Section 62(1), Companies act 2013, Authorized Capital, benefits under Section 62(1) of Companies Act, Ebizfiling

All you need to know about Section 62(1) of the Companies Act

Introduction

Section 62(1) of the Companies Act is a crucial provision that governs the issuance of shares by companies. Under this provision, companies are granted the authority to raise capital by issuing new shares to existing shareholders or potential investors. This section outlines the regulations and procedures for issuing shares, ensuring transparency, fairness, and protection of shareholders’ rights. By complying with Section 62(1), companies can effectively manage their share capital and facilitate their growth and development. In this article we will understand Authorized Capital, Section 62(1) of the Companies Act, process to issue shares and the benefits under Section 62(1) of the Companies Act 2013.

Understanding Authorized Capital and Paid-up Capital

Authorized capital refers to the maximum amount of share capital a company is legally permitted to issue, as outlined in its memorandum of association. On the other hand, paid-up capital represents the portion of authorized capital that shareholders have subscribed to and fully paid for.

What is Section 62(1) of the Companies Act?

Section 62(1) of the Companies Act 2013 outlines the procedure for conducting a right issue of shares. This Section allows companies to offer additional shares to existing shareholders, offering them the first opportunity to increase their stake.

What is the process to issue the shares?

Key steps involved in the right issue process include the following:

  1. Board Approval: The board of directors must convene a meeting and pass a resolution to propose the right issue of shares. This resolution should specify details such as the number of shares to be issued, the price per share, and the proportionate allocation to existing shareholders.

  1. Shareholder Consent: After the board’s approval, the company must seek consent from shareholders through an ordinary resolution passed during a general meeting. This resolution serves as an affirmation of the shareholders’ willingness to participate in the right issue.

  1. Offer Letter: Upon receiving shareholder consent, the company prepares an offer letter. This document provides comprehensive information about the right issue, including the number of shares each shareholder is entitled to, the issue price, and the deadline for accepting the offer.

  1. Subscription Period: Existing shareholders are given a specific period, as specified in the offer letter, within which they can subscribe to the right issue by submitting their applications and payment.

  1. Allotment and Share Certificates: Once the subscription period ends, the company determines the allotment of shares based on the responses received. The allotted shares are then credited to the shareholders’ de-materialized (demat) accounts, and the company issues share certificates as proof of ownership.

What are the benefits under Section 62(1) of Companies Act?

There are several benefits under Section 62(1) to companies and stakeholders involved in the issuance of shares. Some of these benefits include:

  1. Capital raising: The provision enables companies to raise additional capital by issuing new shares. This can be vital for funding business expansion, financing new projects, or addressing financial needs. By attracting investors through share issuance, companies can bolster their financial resources and fuel growth.

  1. Flexibility: Section 62(1) provides flexibility in the issuance of shares. Companies have the freedom to determine the number of shares to be issued, the price at which they will be offered, and the timing of the issuance. This flexibility allows companies to adapt their capital structure according to their specific requirements and market conditions.

  1. Expansion opportunities: Issuing shares under Section 62(1) can create opportunities for companies to expand their operations. With increased capital, businesses can explore new markets, invest in research and development, acquire assets, or undertake mergers and acquisitions. This expansion potential can contribute to the long-term success and competitiveness of the company.

  1. Shareholder participation: Existing shareholders have the right of first refusal when new shares are issued under Section 62(1). This provision allows them to maintain their proportionate ownership in the company. By giving priority to existing shareholders, companies ensure fairness and encourage shareholder participation in the growth and decision-making processes.

  1. Dilution control: Section 62(1) includes safeguards to protect the interests of existing shareholders from excessive dilution. The provision sets limits on the percentage of share capital that can be issued without shareholders’ approval. This control helps maintain the balance of ownership and prevents undue dilution of existing shareholders’ equity.

  1. Regulatory compliance: Adhering to Section 62(1) ensures that companies comply with the legal and regulatory framework governing the issuance of shares. By following the prescribed procedures and disclosure requirements, companies can maintain transparency, accountability, and compliance with applicable laws, promoting investor confidence and protecting shareholder rights.

Conclusion

Section 62(1) of the Companies Act 2013 serves as a vital guideline for companies conducting a right issue of shares. This provision ensures transparency and fairness in the process, granting existing shareholders the opportunity to increase their investment in proportion to their current holdings. Familiarity with authorized capital, paid-up capital, and the steps involved in the right issue process is crucial for both companies and shareholders. Adhering to the provisions of Section 62(1) promotes good corporate governance and reinforces the principle of shareholder democracy. By enabling shareholders to participate in the growth of the company actively, the right issue mechanism strengthens investor confidence and contributes to the overall development of the business.

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