Authorized Share Capital of a Company: Meaning, features, Advantages, and How Is Authorized Share Capital Acquired by a Company?

Introduction

Every company, regardless of its organizational structure or size, will have a specific share capital. Today in this article we have covered information on an Authorized Share Capital of a Company, the Purpose of Authorized Share Capital, features of Authorized Share Capital and “How do startups obtain authorized capital?”

Meaning of Authorized Share Capital of a Company

Authorized Capital, also known as the company’s registered capital or nominal capital, is the maximum amount of share capital that a company is permitted to issue to its shareholders under its constitutional documents. Shares are financial instruments that serve as units of the overall capital. It is used to solicit donations from the public.

A company’s authorized capital can be increased in the future by passing a resolution at a general meeting of shareholders. However, once set, the company cannot issue shares or raise funds in excess of this amount. In other words, it limits the total number of shares that a company can issue.

For example, if XYZ Private Limited Company has an authorized capital of INR 20 lakh, it means that it can issue shares worth up to INR 20 lakh to its investors. XYZ Private Limited Company is unable to issue shares worth INR 15 lakhs to its shareholders. However, because the company has not issued shares in excess of the authorized capital, it can still issue shares worth only INR 5 lakh to its investors.

Features of Authorized Share Capital

• The authorized capital is determined at the time of the company’s formation and incorporation.
• ROC fees will rise in accordance with the amount of approved capital.
• Authorized Capital of a company needs to be specified in the MOA and AOA of a Company.
• The authorized share capital is the maximum amount of capital that a company can have and is used to determine the nominal value of each share.
• It can be modified at any moment after the company’s establishment.
• The company’s net worth cannot be calculated using authorized capital.
• A firm does not have to issue shares up to its authorized capital; it can issue shares with a lower value.

Advantages of Authorized Capital

The following are some of the advantages of authorized capital:

• The company may focus on its business expansion without borrowing money or obtaining finances from other traditional sources thanks to the additional revenue gained from stock sales.
• The company can offer more pay to its investors, shareholders, partners, senior management, employees enrolled in equity ownership plans, founders, and owners with increased cash inflow.
• The company’s overall net worth improves when more share capital is added. As a result, the company’s borrowing capacity is increased.

How do startups obtain authorized capital?

The majority of today’s startups are bootstrapped and cash-strapped. As a result, they are unable to pay large sums to increase their share capital authorized during incorporation with the MCA. Furthermore, the remainder of the capital invested is in the form of an unsecured loan or a share premium.

Furthermore, this reduces the need for them to raise share capital during the early stages of their company. However, as the company grows and requires debt or equity, the share capital limit is increased in order to issue more shares. As a result, most startups start with the minimum required share capital for private companies and gradually raise the limit as they require debt or equity funding.

How Is Authorized Share Capital Acquired by a Company?

There are several methods for raising authorized share capital:

• Investors will be issued new shares.
• New shares are being issued to existing shareholders.
• Issuing new shares to the company directly.

FAQs on Authorized Share Capital of a Company

1. What is the difference between Authorized Share Capital and Paid-up Share Capital?

The primary difference between authorized capital and paid-up capital is that authorized capital is the total number of shares a company can issue to its shareholders, whereas paid-up capital is the total number of shares it has actually issued to its shareholders.

2. How much authorized capital should be decided?

At the time of company formation, there is no limit on authorized share capital. So it’s up to you how much you need to keep a company’s authorized capital. However, if an increase in authorized share capital is required, it must be done after passing a resolution in the company’s general meeting and then after modifying the company’s MOA and AOA.

3. Is it possible to increase authorized capital?

Yes, it is possible for a company to increase authorized capital; however, they must first discuss it in a meeting and obtain shareholder approval, after that they need to change MOA and AOA of a company. This procedure must be followed when increasing authorized share capital.