further capital by issuing new shares. It can be important for investing in new projects, funding expansion, or paying down debt. 

Conclusion

Through the above-mentioned information, it can be said that increase in authorized share capital is a financial decision. That will empower companies to evaluate the ever-evolving business. It gives the company the flexibility and resources required to pursue development opportunities, react to market changes, and protect the future of its performance. However, this procedure must not be taken lightly; do with careful consideration and transparency to regulate needs are essential.