What are the Benefits of Increasing Authorized Capital?

Introduction

Under the provisions of the Companies Act, 2013, increase in authorized capital is a significant financial decision for businesses. It empowers companies to raise additional capital by issuing more shares. In this article, we will explore the benefits of increasing authorized capital.

What is Authorized Capital?

It is the maximum amount of capital that a company is allowed to issue to its shareholders. It is also known as “Authorized Stock” and defined in the company’s articles of association and can be changed through a resolution passed by the company’s shareholders. It is divided into shares, and each share represents a portion of the company’s ownership.

Benefits of Increasing Authorized Capital

There are several benefits of increasing authorized stock for businesses, including the ability to raise additional funds, improve financial flexibility, and attract new investors.

1. Raising additional funds: One of the primary benefits of increasing authorized stock under the Companies Act, 2013 is the ability to raise additional funds. By increasing the authorized capital, a company can issue new shares to its shareholders and raise more capital for expansion, research, development, or other business activities. For example, if a company has an authorized stock of $1 million, it can issue new shares worth $500,000 if it increases its authorized stock by 50%. This can help the company to raise the necessary funds for its growth and expansion plans.

2. Improving financial flexibility: Increase in authorized capital can also provide a company with greater financial flexibility. With more authorized stock, a company can issue new shares or debt instruments to raise capital without having to go through the process of increasing authorized stock again. This can help a company to respond quickly to opportunities in the market, such as acquisitions or investments. Additionally, an increased authorized stock can provide a buffer for future needs, helping a company to avoid the need for frequent increases in authorized capital, which can be time-consuming and costly.

3. Attracting new investors: Increasing authorized capital can also help a company attract new investors. By increasing its authorized stock, a company can demonstrate its commitment to growth and expansion, which can be attractive to investors looking for opportunities in the market. Moreover, a company with increased authorized capital can issue new shares to investors, providing them with an opportunity to invest in the company’s growth. This can help to broaden the company’s investor base and increase its visibility in the market.

4. Adapting to regulatory requirements: Certain regulatory frameworks, including listing requirements on stock exchanges, may necessitate a minimum authorized capital for companies to be eligible for listing or to meet ongoing compliance obligations. Increasing authorized stock ensures that companies can meet these requirements and access capital markets for raising funds or enhancing their public profile.

5. Avoiding frequent alterations: Increasing authorized stock to a higher level can reduce the need for frequent alterations in the future. It provides companies with a substantial capital base that can accommodate future financing needs without requiring repeated approvals from shareholders or regulatory authorities. This streamlines administrative processes and minimizes disruptions caused by frequent alterations in the authorized stock.

Conclusion

In conclusion, increasing authorized capital can provide several benefits for businesses, including the ability to raise additional funds, improve financial flexibility, and attract new investors. However, it is important for companies to consider the potential risks carefully and drawbacks before making a decision. By evaluating the benefits of increasing authorized stock, consulting with legal and financial advisors, and complying with all legal and regulatory requirements, companies can make an informed decision about whether to increase their authorized stock and how much to increase it.