Increasing Capital Of Private Limited Companies

There are many restrictions when it comes to issuing of shares in a private limited company

1. It is prohibited from inviting any funds from the public by issuing shares/securities of the company.
2. Restriction on the number of members – i.e maximum no. of members which private limited company is allowed to have is 200.
3. Restriction in transferability of its shares.

Despite the restrictions placed upon it, equity financing is always been a favorite source for the increase in capital for private limited companies. Various means through which share capital can be raised is been discussed in detail in below-mentioned paragraphs.

Before discussing various means of financing, a gist of prerequisites required for better understanding is been discussed herewith –
Types of Capital
Authorized share capital is the maximum amount of capital which the company is authorized to raise; it cannot have capital more than the authorized capital. These are provided in MOA of the company separately for both Equity and preference share capital. Issued Share capital, on the other hand, is that part of authorized share capital which is issued by company, whereas Subscribed share capital is capital which is subscribed by investors and the part of it which is asked for payment by the company is called up capital and finally, paid-up share capital represents which has been paid by investors.

Importance of these terms

Many companies opting for issuing capital should check its authorized share capital before proceeding, it may warrant increase in its authorized share capital in case there is no sufficient authorized share capital for raising the paid up capital.

Increase in authorized share capital

Enabling provision in AOA

To increase authorized capital mentioned in MOA there is requirement of enabling provision in AOA. Table F by default has the enabling provision, in case if there is no such enabling provision then AOA must be altered by a special resolution passed by shareholders and the same should be filed with ROC within 30 days of passing such resolution in Form-MGT-14.

Board Meeting

Convene a board meeting by giving notice as per section 173 (7 days notice).
In duly convened Board Meeting

1. Get In-principal approval of directors for increase in authorized share capital specifying amount and no. shares along with face value.
2. Fix date, time place for holding Extra-ordinary general meeting for getting approval of shareholders,
3. Approve notice, agenda and explanatory statement which is to be annexed to notice and authorize company secretary or director to issue notice.

Extraordinary general meeting

Hold the necessary general meeting and pass ordinary resolution for increase in authorized share capital.

 ROC form filing

File eform SH-7 within 30 days of passing ordinary resolution along-with the following attachments –

• Copy of the resolution for alteration of capital
• Altered articles of association and altered MOA

Types of shares and procedure for increasing share capital

After an increase in authorized share capital, the company is now in a position to increase its issued and paid up share capital, though it can raise capital through various sources, the most common sources for the private limited company are –

Private placements
1. It is nothing but offer to subscribe securities to a selected group of people, other than by way of offer to public through private placement offer letter.
2. A board resolution followed by special resolution of shareholders is required before proceeding with the offer.
3. These resolutions should be filed with ROC in e-Form MGT-14.
4. The offer letter is required to be maintained in the Form PAS-4 and the record of persons to whom such letters are issued are required to be maintained in PAS-5.
5. However, the requirement to file such records is been done away with.
6. Amounts received towards such subscriptions should be kept in separate bank account and can be only received through approved banking channels.

Rights Issue
It is offering shares to existing members in the said ratio with respect to their holdings.

Employee Stock option scheme
Private company can issue ESOP provided after issue it is within the limit of maximum no. of shareholders and articles of association provide for such issue.If there is no enabling provision in the article then there is need for alteration of article by special resolution as mentioned above.

Allotment of securities

e-Form PAS-3
Any allotment of shares should be filed with ROC within 30days of allotment.
List of attachements required for such forms are entailed here-

1. List of allottees
2. Copy of board or shareholders resolution
3. Valuation report, in case valuation obtained from the valuer
4. Copy of Contracts duly stamped in case securities are issued other than cash
5. A special resolution authorizing bonus issue, in case of a bonus issue of shares
6. Minimum allotment size which was Rs.20,000 is also been done away with. So now there is no minimum requirement for each member to invest.