Share Capital Change – Raise, Restructure or Realign Capital

Is a share capital change the right filing for your situation?

You need a capital-change filing if any of these fit:

• You are raising money and the new shares would exceed the current authorised capital — raise the ceiling first (SH-7), then allot (PAS-3).
• You are issuing shares to existing shareholders in proportion to their holdings — a rights issue under Section 62.
• You are bringing in new investors or allotting ESOPs — a private placement or preferential allotment.
• You want to reward shareholders without paying cash — a bonus issue from free reserves (Section 63).
• The company is sitting on surplus cash and wants to return it while reducing the share count — a buyback (Section 68).
• You want to consolidate, sub-divide or cancel unissued shares — an alteration under Section 61.

You are looking at the wrong filing if:

• You only want to move existing shares from one person to another — that is a share transfer, recorded in the register of members on Form SH-4. No capital changes, no SH-7, no PAS-3.
• You want to reduce the paid-up capital or write off losses against capital — that is a reduction under Section 66, which needs NCLT approval. It is a different proceeding, not an SH-7.
• You are converting loans or debentures into equity — the conversion itself is an allotment (PAS-3), and if it breaches the ceiling you need SH-7 first. The loan agreement governs the commercial terms; the Act governs the filings.
• A foreign investor is buying existing shares from an Indian shareholder — that is a secondary transfer, reported under FEMA (Form FC-TRS), not a fresh issue. No PAS-3 arises because the company issues nothing new.

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Authorised vs paid-up — the distinction everything turns on

Authorised capital is the maximum the company is permitted to issue, stated in Clause V of the Memorandum. Think of it as the size of the tank. Issued capital is what the company has actually offered. Subscribed and paid-up capital is what shareholders have taken and paid for — the fuel actually in the tank. The Companies Act filings track both levels separately, which is why two forms exist: SH-7 moves the ceiling, PAS-3 records what was poured in.

The practical rule: never allot shares beyond the authorised capital. An allotment in excess of the ceiling is void — the shares do not legally exist, the money must be returned, and the directors face liability. Before every fresh issue, compare the post-issue paid-up capital against the authorised capital. If the issue breaches the ceiling, increase it first. This sequencing — SH-7 before PAS-3 — is the single most important discipline in capital compliance.

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Increasing authorised capital — Sections 61 and 64

This is the commonest capital change: the company needs headroom for a future fundraise, an ESOP pool, or a bonus issue, so it raises the ceiling in its Memorandum.

The authority check comes first. Section 61(1) allows a limited company to alter its share capital only "if so authorised by its articles." Read the Articles before anything else. Most professionally drafted Articles contain the power; older or template Articles sometimes do not. If the power is missing, amend the Articles first by special resolution under Section 14 — and that amendment does need MGT-14 within 30 days.

The resolution. With the Articles in order, shareholders pass an ordinary resolution at a general meeting — 21 days' clear notice, simple majority. A special resolution is needed only if the Articles demand a higher threshold. Note what you do not file: MGT-14 is not required for the capital increase itself. Section 13's special-resolution machinery does not apply here; Section 61 has its own procedure, and the notice goes to the ROC under Section 64, not through MGT-14.

Stamp duty on the increase. The altered Memorandum attracts stamp duty on the increased amount — state-specific, indicatively around 0.15% of the increase. It is paid electronically through the MCA portal during the SH-7 filing. Confirm your state's current rate before filing; duty tables change.

File SH-7 within 30 days. Section 64(1) requires the company to file notice of the alteration with the Registrar within 30 days of the resolution, with the altered memorandum. On the MCA V3 portal, SH-7 carries an integrated e-MOA module — the altered capital clause is entered electronically rather than attached as a separate deed. Attach the certified resolution, the EGM notice with explanatory statement, and the fee.

