A company’s authorised share capital is the total amount of capital that the company is allowed to issue or allot. In India, the Companies Act, 2013 (the “Act”) provides a statutory definition of authorised share capital in section 2(8), as the “capital authorised by the memorandum of a company to be the maximum amount of share capital of the company”. While the Act places no minimum threshold for the authorised share capital that a company is required to maintain, it remains a mandatory requirement under law for Indian companies to possess an authorised share capital.
The question that arises is whether the requirement for having an authorised share capital continues to be relevant. The requirement for having an authorised share capital has been done away with in other common law countries such as the United Kingdom and Singapore.
In India, any allotment of shares made to shareholders in the absence of sufficient authorised share capital to accommodate the issuance may be considered void, and may hamper the company’s abilities to fulfil statutory obligations in connection with the allotment, such as the requirement for filing a return of allotment within 30 days of the allotment of securities to the Registrar of Companies of the relevant jurisdiction. However, the requirement for possessing an authorised share capital is unduly onerous and provides no tangible protection to the interests of the creditors, shareholders or the company for it to be retained as a mandatory requirement under law.
As mentioned previously, a company is required to ensure that it possesses sufficient authorised share capital before making any allotment of its securities. Companies may choose to either increase or reclassify their authorised share capital to accommodate the proposed issuance of securities. The power of a limited company to increase, consolidate, sub-divide, convert or cancel its share capital is granted to it under section 61 of the Act.
This alteration is required to take place in a general meeting of the company’s shareholders, provided that the articles of association of the company grant the power to the company to do so. Once the shareholders resolve to alter the share capital of the company, the company is required to file a notice of such alteration of share capital with the Registrar of Companies of the relevant jurisdiction.
The shareholders’ resolution approving alteration in the authorised share capital of the company is coupled with a resolution for approval to amend the memorandum of association of the company to reflect the change in the share capital structure of the company. Companies are also burdened with the task of filing a copy of the said resolution with the Registrar of Companies.
This can prove to be onerous and unduly burdensome on small companies, especially start-ups, as the requirement of possessing an authorised share capital offers no tangible protection to the shareholders or the company. The justification underpinning the concept of authorised share capital is that a company’s power to make allotments is always subject to the power of the shareholders to prescribe a maximum ceiling that cannot be breached. Hence, this could be seen to operate as a safeguard against dilution of existing shareholders’ holdings in the company.
However, the Indian corporate landscape has evolved significantly over the last few years. Shareholders in private companies are armed with pre-emptive and affirmative consent rights under a shareholders’ agreement or the articles of association, which require that their waivers or specific assent be obtained prior to the raising of any new round of funding of the company. Further, if a company makes a private placement of its securities to a new investor, the shareholders of the company are required to provide their assent to the proposed issuance through a special resolution. This defeats the purpose of having a mandatory authorised share capital as a shareholder protection measure as the shareholders have already provided their assent to the proposed issuance to a new investor. Hence, the authorised share capital requirement remains an obsolete requirement at best, and places an unnecessary compliance burden on start-ups and small companies.
Sanjana Ramkumar is an associate in the law firm IndusLaw.