Authorised Capital 101: Everything You Need to Know

Authorised Capital: A Key Element in Building a Strong and Sustainable Company

Authorised Share Capital

What is Authorised Capital

Authorised Capital, also known as Authorised Share Capital or nominal Capital. It is the maximum amount of Equity share and/or Preference share, that a company is allowed to issue and sell to its shareholders.

This amount is specified in the company's Memorandum of Association and Articles of Association, which is a legal document that outlines the company's purpose, structure, and operations.

• The Authorised Capital represents the ceiling for the number of shares that a company can issue. Companies may choose to issue a portion of their Authorised Capital in order to raise funds for business operations, expansion, or other purposes.

• The Authorised Capital is an important factor in determining the financial stability and growth potential of a company.
• A high Authorised Capital can indicate a strong commitment to growth and a long-term vision for the company, while a low Authorised Capital may suggest a limited ability to raise funds and a more conservative approach to growth.

It's important to note that Authorised Capital does not represent the actual amount of Capital that a company has raised or that it currently holds.

Companies may choose to issue only a portion of their Authorised Capital, or they may choose not to issue any shares at all.

When a company issues new shares, it increases its capital and generates new funds, which can be used to grow the business.

Additionally, Authorised Capital can be increased or decreased over time by changing the Memorandum of Association and Articles of Association as the case may be, which requires approval from the shareholders and other relevant parties.

Understanding the concept of Authorised Capital is essential for investors, analysts, and anyone interested in evaluating the potential of a company.

In conclusion, Authorised Capital plays a crucial role in the financial structure of a company and its ability to raise funds and grow.

What is Authorised Capital with Example

Let's say that a company has an Authorised Capital of Rs. 15 Lakh and paid up Capital of Rs. 1 Lakh initially, the balance sheet will look like this.

Before Issue

Authorised Capital ( Equity ) Rs. 15 Lakh

Paid Up Capital ( Equity )Rs. 1 Lakh

 

Now the Company has decided to issue 1,40,000 of Shares at Rs.10 per share on 01^st January. This means, that the company is raising Rs.14 Lakh in Capital by issuing and selling its shares to shareholders

After Issue

Authorised Capital (Equity) Rs. 15 Lakh

Paid Up Capital (Equity)Rs. 15 Lakh

 

If the company later decides to raise additional funds, say of Rs. 5 Lakh, then the Company need to first increase the Authorised Capital upto Rs.20 Lakh ( 15 + 5 ), then only it can issue more shares to increase it’s Paid up Capital by Rs. 5 Lakh. The total number of shares issued ( Paid up Capital ) cannot not exceed the Authorised Capital.

After Further issue

Authorised Capital (Equity) Rs. 20 Lakh

Paid Up Capital (Equity)Rs. 20 Lakh

What is the definition of Authorised Capital as per Companies Act, 2013

This the definition as such: Authorised Capital" or "Nominal Capital" means such Capital as is Authorised by the Memorandum of a company to be the maximum amount of Share Capital of the Company.

What is the purpose of Authorised Capital

The purpose of Authorised Capital is to provide a legal framework for a company to issue and sell equity shares to its shareholders, in order to raise funds for business operations, expansion, or other purposes.

The Authorised Capital acts as a ceiling for the number of shares that a company can issue, and it helps to control the company's equity and protect its financial stability.

The Authorised Capital also provides flexibility for a company to raise funds as needed, without the need for frequent legal changes or shareholder’s approvals.

By issuing new shares of Authorised Capital, a company can increase its Capital and generate new funds, which can be used to grow the business and achieve its long-term goals.

Is it Good to have more Authorised Capital

Having more Authorised Capital can have both advantages and disadvantages.

Advantages:

• More funding options: Having a higher Authorised Capital provides a company with more flexibility to issue and sell new shares in order to raise funds for business operations, expansion, or other purposes.
• Indicator of growth potential: A high Authorised Capital can indicate a strong commitment to growth and a long-term vision for the company, and can be viewed positively by investors and analysts.
• Increased Equity: By issuing new shares of Authorised Capital, a company can increase its Capital and equity, which can be used to support its growth and financial stability.

Disadvantages:

• Dilution of existing shareholder ownership: Issuing new shares of Authorised Capital can dilute existing shareholder ownership, and affect the value of their stock holdings.
• Pressure to issue shares: Having a high Authorised Capital can also create pressure for a company to issue more shares, which can negatively impact the stock price and the financial stability of the company.
• Complex legal and regulatory requirements: Increasing or decreasing the Authorised Capital requires approval from the shareholders and other relevant parties, and can be subject to complex legal and regulatory requirements.

