How to Increase Authorised Share Capital: Resolution, SH-7 and Stamp Duty

Most startups incorporate with a small authorised capital, often ₹1 lakh, because it keeps the incorporation costs down. That works until the company needs to issue more shares: to an investor, to employees under an ESOP, or as a bonus issue. At that point, the authorised capital has to be increased first. This guide explains what authorised capital is, how to increase it, and what it costs.

Authorised vs. Paid-up Capital

• Authorised capital is the maximum share capital a company is allowed to issue. It's set out in the capital clause of the Memorandum of Association.
• Issued or paid-up capital is the share capital the company has actually issued and been paid for.

A company can't allot shares beyond its authorised capital. If a fundraise or ESOP pool would take issued capital past the limit, the authorised capital has to be raised before the allotment.

When You'll Need to Increase It

• Before a preferential allotment to an angel or venture investor.
• Before creating or expanding an ESOP pool.
• Before a rights issue or bonus issue.
• Before converting convertible notes or preference shares into equity.

It's worth building in some headroom, so the company doesn't need to repeat the process for every round. The trade-off is that the ROC fee and stamp duty are both based on the size of the increase.

The Process

1. Check the articles

Under Section 61 of the Companies Act, 2013, a company can increase its authorised capital if its Articles of Association allow it. Most modern articles do. If yours don't, the articles have to be amended first by special resolution.

2. Board meeting

The board approves the proposal and calls a general meeting, with a notice and explanatory statement setting out the new authorised capital.

3. Shareholders' resolution

The shareholders pass an ordinary resolution to increase the authorised capital and alter the capital clause of the MoA accordingly. Where the articles require a special resolution, or the articles are being changed at the same time, a special resolution is passed and filed in MGT-14.

4. File SH-7

The company files Form SH-7 with the Registrar within 30 days of the resolution, attaching the resolution and the altered MoA, and pays the ROC fee and stamp duty. Once the filing is approved, the new authorised capital is in effect and shares can be allotted up to it.

What It Costs

ROC fee

The ROC fee on SH-7 is calculated on the amount of the increase, on a slab scale set by the Companies (Registration Offices and Fees) Rules. It's higher for larger increases.

Stamp duty

Stamp duty is payable on the increase in authorised capital, at the rate of the state where the company's registered office is. The rate and any cap vary considerably between states. In most cases it's paid as part of the MCA filing.

Because both costs grow with the size of the increase, it's worth planning a sensible target, enough for the next round and ESOP pool, rather than either a tiny increase or an unnecessarily large one.

Related Changes Under Section 61

• Consolidating shares into fewer shares of a larger face value.
• Sub-dividing shares into more shares of a smaller face value, often done before a funding round to make the per-share price more manageable.
• Converting fully paid shares into stock, or cancelling shares not taken up.

These are also approved by shareholders and reported in SH-7.

Common Mistakes

• Discovering the authorised capital is too low days before an investor's money arrives.
• Allotting shares beyond the authorised capital, which makes the allotment invalid.
• Filing SH-7 after 30 days, which adds fees that rise with the delay.
• Forgetting to update the company's own copies of the MoA after the change.

Getting Help

Think Filing handles authorised capital increases end to end, from the board and shareholder resolutions to the SH-7 filing, and times them so they're in place before an allotment.