The penalty for delay is daily. Section 64(2) imposes ₹500 for every day of default, up to ₹5 lakh for the company and ₹1 lakh for every officer in default — on top of the additional filing fees. The clock starts on day 31 after the resolution. This is one of the steeper daily penalties in company law, and it is entirely avoidable.

Section 61 covers more than increases. The same provision — and the same SH-7 — covers consolidation of shares into larger denominations, sub-division into smaller ones, conversion of fully paid shares into stock (and back), and cancellation of unissued shares. The procedure is identical; only the resolution's content changes.

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Issuing new shares — the routes compared

Once the ceiling allows it, the company issues shares. The Act offers three doors under Section 62, plus the private placement route under Section 42. Which door you take changes the procedure, the pricing discipline and the filings.

Rights issue — Section 62(1)(a)

The default route: new shares are offered to existing equity shareholders in proportion to their paid-up capital. The offer letter goes to every existing holder, stays open for not less than 15 days and not more than 30 days, and the shareholder may renounce the entitlement in favour of someone else. Shares not taken up can then be offered to others — but not on terms more favourable than the rights offer, unless a special resolution permits it.

The rights issue is the fairest route for insider raises — existing shareholders keep their percentage if they subscribe. For a two-founder company raising from its own promoters, it is usually the simplest compliant path. Private companies enjoy certain relaxations from the full Section 62(1)(a) offer machinery under the MCA's exemption notifications — confirm the current position with your CS, because the exemption's conditions have been amended over the years. [NEEDS VERIFICATION — confirm current private-company exemption position at publish time]

Private placement — Section 42

The investor route: shares are offered to a select group — identified in advance, no public advertising, no media announcements about the issue. The company issues a private placement offer letter in Form PAS-4, maintains a record in Form PAS-5, and keeps the application money in a separate bank account. Allotment must happen within 60 days of receiving the application money; if it does not, the money is refunded within 15 days, with 12% interest running after the 60-day mark.

Private placement is how funding rounds, angel investments and strategic allotments are done. The discipline that trips companies up is the 60-day allotment clock — money received but shares not allotted in time must go back, with interest. Diary the receipt date the day the money lands.

Preferential allotment — Section 62(1)(c)

A cousin of private placement: shares offered to persons who are not existing shareholders (or on terms outside the rights framework), requiring a special resolution and a valuation report from a registered valuer. The price cannot be less than the determined fair value. In practice, most investor allotments are structured under Section 42's private placement machinery with Section 62(1)(c) compliance where applicable — your CS will pick the right frame for the facts.

ESOP allotment — Section 62(1)(b)

Shares offered to employees under an employees' stock option scheme, pursuant to a special resolution and the scheme's terms. The allotment is reported in PAS-3 like any other issue. ESOPs have their own design discipline — vesting, exercise windows, tax at exercise — covered on our ESOP page; the capital-change mechanics here are the allotment and the PAS-3.

The return of allotment — PAS-3 within 30 days

Every route above ends at the same filing. Rule 12 of the Prospectus and Allotment Rules requires the company to file Form PAS-3 within 30 days of allotment, with the list of allottees (names, addresses, occupations, shares allotted), certified as complete and correct. Where shares are allotted for consideration other than cash, the stamped contract and a registered valuer's report ride along. For bonus issues, the general-meeting resolution authorising the bonus is attached. [NEEDS VERIFICATION — one secondary source suggests a 15-day PAS-3 timeline specifically for private placements under Rule 14; the primary Rule 12 text says 30 days for all allotments. Confirm at publish time.]

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Rights issue vs private placement vs bonus — the dedicated comparison

Founders ask this constantly, because the three look similar from a distance — "we are issuing shares" — and work very differently up close.

Choose a rights issue when the money is coming from people who already own the company — promoters putting in more, existing investors topping up. It preserves everyone's percentage automatically, needs no valuer, and the procedure is the lightest of the three. The constraint: you cannot use it to bring in a genuinely new investor, except for the unsubscribed portion after the offer closes.

