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FUND RAISING BASICS – on Authorised Share Capital

The number of companies raising larger rounds of funding has been steadily increasing, owing to the positive attitudes surrounding technology and the digital economy – with start-ups raising $7.8 billion in the first four months of 2021 vis-à-vis $12.1 billion raised in entire 2020[1].

One aspect that stakeholders may tend to overlook is whether the company has the requisite amount of authorised share capital for the fund raising.

I’d like to explain the catch with an example –

Let’s say a private limited company started with an initial authorized share cap of Rs. 1,00,000/- divided into 10,000 equity shares (and the face value is Rs. 10/-) which are fully subscribed by the founders. The company decides to raise further capital of Rs. 25,00,000/- by issuing 2.5 lakh equity shares. But the memorandum of association of the company will not permit it to raise further capital as the authorized share capital is only Rs. 1,00,000/-. In such an event, the company will have to amend its MoA and increase its authorized share capital to raise further money.

The company’s Articles of Association should have a clause authorizing the company to amend the capital clause of the MoA.[2] The company would call for a board meeting to get an in-principle approval of the directors and an approval of shareholders by way of ordinary resolution. The company would be required to file Form SH-7 and MGT-14 along with the necessary attachments. The capital clause in the MoA would then reflect the new authorised share capital of the company.

The author is Karann Damani, a law graduate from School of Law, CHRIST, Bengaluru, and an associate with HS Law & Associates.

[2] Section 61 of the Companies Act, 2013.

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