Comprehensive Guide: Authorized Share Capital, Bonus Shares & Rights Issue

This guide explains Authorized Share Capital, Bonus Shares, and Rights Issue in detail, including:

✅ When to do it?
✅ Why to do it?
✅ When should it be avoided?
✅ How to do it (Step-by-Step Process)?
✅ Eligibility Criteria for Companies in India

1️⃣ AUTHORIZED SHARE CAPITAL

What is Authorized Share Capital?

Authorized Share Capital is the maximum amount of share capital that a company is legally allowed to issue. It is specified in the Memorandum of Association (MOA) – Clause V.

📌 Important: Authorized Share Capital is NOT real money. It is just a legal limit on how many shares the company can issue.

💡 Example:

• A company has an Authorized Share Capital of ₹10 lakh but has issued only ₹5 lakh worth of shares.
• The company can issue ₹5 lakh more shares without increasing authorized capital.
• If the company needs to issue ₹10 crore worth of shares, it must first increase its authorized capital.

✅ When to Increase Authorized Share Capital?

✔️ When the company plans to issue new shares (for investment, employee stock options, or expansion).
✔️ Before issuing Bonus Shares or a Rights Issue, if the current Authorized Capital is insufficient.
✔️ If the company is planning for future fundraising rounds.

❌ When to Avoid Increasing Authorized Share Capital?

❌ If the company has no plans to issue more shares in the near future.
❌ If the company already has sufficient authorized capital for growth.
❌ If founders want to avoid extra compliance and legal filings.

📌 How to Increase Authorized Share Capital? (Step-by-Step Process)

1️⃣ Check Current Authorized Capital – Found in MOA (Clause V).
2️⃣ Hold a Board Meeting – Pass a resolution to increase the authorized capital.
3️⃣ Call an Extraordinary General Meeting (EGM) – Get shareholder approval.
4️⃣ Amend the MOA (Clause V) – Modify to reflect the new authorized capital.
5️⃣ File MCA Forms:

• MGT-14 (Approval of special resolution).
• SH-7 (Application for increasing authorized share capital).

📌 Eligibility Criteria for Increasing Authorized Share Capital

✔️ Any Private Limited or Public Limited Company can increase its authorized capital.
✔️ The company must have shareholder approval.
✔️ The change must be filed with the MCA (Registrar of Companies – ROC).

📌 Key MCA Forms: SH-7, MGT-14

2️⃣ BONUS SHARES

What are Bonus Shares?

Bonus Shares are free shares issued to existing shareholders by capitalizing reserves or profits. The company does not receive any money from shareholders when issuing bonus shares.

💡 Example:

• A company has ₹10 crore in reserves and issues a 1:1 bonus.
• If a shareholder owns 100 shares, they get 100 additional shares for free.

✅ When to Issue Bonus Shares?

✔️ When the company has strong reserves or retained earnings and wants to reward shareholders.
✔️ When the company wants to increase share liquidity without taking new investment.
✔️ When the company wants to increase the total number of shares before fundraising to avoid dilution.

❌ When to Avoid Issuing Bonus Shares?

❌ If the company has no reserves or profits (as bonus shares must be issued from free reserves).
❌ If the company has accumulated losses and no positive reserves.
❌ If the company plans to raise capital through a Rights Issue or Private Placement instead.

📌 How to Issue Bonus Shares? (Step-by-Step Process)

1️⃣ Check Available Reserves – Only Free Reserves, Securities Premium, or Capital Redemption Reserve (CRR) can be used.
2️⃣ Hold a Board Meeting – Approve the bonus issue proposal.
3️⃣ Get Shareholder Approval in an EGM – Pass a special resolution.
4️⃣ File MCA Forms:

• MGT-14 (Approval of special resolution).
• PAS-3 (Return of share allotment).
  5️⃣ Issue New Share Certificates to shareholders.

📌 Eligibility Criteria for Issuing Bonus Shares

✔️ The company must have sufficient reserves (profits, securities premium, or CRR).
✔️ The company CANNOT issue bonus shares using borrowed funds or revaluation reserves.
✔️ The company must have shareholder approval.

📌 Key MCA Forms: MGT-14, PAS-3

3️⃣ RIGHTS ISSUE

What is a Rights Issue?

A Rights Issue allows a company to raise funds by offering new shares to existing shareholders first, usually at a discount.

💡 Example:

• A company offers a 1:2 rights issue at ₹50 per share (market price ₹100).
• This means shareholders can buy 1 additional share for every 2 shares they own at ₹50.

✅ When to Use a Rights Issue?

✔️ When the company needs additional funds from existing shareholders instead of external investors.
✔️ When the company wants to raise money without issuing shares to outsiders.
✔️ When the company is expanding and needs growth capital.

❌ When to Avoid a Rights Issue?

❌ If existing shareholders are unwilling or unable to invest.
❌ If the company plans to onboard external investors instead.
❌ If the company wants to avoid dilution of existing shareholders who do not participate.

📌 How to Issue a Rights Issue? (Step-by-Step Process)

1️⃣ Board Meeting – Approve the rights issue and decide on the price & ratio.
2️⃣ Offer Letter to Shareholders (PAS-4) – Inform shareholders about their rights.
3️⃣ Shareholder Subscription Period – Allow shareholders to subscribe within 15-30 days.
4️⃣ Allot Shares & File PAS-3 – Return of allotment must be filed with MCA.
5️⃣ Issue New Share Certificates to shareholders.

📌 Eligibility Criteria for Rights Issue

✔️ The company must be a Private Limited or Public Limited Company.
✔️ Only existing shareholders can participate in a Rights Issue.
✔️ The issue price should be lower than the market price to attract investors.

📌 Key MCA Forms: PAS-4, PAS-3

📌 Final Comparison Table

📌 Final Summary

✅ Increase Authorized Share Capital before issuing new shares.
✅ Issue Bonus Shares only if the company has sufficient reserves.
✅ Use Rights Issue when the company wants to raise money from existing shareholders.

Would you like templates for board resolutions or MCA filings? 😊