Choose a private placement when new money is coming from outside — angels, VCs, strategic investors. It is the only route designed for identified outsiders, and it carries the heaviest discipline: PAS-4, PAS-5, separate bank account, 60-day allotment clock. The pricing for preferential allotments needs a registered valuer's report, which the rights route does not.

Choose a bonus issue when no new money is involved at all. A bonus capitalises the company's own reserves — free reserves, securities premium, capital redemption reserve — into paid-up capital, issuing fully paid shares to existing holders pro-rata. It rewards shareholders, improves the share count for liquidity, and costs the company no cash. What it cannot do: bonus shares cannot come from revaluation reserves, cannot be partly paid, and cannot be issued in lieu of dividend. The Articles must authorise the capitalisation, and once a bonus is announced it cannot be withdrawn.

The tax and accounting footnote. Each route has different accounting entries and tax consequences — securities premium treatment, deemed dividend risks on buybacks, perquisite taxation on ESOP exercise. The capital filing is only half the job; run the accounting and tax treatment past your CA before the resolution, not after the allotment.

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Bonus issues — Section 63 in detail

A bonus issue deserves its own section because companies get the source rules wrong more often than any other part of capital law.

Permitted sources: free reserves, the securities premium account, and the capital redemption reserve account. Forbidden source: reserves created by revaluation of assets. This is the rule that kills most DIY bonus plans — a company whose "reserves" are mostly revaluation surplus cannot bonus from them.

The conditions: the Articles must authorise bonus capitalisation (amend them first if not); the company must not have defaulted on statutory dues like PF, gratuity or bonus to employees; partly-paid shares must be made fully paid first; and the bonus shares themselves must be fully paid-up. The issue must be authorised by the shareholders in general meeting on the board's recommendation.

No withdrawal after announcement. Once the board recommends and the company announces a bonus, it cannot back out. The commitment is irrevocable — which is why the reserve verification happens before the board meeting, not after.

The filing is PAS-3 within 30 days of allotment, with the general-meeting resolution attached.

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Buyback — Section 68 in detail

A buyback is capital change in reverse: the company buys its own shares and extinguishes them, returning surplus cash to shareholders who choose to tender.

The caps. Through the board route (board resolution only): up to 10% of the paid-up equity capital plus free reserves. Through the shareholder route (special resolution): up to 25%. In either case, the post-buyback debt-equity ratio must not exceed 2:1, and the buyback must be completed within the statutory timeline. These caps are what keep buybacks from hollowing companies out.

The sources. A buyback can be funded from free reserves, the securities premium account, or the proceeds of a fresh issue of shares — but not from the proceeds of an earlier issue of the same kind of shares. The distinction matters in the board's solvency declaration.

The procedure. Board or shareholder approval as above, a solvency declaration by the directors, the offer process, extinguishment of the bought-back shares within the statutory period, and Form SH-11 — the return of buyback — within 30 days of completion (Rule 17 of the Share Capital Rules). The registers and the annual return must reflect the reduced capital.

Buyback vs dividend. A dividend pays every shareholder proportionally and leaves the capital structure untouched. A buyback pays only those who tender, reduces the share count, and concentrates the remaining holders' ownership. Companies choose buybacks when they want to return cash selectively — or when the promoters want to increase their percentage without buying shares themselves.

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Reduction of capital — Section 66 (the NCLT route)

Reducing paid-up capital — writing off accumulated losses against capital, returning capital to shareholders, cancelling unpaid liability — is not an SH-7 matter. Section 66 requires a special resolution and NCLT approval, with creditors given the opportunity to object. The tribunal satisfies itself that creditors' interests are protected before confirming the reduction.

Do not confuse reduction with buyback. A buyback (Section 68) is a company repurchasing its own shares within statutory caps — no tribunal involved. A reduction (Section 66) rewrites the capital itself and needs a judge's order. If your objective is "clean up the balance sheet," you are probably looking at Section 66. If it is "return surplus cash," you are looking at Section 68.

