What Is Authorized Capital and When Does It Need to Be Increased?
Authorized capital (also called nominal capital) is the maximum amount of share capital a company is permitted to issue, as stated in its Memorandum of Association. For example, if a company's authorized capital is Rs. 10 lakh divided into 1,00,000 equity shares of Rs. 10 each — the company can issue shares up to Rs. 10 lakh total. It CANNOT issue shares worth Rs. 12 lakh without first increasing the authorized capital to at least Rs. 12 lakh.
Authorized capital needs to be increased when: (a) the company wants to allot more shares than the current authorized limit (new investment, rights issue, bonus shares, ESOP), (b) the company wants to create headroom for future allotments without repeated amendments, or (c) a strategic investor or lender requires a minimum authorized capital.
Key Distinction: Authorized vs Paid-Up vs Subscribed Capital
| Type | Definition | Example |
|---|---|---|
| Authorized capital | Maximum that CAN be issued (ceiling) | Rs. 10 lakh (in MOA) |
| Issued/subscribed capital | Amount actually OFFERED to shareholders | Rs. 5 lakh (50,000 shares issued) |
| Paid-up capital | Amount actually PAID by shareholders | Rs. 5 lakh (fully paid) |
You can increase authorized capital at any time — even if you have not yet utilized the existing authorized capital fully. Many companies keep authorized capital higher than current paid-up to allow flexibility for future allotments.
Step-by-Step Procedure to Increase Authorized Capital
Step 1: Check AOA for Power to Increase
The Articles of Association must contain a clause empowering the company to increase its authorized capital. Table F (model AOA under Schedule I) contains this power in Article 2: "The Company may, from time to time, by ordinary resolution increase its share capital..." If your AOA does not have this clause: first alter the AOA by special resolution (Section 14) to include it, then increase capital.
Step 2: Board Meeting — Recommend the Increase
The Board passes a resolution recommending the increase to the shareholders. The resolution should specify: (a) current authorized capital, (b) proposed increased authorized capital, (c) number and type of new shares to be created, (d) recommendation to alter Clause V (Capital Clause) of the MOA. The Board also fixes the date, time, and venue of the general meeting and authorizes issuance of notice.
Step 3: General Meeting — Pass Ordinary Resolution
Unlike most alterations of the MOA (which require special resolution), increase in authorized capital requires only an ordinary resolution (simple majority — votes in favor > votes against). This is because Section 61(1)(a) specifically provides for increase by ordinary resolution. The resolution should state: "RESOLVED THAT pursuant to Section 61 and 64 of the Companies Act, 2013, the Authorized Share Capital of the Company be and is hereby increased from Rs. [Current] to Rs. [New Amount] by creation of [Number] new equity shares of Rs. [FV] each, and Clause V of the Memorandum of Association be and is hereby altered accordingly."
21 clear days notice for the general meeting. Can be done at EGM (no need to wait for AGM).
Step 4: File Form SH-7 with ROC (Within 30 Days)
File Form SH-7 (Notice of alteration of share capital) with ROC within 30 days of passing the ordinary resolution. Attachments: (a) certified copy of the ordinary resolution, (b) altered Memorandum of Association, (c) Board Resolution. Stamp duty on increased capital must be paid through the MCA portal (calculated automatically).
Government Fees and Stamp Duty
Two components of cost:
A. ROC Filing Fee for SH-7
| Authorized Capital (After Increase) | Filing Fee |
|---|---|
| Up to Rs. 1 lakh | Rs. 200 |
| Rs. 1 lakh to Rs. 5 lakh | Rs. 300 |
| Rs. 5 lakh to Rs. 25 lakh | Rs. 500 |
| Rs. 25 lakh to Rs. 1 crore | Rs. 1,000 |
| Above Rs. 1 crore | Rs. 2,500 |
B. Stamp Duty on Increased Capital
Stamp duty is charged on the INCREASE amount (not the total authorized capital) and varies significantly by state:
| State | Stamp Duty Rate | Example: Rs. 10L increase |
|---|---|---|
| Maharashtra | 0.15% of increase | Rs. 1,500 |
| Delhi | 0.15% of increase | Rs. 1,500 |
| Karnataka | 0.15% of increase | Rs. 1,500 |
| Tamil Nadu | 0.15% of increase | Rs. 1,500 |
| Gujarat | 0.15% of increase | Rs. 1,500 |
| West Bengal | 0.15% of increase | Rs. 1,500 |
| Uttar Pradesh | 0.10% of increase | Rs. 1,000 |
Stamp duty is paid electronically through the MCA portal at the time of filing SH-7 — no physical stamp paper needed.
Common Scenarios
Scenario 1: Startup Raising Angel/VC Funding
Startup has authorized capital Rs. 1 lakh, paid-up Rs. 1 lakh. VC wants to invest Rs. 2 crore for 20% stake (issuing shares at high premium). Even though the paid-up capital increase is small (say Rs. 20,000 face value at Rs. 10,000 premium per share), the authorized capital must be at least equal to the total face value of all shares AFTER the allotment. If total shares (existing + new) require authorized capital of Rs. 1.2 lakh: increase authorized to at least Rs. 1.5-2 lakh (keeping headroom). Cost: minimal — Rs. 500-2,000 total.
Scenario 2: Bonus Issue
Company wants to issue bonus shares (1:1 ratio — 1 new share for every existing share). If paid-up capital is Rs. 5 lakh and authorized is Rs. 5 lakh: no headroom for bonus. Must increase authorized to at least Rs. 10 lakh before bonus allotment. Cost: SH-7 fee + stamp duty on Rs. 5 lakh increase.
Scenario 3: Large Capital Increase for Expansion
Manufacturing company needs Rs. 50 crore equity. Current authorized Rs. 10 lakh. Must increase to at least Rs. 50 crore (or more for headroom). Stamp duty at 0.15% of Rs. 50 crore = Rs. 7.5 lakh — a significant cost. Strategy: increase in stages — first to Rs. 10 crore (stamp duty Rs. 1.5 lakh), issue shares, then increase again when needed.
Post-Increase: What Can You Do With Higher Authorized Capital?
Higher authorized capital simply creates the CEILING — it does not automatically create new shares or change paid-up capital. To actually issue new shares, you must separately: (a) pass Board/shareholder resolution for allotment (rights issue under 62(1)(a) or preferential allotment under 62(1)(c)), (b) receive consideration from subscribers, (c) allot shares, (d) file PAS-3 (return of allotment) with ROC within 30 days, (e) issue share certificates within 60 days of allotment.