In conclusion, while having more Authorised Capital can provide a company with more funding options and growth potential, it is important to weigh the advantages and disadvantages and consider the impact on the company's equity, financial stability, and stock price.

What is the fee for Authorised Capital

The fee for Authorised Capital can vary depending on several factors, including the jurisdiction in which the company is incorporated, the size of the company, and the complexity of the process.

Typically, companies are required to pay various fees to the government, regulatory authorities, and other parties involved in the process of increasing or changing their Authorised Capital. These fees may include filing fees, legal fees, accounting fees, and other miscellaneous costs.

The exact amount of the fee for Authorised Capital can vary widely, and companies should seek advice from their legal and financial advisors to determine the specific costs involved in their jurisdiction.

For Example if a Company wants to Increase its Authorised Capital From Rs.1 Lakh to Rs. 10 Lakh, then the approx. stamp duty will be Rs.2,500/-

In general, it is important for companies to carefully consider the costs and benefits of increasing or changing their Authorised Capital, and to weigh the impact of the fees involved in the process against the potential benefits of having a higher Authorised Capital.

What is the Minimum Authorised Capital

There is no such criteria for minimum Authorised Capital. It depends on company to company.

The minimum Authorised Capital is set to ensure that companies have sufficient resources and financial stability to carry out their operations and achieve their goals.

Companies are required to maintain the minimum Authorised Capital at all times, and are not permitted to issue or sell shares below this level.

Mostly the Company initially start with Rs. 1 Lakh of Authorised Capital

Companies should seek the advice of legal, financial, and other professional advisors to ensure that they are in compliance with the relevant laws and regulations, and to determine the specific requirements and procedures involved in raising their Authorised Capital.

May I Know what is the difference between Authorised Capital and Issued Share Capital

Authorised Capital and Issued Share Capital are two important concepts in corporate finance that describe different aspects of a company's equity structure.

Authorised Capital refers to the maximum amount of equity that a company is allowed to issue and sell to its shareholders, as specified in its Memorandum and Articles of Association or other legal documents. This is the maximum limit of equity that the company can raise through the issuance of shares.

Issued Share Capital, on the other hand, refers to the actual amount of equity that a company has issued and sold to its shareholders. This is the amount of equity that has been created and is available to be traded or used as collateral.

The difference between Authorised Capital and Issued Share Capital is that Authorised Capital represents the potential or theoretical amount of equity that a company could issue, while Issued Share Capital represents the actual amount of equity that has been created and sold to shareholders.

For example, if a company has an Authorised Capital of Rs.10 Lakh, but has only issued and sold Rs.5 Lakh worth of shares, its Issued Share Capital would be Rs.5 Lakh and its Authorised Capital would still be Rs.10 Lakh. The company still has the potential to issue and sell up to Rs.5 Lakh in additional shares, up to its Authorised Capital limit.

It's important for companies to understand the difference between Authorised Capital and Issued Share Capital, and to ensure that they comply with the relevant laws and regulations in their jurisdiction, as well as their own Memorandum and Articles of Association or other legal documents, with respect to the issuance of shares and the management of their equity structure.

Where is Authorised Capital is shown

Authorised Capital is typically shown in the company's Memorandum of Association, which is a legal document that outlines the basic structure and purpose of the company.

This document is filed with the relevant regulatory authority in the jurisdiction where the company is incorporated, and outlines the company's name, registered office,object, Authorised Capital, and other important details.

In addition to being shown in Memorandum of Association, Authorised Capital may also be shown in the company's balance sheet, which is a financial statement that provides a snapshot of the company's financial position at a specific point in time.

The balance sheet will typically show the company's total equity, including the Authorised Capital and any issued and outstanding shares.

It is also important to note that the information on Authorised Capital may be included in the company's Annual Reports, Financial Statements, and other disclosures that it makes to the relevant regulatory authorities, shareholders, and other stakeholders.

In general, it is important for companies to keep accurate and up-to-date records of their Authorised Capital, and to ensure that the information is readily available to stakeholders and regulators, in accordance with the relevant laws and regulations in their jurisdiction.

How to Increase Authorised and Paid Up Share Capital – Procedure

Increasing authorized and paid-up capital involves several steps and is subject to regulations and laws in the jurisdiction where the company is incorporated.

It involves filing necessary paperwork, obtaining shareholder’s approval, and updating legal documents.

Increase company funds by following the procedure to raise authorized and paid-up capital.

Read More on : Raising Authorized & Paid-up Capital: A Simplified Guide

Disclaimer: The information provided above is not intended to constitute legal advice, accounting advice or any other advice of a professional nature. The content should not be used as a substitute for professional advice. You should always consult your own professional for advice before making important personal or professional decisions. Your reliability on this data provided above is solely at your own risk.