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Shares to foreign investors — the FEMA footnote

When new shares go to a non-resident — an NRI, a foreign fund, an overseas parent — company law is only half the compliance. Under FEMA, the company must report the issue to the RBI in Form FC-GPR within 30 days of allotment, supported by the FIRC evidencing inward remittance and the KYC of the remitter. Pricing must meet the FEMA pricing guidelines (fair value by a registered valuer or chartered accountant, depending on the instrument). A PAS-3 filed perfectly with the ROC does not excuse a missed FC-GPR — the two filings run in parallel, and the RBI's 30-day clock is just as hard as the ROC's.

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What must be decided before filing

The ceiling check. Before any issue, compute the post-issue paid-up capital and compare it against the authorised capital. If the issue breaches the ceiling, the SH-7 increase comes first — resolution, stamp duty, filing — and only then the allotment. Build both filings into one timeline.

The route. Rights, private placement, preferential, ESOP, bonus — each has different resolutions, pricing discipline and offer machinery. Picking the route is a legal decision with tax consequences; make it with your CS and CA together, not after the money has arrived.

The pricing. For preferential and private placement allotments, the price needs a registered valuer's report. For rights issues, the board fixes the price — but income-tax fair-value rules (and FEMA pricing for non-residents) still apply. Agree the price before the offer letter goes out.

The money's path. Private placement money must sit in a separate bank account until allotment. Foreign investment needs FIRC documentation from day one. Bonus issues need the reserve verification completed before the board recommends. Each route has a money discipline — set it up before the resolution.

The shareholder math. Every issue changes percentages. Model the pre- and post-issue shareholding before the EGM notice goes out, so no shareholder is surprised by dilution at the meeting. For rights issues, confirm the renunciation mechanics in the offer letter.

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Advantages of getting capital changes right

Fundraises close without reopening. Investors' lawyers verify the capital history — every SH-7, every PAS-3 — in due diligence. A clean chain from authorised ceiling to allotted shares to updated registers means the round closes on schedule. A broken chain means the round pauses while history is reconstructed, and sometimes while compounding applications are filed.

The ceiling never blocks a good issue. Companies that raise their authorised capital proactively — ahead of a planned round or ESOP pool — never face the embarrassment of an allotment that cannot legally happen. The SH-7 is cheap; an emergency EGM to fix a breached ceiling is not.

Bonus issues compound goodwill. A well-timed bonus rewards long-standing shareholders, improves liquidity by increasing the share count, and signals confidence — all without spending a rupee of cash. Done correctly from eligible reserves, it is one of the cleanest corporate actions available.

Buybacks return cash tax-efficiently. For shareholders who want liquidity without a full exit, and for companies with surplus cash and no deployment, a buyback within the statutory caps is often more flexible than a dividend — and it tidies the capital structure at the same time.

Penalties stay at zero. The 30-day clocks on SH-7 and PAS-3, and the daily ₹500 penalty on SH-7 default, make delay the most expensive part of capital changes. Filing on time is the entire game — the fees themselves are modest.

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Documents required for a share capital change

For SH-7 (authorised capital alteration):

• Certified copy of the shareholder resolution (ordinary, or special if the Articles were amended)
• EGM notice with explanatory statement
• Altered Memorandum of Association (via the e-MOA module on V3)
• Proof of stamp duty payment on the increase
• Board resolution authorising the filing and the signatory

For PAS-3 (return of allotment):

• Board resolution allotting the shares
• List of allottees — names, addresses, occupations, shares allotted — certified complete and correct
• For consideration other than cash: the stamped contract and a registered valuer's report
• For bonus: the general-meeting resolution authorising the issue
• For private placement: PAS-4 offer letter and PAS-5 record references
• Valuation report, where the route requires one

For SH-11 (buyback return):

• Board/shareholder resolution authorising the buyback
• Solvency declaration
• Details of shares bought back and extinguished
• Compliance certificate on the buyback regulations

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Share capital change process — step by step

Increasing authorised capital

Step 1 — Articles check. Confirm the Articles authorise capital alteration. If not, amend them by special resolution (Section 14) and file MGT-14.

