Authorised Capital: Meaning and Example

Authorised Capital: Meaning and Example

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Mar 21, 2024 18:16 IST

Authorized capital is the maximum amount of share capital that a company is legally permitted to issue to shareholders, as specified in its Memorandum of Association. It sets the upper limit for potential equity funding but does not represent the actual capital raised or shares issued.

Authorised Capital

Ever wondered how a startup transforms into a multinational? It begins with authorized capital. Imagine a fledgling tech company planning to conquer the digital world. Its authorized capital, detailed in its Memorandum of Association, sets the ceiling on how much money it can raise by issuing shares. This financial backbone supports everything from initial operations to expansive growth, laying the groundwork for future success by defining its fundraising capabilities.

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Authorised Capital Meaning

Authorized capital of the company is also known as registered capital or nominal capital. It is a crucial concept for a company as it determines the limit to which it can issue shares to its shareholders. This limit is established at the time of company formation and can only be increased by following legal procedures. 

It obtains the approval of the regulatory authorities and shareholders. Authorized capital is not the same as issued capital, which refers to the actual amount of capital that has been issued to the shareholders. 

The authorized capital of a company is mentioned in its Memorandum of Association (MoA) under the capital clause. The MoA is a key legal document required for a company's incorporation. It details its constitution and objectives, including the maximum amount of capital the company is authorized to raise through the issuance of shares to its shareholders.

Who decides the Amount of Authorised Capital?

Founders/Initial Promoters: During a company's incorporation, its founders or initial promoters decide its authorized capital. They determine the amount based on the initial funding they believe will be necessary to start and expand the business operations.

Board of Directors: After incorporation, any changes to the authorized capital, such as increases to support expansion or new projects, are proposed by the company's board of directors.

Shareholders' Approval: Any decision to change the authorized capital, as the board proposes, requires the shareholders' approval. This is typically done through a special resolution passed in a general meeting of the shareholders.

Basis of Deciding Authorised Capital 

The authorized capital of a company is decided based on several factors, including the company's long-term financial strategy, potential for growth, funding requirements for future projects, and the need to issue shares to investors or the public. It's a strategic decision that considers current and anticipated capital needs.

Reasons for Issuing Authorised Capital

  1. Flexibility for future capital raise: Authorized capital allows a company to issue additional shares without the need for frequent regulatory approvals, providing flexibility for future fundraising.
  2. Streamlined process: It streamlines the process of issuing new shares, enabling the company to respond quickly to changing financial needs and market opportunities.
  3. Investor and creditor signaling: It signals investors and creditors about the potential size and scale of the company's operations, which can influence their decisions and perceptions.
  4. Strategic planning: It enables companies to set a clear upper limit for potential capital expansion, aligning with long-term strategic planning and growth objectives.
  5. Regulatory compliance: Authorized capital ensures that the company complies with regulatory requirements regarding issuing shares and capital structure.
  6. Potential for mergers and acquisitions: A higher authorized capital can also make the company more attractive for potential mergers, acquisitions, or strategic partnerships, as it demonstrates capacity for expansion and investment. 

Top FAQs on Authorised Capital

What is authorized capital?

Authorized capital, also known as nominal capital, is the maximum amount of share capital that a company is legally allowed to issue to shareholders as stated in its Memorandum of Association. It sets the upper limit on the value of shares a company can offer.

Who decides the amount of authorized capital?

The amount of authorized capital is decided by the company's founders or promoters at the time of incorporation and can be altered later with the approval of the shareholders through a special resolution.

Can a company increase its authorized capital?

Yes, a company can increase its authorized capital. This requires passing a special resolution in the shareholders' meeting and making necessary amendments to the Memorandum of Association, followed by filing the appropriate forms with the Registrar of Companies.

Does authorized capital affect a company's valuation?

Authorized capital itself does not directly affect a company's valuation. However, it indicates the potential scope for a company to raise funds by issuing more shares, which can impact future valuation.

How is authorized capital different from paid-up capital?

Authorized capital is the maximum share capital a company is allowed to issue, while paid-up capital is the actual amount raised by the company through issued shares that shareholders have fully paid for.

What happens if a company issues shares beyond its authorized capital?

Issuing shares beyond the authorized capital is illegal and violates corporate law. A company must first increase its authorized capital through the proper legal procedure before issuing additional shares.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio