What is Authorized Capital?
Authorised share capital is the maximum amount of shares a company can issue to its shareholders. It is defined in the company's Articles of Association and sets the limit of the company's borrowing capacity. The authorised share capital can be increased or decreased by passing a special resolution in a general meeting.
If your business is looking to expand or attract investors, increasing authorised share capital may be necessary. By doing so, you increase the number of shares available to be issued to shareholders, which can help raise capital for the company.
Authorized capital is not the same as issued capital, which is the amount of capital that a company has actually issued to its shareholders. The issued capital cannot exceed the authorized capital.
Why is Authorized Capital Important?
Authorized capital is important because it determines the maximum amount of money that a company can raise by issuing shares. It also plays a crucial role in determining the company's legal status, as it affects the company's ability to borrow money, issue new shares, and pay dividends to shareholders.
In addition, authorized capital is important for investors, as it gives them an idea of the company's potential for growth. A company with a high authorized capital may be seen as more attractive to investors, as it indicates that the company has the potential to grow and expand in the future.
How to Determine the Right Amount of Authorized Capital for Your Business?
The amount of authorized capital that a company needs will depend on several factors, including the size of the business, its growth potential, and its financial requirements. Some of the factors to consider when determining the right amount of authorized capital include:
- Business Size: The size of the business will determine the amount of capital that is required to start and operate the business. A small business may require less authorized capital than a larger business.
- Growth Potential: The potential for growth and expansion is another important factor to consider when determining the amount of authorized capital. A business with high growth potential may require more authorized capital than a business with limited growth potential.
- Financial Requirements: The financial requirements of the business will also determine the amount of authorized capital that is needed. If the business requires a significant amount of capital to start or operate, it may need a higher authorized capital.
How to Increase Authorised Share CapitalFollowing is the Step-by-Step Procedure to increase authorized share capital:
- Hold a Board Meeting: The first step is to convene a board meeting to discuss and approve the proposal to increase the authorized share capital. The board should pass a resolution to approve the increase and authorize the directors to take all necessary steps to give effect to the resolution.
- Call an Extraordinary General Meeting (EGM): After obtaining the board's approval, the company should call an EGM to obtain the approval of the shareholders. A notice of at least 21 days should be given to the shareholders, along with an explanatory statement outlining the reasons for the increase and its impact on the company's share capital structure.
- Pass a Special Resolution: At the EGM, the shareholders should pass a special resolution to approve the increase in authorized share capital. The resolution should also amend the memorandum of association to reflect the new authorized share capital.
- File Form MGT-14: Within 30 days of passing the special resolution, the company must file Form MGT-14 with the Registrar of Companies (ROC). This form contains details of the resolution, the date of the EGM, and the number of votes cast in favour of the resolution.
- Obtain Approval from ROC: After filing Form MGT-14, the ROC will examine the form and, if satisfied, will issue a certificate of registration. The certificate confirms that the increase in authorized share capital has been approved and registered with the ROC.
- Issue New Shares: Once the increase in authorized share capital has been approved and registered with the ROC, the company can issue new shares to its shareholders after complying with the provisions of the Company Act. The company should update its share register and issue share certificates to the shareholders whenever it issues fresh shares.
Advantages of Increasing Authorised Share CapitalIncreasing authorised share capital has several advantages:
- Attract investors: By increasing authorised share capital, you can issue more shares to investors, which can help raise capital for the company.
- Fund expansion: If your business is looking to expand, increasing authorised share capital can provide the funds needed to do so.
- Flexibility: Increasing authorised share capital gives your business the flexibility to issue shares as needed, without having to constantly seek shareholder approval.
To increase the authorized capital of a company in India, the following documents are generally required:
Board Resolution: A resolution passed by the Board of Directors of the company approving the increase in authorized capital.
Shareholders' Resolution: A resolution passed by the shareholders of the company approving the increase in authorized capital. This can be done through an Extraordinary General Meeting (EGM) or through the Postal Ballot process.
Altered Memorandum of Association (MOA): The MOA of the company needs to be altered to reflect the increased authorized capital. This alteration needs to be approved by the Registrar of Companies (ROC).
Altered Articles of Association (AOA): The AOA of the company needs to be altered to reflect the increased authorized capital. This alteration needs to be approved by the ROC.
Form SH-7: This form needs to be filed with the ROC within 30 days of passing the shareholders' resolution. This form contains the details of the increase in authorized capital and the altered MOA and AOA.
Payment of Fees: The requisite fees need to be paid to the ROC for filing the necessary forms and documents.
Have questions about Authorised Share Capital?
We have got you covered:
Can authorised share capital be decreased?
Yes, authorised share capital can be decreased if authorised by its Article of association, by passing an ordinary resolution in a general meeting of shareholders.
- What is the difference between authorised share capital and issued share capital?
- Can authorised share capital be increased multiple times?
- How can I increase my paid up share capital?
- Is it good to increase paid up capital?
- What are the advantages and disadvantages of raising capital?
- Why is share capital important?
- What is fully paid up share capital?
- What are the fees for an increase in authorized capital?
- Is stamp duty required for increase in Authorised share capital?
- What happens when authorized shares increase?
- What is the minimum share capital for a private company?
- What is the minimum capital for a public company?
- How much share capital should a company have?
- What is the maximum paid up capital of a company?
- Why would a company want to increase its authorized share capital?
- Can the company issue shares before the authorized share capital is increased?
- How long does the process take to increase authorized share capital in India?
- Are there any restrictions on the use of the increased share capital?
- Can the increase in authorized share capital be done without shareholder approval?