Step 2 — General meeting. Issue 21 days' notice with explanatory statement, pass the ordinary resolution fixing the new authorised capital.

Step 3 — Stamp duty. Pay duty on the increase through the MCA portal — confirm the state rate first.

Step 4 — File SH-7 within 30 days. Complete the e-MOA module, attach the certified resolution and EGM notice, pay the fee on the increased capital.

Step 5 — Update records. The altered MOA, the register of members' ceiling reference, and the statutory registers reflect the new authorised capital from the resolution date.

Fresh issue of shares (rights / private placement)

Step 1 — Ceiling check and route selection. Verify headroom under the authorised capital; select the Section 62 or Section 42 route with your CS.

Step 2 — Valuation and pricing. Obtain the registered valuer's report where required; fix the issue price by board resolution.

Step 3 — Offer machinery. For rights: dispatch offer letters, keep the 15–30 day window open, record acceptances and renunciations. For private placement: issue PAS-4, maintain PAS-5, receive money into the separate bank account.

Step 4 — Allotment. Board resolution allotting the shares — within 60 days of application money for private placements. Issue share certificates within 60 days of allotment (Section 56).

Step 5 — File PAS-3 within 30 days of allotment. Attach the allottee list, contracts and valuer reports as applicable.

Step 6 — FEMA reporting if applicable. File FC-GPR within 30 days of allotment for shares issued to non-residents, with FIRC and KYC.

Buyback

Step 1 — Board or shareholder approval depending on whether the buyback is within 10% (board) or up to 25% (special resolution). Verify the 2:1 debt-equity condition and the funding sources.

Step 2 — Solvency declaration and offer process per the buyback regulations.

Step 3 — Extinguish the shares bought back within the statutory period.

Step 4 — File SH-11 within 30 days of completion, and update the registers and the reduced capital in all records.

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How long does it take?

| Change type | Shareholder process | ROC filing | Total typical | |---|---|---|---| | Authorised capital increase | 21 days EGM notice + meeting | SH-7 within 30 days; approval 2–5 working days | 25–40 days | | Rights issue | Board + 15–30 day offer window | PAS-3 within 30 days of allotment | 45–75 days | | Private placement | Board + PAS-4 + 60-day allotment clock | PAS-3 within 30 days of allotment | 30–75 days | | Bonus issue | Board + general meeting | PAS-3 within 30 days of allotment | 30–45 days | | Buyback | Board / EGM + offer process | SH-11 within 30 days of completion | 45–90 days | | Capital reduction | Special resolution + NCLT | NCLT order + filing | 4–8 months |

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How ComplyKart helps in this entire process

Route selection and sequencing. We map the right route — rights, placement, bonus, buyback — and sequence the filings (SH-7 before PAS-3, always) so the ceiling never blocks the issue.

Resolution and offer documentation. We draft the board and shareholder resolutions, EGM notices with explanatory statements, PAS-4 offer letters, and renunciation mechanics for rights issues.

Valuation coordination. We brief the registered valuer and align the valuation report with the pricing, the FEMA guidelines where non-residents participate, and the income-tax fair-value position.

Filings within the windows. SH-7, PAS-3 and SH-11 prepared and filed inside their 30-day clocks, with allottee lists certified and attachments complete — plus FC-GPR within 30 days where foreign investment is involved.

Register and certificate hygiene. Statutory registers updated, share certificates issued within the Section 56 timeline, and the capital history kept in a form the next round's due diligence will accept without questions.

What we will not do: we will not allot shares beyond the authorised capital and "fix the ceiling later" — an excess allotment is void, not a paperwork delay. We will not skip the valuer where the Act requires one. And we will not structure a bonus from revaluation reserves or a buyback beyond the statutory caps — the limits are the law, not our conservatism.

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What happens after the filing

In the first 30 days: the ROC approves the SH-7 or PAS-3 (typically 2–5 working days on clean filings) and the master data updates. Issue share certificates within 60 days of allotment (Section 56) — the certificates are the shareholders' title documents, and delays here create transfer problems later. Update the register of members the same week.

In the first 6 months: the new capital structure flows into the board's report and the annual return. If the issue involved foreign investment, confirm the FC-GPR approval and keep the FIRC set with the statutory records. For buybacks, verify the extinguished shares are reflected everywhere — registers, depository records, and the reduced capital in the MOA's paid-up references.

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The recurring compliance you are signing up for

Event-based, every time: SH-7 within 30 days of any capital alteration resolution. PAS-3 within 30 days of every allotment. SH-11 within 30 days of buyback completion. FC-GPR within 30 days of allotment to non-residents. Share certificates within 60 days of allotment.

Annual: the capital structure — authorised, issued, subscribed and paid-up — is reported in the MGT-7 annual return and the board's report, and must reconcile with the SH-7/PAS-3 history. Discrepancies between the annual return and the filing history are among the first things a due-diligence team flags.

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Common mistakes and how to avoid them

Allotting before raising the ceiling. The void allotment — shares issued beyond the authorised capital do not exist in law. Always sequence SH-7 before the allotment resolution, and verify the math twice.

Filing SH-7 but forgetting PAS-3 (or vice versa). The two forms track different things. A company that raises its ceiling but never reports the allotment has phantom headroom; one that reports allotments against an unraised ceiling has void shares. File both, every time.

Missing the 60-day private placement clock. Application money received but shares not allotted within 60 days must be refunded within 15 days, with 12% interest after day 60. This is not a filing technicality — it is cash out the door.

Bonus from the wrong reserves. Revaluation reserves cannot fund a bonus. Verify the reserve composition — free reserves, securities premium, capital redemption reserve only — before the board recommends.

Treating a capital reduction as an SH-7. Reduction of paid-up capital needs the NCLT under Section 66. Filing SH-7 for a reduction does not make it legal; it makes it an unapproved alteration.

Forgetting FEMA on foreign allotments. The ROC filing and the RBI filing are parallel obligations. A perfect PAS-3 with a missed FC-GPR is still a FEMA contravention, with its own compounding process.

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Share capital changes compared

| | Increase authorised (Sec 61) | Fresh issue (Sec 62/42) | Bonus (Sec 63) | Buyback (Sec 68) | Reduction (Sec 66) | |---|---|---|---|---|---| | What changes | The ceiling (MOA) | Paid-up capital up | Paid-up capital up, reserves down | Paid-up capital down | Paid-up capital down | | Cash movement | None | Cash in | None | Cash out | Varies | | Resolution | Ordinary | Board / special | Board + shareholders | Board (10%) / special (25%) | Special + NCLT | | Form | SH-7 (30 days) | PAS-3 (30 days) | PAS-3 (30 days) | SH-11 (30 days) | NCLT order | | Tribunal? | No | No | No | No | Yes |

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Sources

This page is built on the Companies Act, 2013 — particularly Sections 42 (private placement), 56 (share certificates), 61 (alteration of capital), 62 (further issue), 63 (bonus), 64 (notice of alteration), 66 (reduction), 68 (buyback) — the Companies (Share Capital and Debentures) Rules, 2014 (Rules 12, 13, 15, 17), the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Rules 12, 14), and the FEMA reporting framework for FC-GPR. Form instruction kits and MCA guidance were used for procedural detail. Where a claim could not be verified against a primary source, it is marked [NEEDS VERIFICATION].

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