Increase In Paid Up Shared Capital Under The Companies Act, 2013

Paid-up share capital refers to the portion of the issued share capital that has been fully paid by shareholders. Unlike authorized capital, which is the maximum limit set in the Memorandum of Association (MoA), paid-up capital reflects the funds actually received and available for business use. Increasing paid-up capital typically involves issuing additional shares, which may necessitate a prior increase in authorized capital if the current limit is insufficient.

Companies often seek to expand their operations, fund new projects, or strengthen their balance sheets by augmenting their share capital. Paid-up share capital, a critical component of a company’s equity structure, represents the actual amount contributed by shareholders for the shares issued to them.

Under the Companies Act, 2013, increasing this capital is a regulated process designed to ensure transparency, shareholder protection, and compliance with statutory norms. We will explore the concept of paid-up share capital, the rationale for its increase, the legal provisions governing it, and the various types of capital increases, along with their brief processes.

Legal Framework Under the Companies Act, 2013

The Companies Act, 2013, primarily through Sections 61, 62, 42, and 63, outlines the mechanisms for altering and increasing share capital. Section 61 empowers limited companies to alter their share capital, including increasing authorized capital via an ordinary resolution in a general meeting. Once authorized capital is enhanced, paid-up capital can be increased by issuing new shares under Section 62, which mandates offering shares first to existing shareholders unless specified otherwise. Compliance involves filing forms like SH-7 for authorized capital changes and PAS-3 for allotments with the Registrar of Companies (RoC).

Types of Capital Increases and Their Processes

Companies can increase paid-up share capital through several methods, each suited to different scenarios. Below, we outline the primary types and their brief processes, ensuring adherence to the Act’s provisions.

1. Rights Issue: A rights issue allows existing shareholders to subscribe to additional shares in proportion to their current holdings, preserving their ownership ratios. This method is cost-effective and prioritizes current investors.

Brief Process:

• Convene a board meeting to approve the issue and fix terms like price and ratio.
• Send a letter of offer to existing shareholders, giving them at least 15 days to respond.
• Allot shares to subscribers and file Form PAS-3 with the RoC within 30 days.
• Update the share register and issue share certificates.

2. Bonus Issue: A bonus issue involves capitalizing the existing reserves or profits of the Company to issue fully paid-up shares to existing shareholders without any cash inflow. It’s often used to reward shareholders and improve liquidity.

Brief Process:

• Ensure the AoA permits bonus issues and verify sufficient free reserves.
• Pass a board resolution recommending the issue, followed by shareholder approval via ordinary resolution.
• Allot bonus shares within two months and file Form PAS-3 with the RoC.
• No payment is required from shareholders; shares are issued against capitalized profits.

3. Private Placement: Private placement entails offering shares to a select group of up to 200 persons (excluding qualified institutional buyers and employees) in a financial year, ideal for targeted fundraising.

Brief Process:

• Obtain board approval, shareholders’ approval, and pass a special resolution in the general meeting.
• Prepare a private placement offer letter (Form PAS-4) and value shares via a registered valuer.
• Open a separate bank account for proceeds and allot shares within 60 days of receipt.
• File Form PAS-3 and MGT-14 with the RoC.

4. Preferential Allotment: This method allows allotment of shares to any person (including non-shareholders) on a preferential basis, often for strategic investments or promoter infusions.

Brief Process:

• Secure special resolution approval from shareholders.
• Conduct a valuation by a registered valuer and justify the price in the explanatory statement.
• Allot shares within 12 months of the resolution and file Form PAS-3 with the RoC.
• Ensure compliance with pricing guidelines if the company is listed.

5. Employee Stock Option Plan (ESOP): ESOPs incentivize employees by offering shares at a discounted price, increasing paid-up capital upon exercise of options.

Brief Process:

• Draft an ESOP scheme and obtain shareholder approval via special resolution.
• Grant options to eligible employees with a vesting period.
• Upon exercise, allot shares after receiving payment and file Form PAS-3 with the RoC.
• Comply with SEBI guidelines if applicable for listed companies.

Conclusion

Increasing paid-up share capital under the Companies Act, 2013, is a strategic tool for corporate growth, but it demands meticulous compliance to avoid penalties. By choosing the appropriate type—be it a rights issue for loyalty or private placement for efficiency—companies can optimize their capital structure while safeguarding stakeholder interests.