Quick answer
If a private company's authorised capital is too small for a new investment, it first increases it by special resolution under section 85 of the Companies Act, 2017 and notifies the registrar within 15 days on SECP's Form 7. New shares are then offered to existing members first under section 83, unless the articles and a special resolution allow allotment to the investor. The return of allotment, SECP's Form 3, is due within 45 days.
Authorised capital or paid-up capital: which one limits you?
Authorised capital is the maximum share capital in your memorandum; paid-up capital is what has actually been issued. If an investor's new shares would exceed the authorised figure, the memorandum must be altered first.
How do you increase authorised capital?
Section 85(1) of the Companies Act, 2017 allows a company with share capital, if its articles authorise it, to alter its memorandum through a special resolution to increase its authorised capital. Section 85(4) requires the company to file notice with the registrar within 15 days. SECP's form for this is Form 7, the notice of alteration in share capital.
A special resolution needs a majority of at least three-fourths of the members voting, at a general meeting called with at least 21 days' notice. Shorter notice is allowed if all members entitled to attend and vote agree. Section 150 then requires the special resolution itself to be filed with the registrar within 15 days, authenticated by a director or the company secretary.
Who gets the first offer of new shares?
Under section 83(1)(a), when directors decide to issue further shares, they must first offer them to existing members in proportion to their current holdings. The letter of offer must:
- state the number of shares offered
- give between 15 and 30 days to accept, after which the offer is treated as declined
- be signed by at least two directors and sent by registered post, courier or electronic mode
Section 83(3) adds a signed circular with material information, the latest accounts and the reason for the issue, filed with the registrar at the same time. Shares that are declined can be allotted by the directors within 30 days of the offer closing.
There is a separate route for private companies. Section 83(1)(c) allows a private company, subject to its articles and a special resolution, to issue shares to any person for cash or for other consideration, on conditions that may be notified.
What do you file after allotment?
Section 70 requires a return of allotment within 45 days. It states the number and nominal amount of the shares, the particulars of each allottee and the amount paid on each share. For shares paid in cash, the return goes with an auditor's report confirming the money was received in full. If an audit is not mandatory, a practising chartered accountant or cost and management accountant can give that report. SECP's Form 3 is the return of allotments of shares.
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Frequently asked questions
Do I always need to increase authorised capital before taking investment?
Only if the new shares would take issued capital above the authorised capital in your memorandum. Section 85 lets the company increase it by special resolution.
How long do I have to tell SECP about an increase?
Section 85(4) requires notice to the registrar within 15 days, and section 150 requires the special resolution to be filed within 15 days of being passed.
Can a private company allot shares to an outside investor?
Yes. Section 83(1)(c) allows it, subject to the company's articles and a special resolution, on conditions that may be notified.
When is Form 3 due?
Section 70 requires the return of allotment within 45 days of allotment, with an auditor's or accountant's report for shares paid in cash.
