If your Private Limited Company was set up with ₹1 lakh in 2016 and is now valued at ₹100 crore, but you do not have enough money in the company’s bank account to justify this valuation, follow this step-by-step process to increase authorized capital, issue new shares, and raise ₹20 crore from investors while maintaining control.
📌 Step 1: Understand the Key Concepts
✅ 1. Authorized Share Capital vs. Paid-up Capital vs. Valuation
| Term | Meaning |
|---|---|
| Authorized Share Capital | The maximum share capital the company can issue. It can be increased but does NOT require real money. |
| Paid-up Capital | The actual capital raised from shareholders. |
| Valuation | The estimated worth of the company based on assets, revenue, or market potential. |
| Right Issue | Issuing new shares to existing shareholders first. |
| Private Placement | Issuing new shares directly to new investors. |
| Bonus Shares | Issuing free shares to existing shareholders to increase their holdings without requiring investment. |
🚀 Your Goal
- Raise ₹20 crore from investors.
- Retain majority control in the company.
- Legally structure the company for investment.
📌 Step 2: Increase Authorized Share Capital
Since the current authorized capital is ₹1 lakh, you need to increase it before issuing new shares to investors.
🔹 Why Not Increase It to ₹100 Crore?
- Increasing it too much is unnecessary at this stage.
- A gradual increase (e.g., ₹5 crore) is enough for this round and avoids dilution.
- Authorized capital increase does not require actual money, only compliance.
🔹 Recommended Action: Increase to ₹5 Crore
Steps to Increase Authorized Share Capital
1️⃣ Hold a Board Meeting – Pass a resolution to increase authorized capital.
2️⃣ Call an Extraordinary General Meeting (EGM) – Get shareholder approval.
3️⃣ Amend Memorandum of Association (MOA) – Clause V – Reflect the new authorized capital.
4️⃣ File MCA Forms:
- MGT-14 (Resolution approval)
- SH-7 (Increase in Authorized Capital)
New Authorized Share Capital
| Before | After |
|---|---|
| ₹1 lakh | ₹5 crore |
📌 Step 3: Issue Bonus Shares to Maintain Founder Control
Since ₹20 crore investment at ₹100 crore valuation would dilute founders significantly, issue Bonus Shares to founders before investment to maintain a higher ownership percentage.
🔹 Why Issue Bonus Shares?
- Increases the number of founder shares without requiring money.
- Ensures founders retain control after the investment round.
🔹 Bonus Shares Issuance Plan
1️⃣ Issue 9,90,000 bonus shares to founders in a 10,000:990,000 ratio.
2️⃣ This increases founder holdings to 10,00,000 shares.
Post-Bonus Shareholding
| Shareholder | Before Bonus Issue | Bonus Shares Issued | After Bonus Issue |
|---|---|---|---|
| Founders | 10,000 shares | 9,90,000 shares | 10,00,000 shares |
| New Investors | 0 | 0 | 0 |
| Total | 10,000 | 9,90,000 | 10,00,000 |
📌 Founders now own 10,00,000 shares (100% ownership) before investment.
📌 Step 4: Issuing New Shares to Investors
Now that founders hold 10,00,000 shares, issue new shares to investors using Private Placement.
🔹 Calculating Shares for ₹20 Crore Investment
- Pre-Money Valuation = ₹100 crore
- Investment Amount = ₹20 crore
- Post-Money Valuation = ₹120 crore
- Investor Shareholding (16.67%) = ₹20Cr₹120Cr=16.67%\frac{₹20 Cr}{₹120 Cr} = 16.67\%
- New Share Price = ₹1,000 per share
- New Shares to be Issued: ₹20,00,00,000₹1,000=2,00,000 new shares\frac{₹20,00,00,000}{₹1,000} = 2,00,000 \text{ new shares}
📌 After investment, founders will own 83.33%, and investors will own 16.67%.
Post-Investment Shareholding
| Shareholder | Before Investment | New Shares Issued | After Investment | Final % Holding |
|---|---|---|---|---|
| Founders | 10,00,000 | 0 | 10,00,000 | 83.33% |
| Investors | 0 | 2,00,000 | 2,00,000 | 16.67% |
| Total | 10,00,000 | 2,00,000 | 12,00,000 | 100% |
📌 Founders successfully retain majority control (83.33%) after the funding round. 🚀
📌 Step 5: Legal Compliance & MCA Filings
To legally complete the investment round, follow these compliance steps:
🔹 For Bonus Shares Issuance
1️⃣ Board Resolution & Shareholder Approval (EGM)
2️⃣ File MGT-14 (Approval for issuing bonus shares)
3️⃣ Issue New Share Certificates to Founders
🔹 For New Share Issuance to Investors (Private Placement)
1️⃣ Board Resolution – Approve the issuance of new shares.
2️⃣ Shareholder Approval (EGM) – Approve the entry of new investors.
3️⃣ File PAS-4 – Offer letter to investors.
4️⃣ Receive Investment Money in a Separate Bank Account
5️⃣ Allot New Shares to Investors & Update Register of Members
6️⃣ File PAS-3 – MCA filing for share allotment.
📌 Step 6: Protect Founders’ Voting Rights (Optional)
To further secure control, founders can issue Differential Voting Rights (DVR) shares with higher voting power.
| Share Type | Voting Power |
|---|---|
| Normal Shares | 1 vote per share |
| DVR Shares | 10 votes per share |
📌 If founders take DVR shares, they retain control even if they own fewer than 51% shares.
🚀 Final Summary: Steps to Raise ₹20 Crore Without Losing Control
| Step | Action |
|---|---|
| Step 1 | Understand the difference between valuation, authorized capital & shareholding. |
| Step 2 | Increase Authorized Share Capital from ₹1 lakh to ₹5 crore (not ₹100 crore). |
| Step 3 | Issue Bonus Shares to founders to increase holdings before investment. |
| Step 4 | Issue New Shares to Investors at ₹1,000 per share via Private Placement. |
| Step 5 | Complete MCA Filings (SH-7, MGT-14, PAS-3, PAS-4) for legal compliance. |
| Step 6 | Use Differential Voting Rights (DVR) if needed for extra control. |
📌 Outcome: ✅ Founders retain 83.33% ownership while raising ₹20 crore investment at a ₹100 crore valuation. 🚀🔥
Would you like templates for board resolutions or MCA filings? 😊