Increase Authorized Share Capital

Authorized share capital is the maximum amount of share capital that a company is legally permitted to issue, as stated in its Memorandum of Association. Paid-up capital is the portion of authorized capital that has actually been issued to shareholders and for which full payment has been received. A company with an authorized capital of Rs 10 lakh and a paid-up capital of Rs 5 lakh can issue further shares up to the remaining Rs 5 lakh headroom without needing to increase the authorized capital.

Form SH-7 must be filed with the Registrar of Companies within thirty days of the ordinary resolution passed by the shareholders authorizing the increase in authorized share capital. The form must be accompanied by certified copies of the ordinary resolution, the amended capital clause of the Memorandum of Association, and the altered Articles of Association if applicable. Filing after thirty days requires payment of additional fees under Section 403 of the Companies Act, 2013.

The government fee for filing Form SH-7 is calculated on the amount of increase in authorized share capital. The fee slab under the Companies (Registration Offices and Fees) Rules, 2014 is approximately Rs 5,000 for an increase up to Rs 1 lakh, rising progressively for higher amounts, with a maximum fee structure for large increases. Additionally, state stamp duty on the altered Memorandum of Association is payable at rates that vary by state — typically between 0.1 percent and 0.5 percent of the increased capital amount.

Under Section 61(1)(a) of the Companies Act, 2013, an ordinary resolution passed in a general meeting is sufficient to increase authorized share capital, provided the Articles of Association permit the increase. However, if a simultaneous amendment to the Articles of Association is required — for example, to remove a cap on authorized capital specified in the AOA — that amendment requires a special resolution under Section 14. It is important to confirm the AOA position before convening the meeting.

Yes. Under Section 114 of the Companies Act, 2013, a private limited company may pass an ordinary resolution by postal ballot or, more practically, by written consent in lieu of a general meeting if all shareholders with the right to vote agree in writing. This is commonly used by startups with a small number of shareholders to avoid the formality of a physical meeting. The written consent must be dated and must contain the exact text of the resolution passed.

It is advisable to increase the authorized capital to comfortably accommodate the current round plus an ESOP pool of at least 10 to 15 percent of the fully diluted post-round cap table, and to leave room for one or two subsequent funding rounds. If a Series A is being raised, sizing the authorized capital to three to five times the post-round paid-up capital is a common practice. The cost of a larger increase is not significantly higher than a smaller one, but avoiding a repeat SH-7 filing six months later saves time, legal fees, and disruption during a subsequent deal.

The increase in authorized share capital itself does not create a direct income tax liability. However, the stamp duty paid on the altered Memorandum of Association is not deductible as a revenue expenditure — it is a capital expenditure and is added to the cost of incorporation. If the authorized capital increase is followed by an allotment to foreign investors, the company must comply with FEMA 20(R) fair-valuation requirements and report the foreign investment to the RBI within thirty days of allotment using the FC-GPR form.

An allotment of shares beyond the authorized share capital limit is void ab initio under Section 60 of the Companies Act, 2013. The allottees do not become shareholders, the share certificates issued are invalid, and any rights purportedly exercised — including voting rights or dividend entitlements — have no legal basis. The company must either cancel the excess allotment or first increase the authorized capital through the proper SH-7 process and then ratify the allotment. This situation creates serious complications in a funding round and must be avoided.

The substantive requirement — filing SH-7 within thirty days of the resolution — applies equally to all companies registered under the Companies Act, 2013. However, a One Person Company has a single shareholder-director, so the ordinary resolution is passed by that member alone through a written consent. The filing fees and stamp duty computation are identical. Small companies enjoy certain exemptions under the Act but the authorized capital increase procedure is not among the areas where the exemption applies.