Authorised Capital of a Company: Understanding the Basics
When it comes to starting a business, there are many legal and financial matters that need to be taken care of. One of the most important aspects of a company is its authorized capital. In this blog, we will discuss what authorized capital is, its importance, and how it works.
What is Authorized Capital?
Authorized capital is the maximum amount of capital that a company is authorized to raise by issuing shares to its shareholders. It is also known as registered capital, authorized share capital, or nominal capital. This capital is mentioned in the company’s Memorandum of Association (MoA), which is a legal document that sets out the company’s objectives and rules for its operations.
Importance of Authorized Capital
Authorized capital plays a vital role in the formation of a company as it determines the maximum amount of money that a company can raise. It also helps in assessing the company’s financial strength and credibility, which is important for investors and creditors.
In addition, authorized capital also protects the company from unwanted takeovers as it sets a limit on the amount of shares that can be issued by the company. This helps in maintaining the ownership structure of the company.
How Does Authorized Capital Work?
Authorized capital is divided into shares, and each share has a fixed nominal value. The nominal value of a share is the minimum price at which a share can be issued. The company can issue shares up to the amount of its authorized capital. The actual amount of money that a company raises depends on the number of shares it issues and the price at which it issues those shares.
For example, if a company has an authorized capital of $1,000,000 and the nominal value of each share is $10, the company can issue up to 100,000 shares. If the company decides to issue only 50,000 shares, it can raise a maximum of $500,000 ($10 x 50,000 shares).
Authorized capital is often determined based on the business plan of the company and the amount of capital that is required to achieve its objectives. Companies can increase their authorized capital by making changes to their MoA and getting approval from the relevant regulatory authorities.
It is important to note that authorized capital is not the same as paid-up capital. Paid-up capital is the amount of money that has been raised by the company through the issuance of shares, and it can be lower than the authorized capital. For example, a company may have an authorized capital of $1,000,000, but it may have only issued $500,000 worth of shares, which means its paid-up capital is $500,000.
Companies may also choose to issue different types of shares with different nominal values and voting rights. For example, a company may issue preference shares with a higher nominal value and a fixed dividend rate, while the ordinary shares may have a lower nominal value but offer voting rights to the shareholders.
Authorized capital is an important factor for investors and creditors who are considering investing in or lending money to a company. It provides an indication of the company’s financial capacity and credibility, and it helps in assessing the potential risks and returns of investing in the company.
Conclusion
In conclusion, authorized capital is a key aspect of a company’s formation and operation. It sets the maximum amount of money that a company can raise, helps in maintaining the ownership structure of the company, and provides an assessment of the company’s financial strength and credibility. Companies should carefully consider their authorized capital and make changes to it as needed to support their business objectives.
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Frequently Asked Questions (FAQs)
What is authorized capital?
Authorized capital is the maximum amount of capital that a company is authorized to raise by issuing shares to its shareholders.
What is the difference between authorized capital and paid-up capital?
Authorized capital is the maximum amount of capital that a company can raise, while paid-up capital is the actual amount of money that has been raised by the company through the issuance of shares.
Can a company change its authorized capital?
Yes, a company can change its authorized capital by making changes to its Memorandum of Association and getting approval from the relevant regulatory authorities.
What is the significance of authorized capital?
Authorized capital helps in assessing the financial strength and credibility of a company and sets a limit on the number of shares that can be issued by the company, which helps in maintaining the ownership structure of the company.
How is authorized capital determined?
The authorized capital of a company is determined based on the business plan of the company and the amount of capital that is required to achieve its objectives.
Can a company issue shares beyond its authorized capital?
No, a company cannot issue shares beyond its authorized capital. Doing so would be a violation of the company’s MoA.
What are preference shares?
Preference shares are a type of shares that have a higher nominal value and a fixed dividend rate. They do not usually offer voting rights to the shareholders.
What are ordinary shares?
Ordinary shares are a type of shares that have a lower nominal value but offer voting rights to the shareholders.
What is a Memorandum of Association?
A Memorandum of Association (MoA) is a legal document that sets out the company’s objectives and rules for its operations.
Who approves changes to the authorized capital of a company?
Changes to the authorized capital of a company must be approved by the relevant regulatory authorities, such as the Registrar of Companies or the Securities and Exchange Board of India.
