The Authorized Share Capital is the maximum amount of capital that a company can raise through the issue of shares to the shareholders. In other words, the capital amount with which a corporation is registered with the registrar of the company (as stated within the article of incorporation) is known as the authorized share capital.
Shares are defined as the financial instruments that form units of capital. It’s accustomed to raising funds from the ultimate public.
Purpose of Authorized Capital
- It is used to limit the ability of directors to allot new shares which might have consequences over the control over the company.
- It is also accustomed to preventing any shift within the profit distribution balance.
- Often, the amount provided as authorized capital isn’t fully used and a little percentage is kept as a security buffer to lift additional capital when the need arises.
If a company has an authorized capital of Rs 50,00,000, it can only issue shares valued up to Rs 50,00,000 to its shareholders and cannot issue more. However, if the corporation only issued shares valued up to Rs. 25,00,000, the remaining capital amount is maintained as unused capital and should be used by the firm at any time in the long term.
What Are the Categories of Authorized Share Capital?
There are three types of authorized share capital:
Funds that have not been paid by stockholders for the shares that they have purchased.
Funds are received from stockholders in exchange for shares.
the worth of the shares of stock that are issued.
What Are the Alternative Names of Authorized Share Capital?
Authorized share capital could also be remarked because of the following:
- Registered capital.
- Nominal share capital.
- Nominal capital.
- Authorized stock.
- Authorized capital.
Authorized capital is legally the foremost capital an organization may carry within the design of shares of stock.
Where Can We See What Quantity Authorized Share Capital a Company May Have?
The articles of incorporation or the memorandum of association dictate exactly what quantity stock of capital the corporation may have.
Why Do Companies Have Authorized Share Capital?
Authorized share capital is absolutely the amount during which the corporation may raise capital from the stockholders which could not transcend this limit. Consequently, the corporation will register an amount that exceeds its current need for financing so as to depart a cushion for future demand.
Why is the Authorized Capital Not Fully employed by the Management?
Rarely is the complete authorized capital fully utilized by the corporation. The unissued shares remain as a buffer just in case the corporation must raise additional capital. Remember as more shares are issued, the corporation’s ownership will become increasingly diluted.
Can the Authorized Capital Be Increased?
At any time, shareholders may approve the issuance of additional authorized capital. So in an attempt to do so, a fee must be paid to the registrar of the corporation.
Can Issue Capital Exceed Authorized Capital?
Before starting any company, private or public, the investors and promoters must choose its authorized share capital amount. This will be because the authorized share capital limit establishes what number of shares they’ll receive as a result of their investment within the corporation. Further, Issued or outstanding shares are the shares that are issued by a corporation to its shareholders.
Therefore, since the authorized capital sets the limit for the price of such shares, the paid-up or issued capital can never exceed the authorized share capital.
How Do Startups Raise Authorized Capital?
- The majority of today’s startups are bootstrapped and have limited funding. Hence, they will not pay large amounts to boost their authorized share capital during incorporation with the MCA. As a result, the majority of promoters end up paying the minimum required authorized share capital of Rs. 1 lakh.
- Therefore, they issue shares worth only that quantity to their shareholders or founding members. Additionally, the rest of the capital invested is within the kind of either an unsecured loan or as a share premium.
- Further, this helps them reduce the requirement to increase share capital during the primary 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.
- Hence, most startups begin operations with the minimum required share capital for private companies, and slowly raise the limit as and once they begin needing debt or equity funding.
How to Change a Company’s Authorized Share Capital
A minimum fee of Rs. 5000 is to be paid to MCA if the authorized capital is that of the minimum amount of Rs. 1 lakh, because the number of authorized capital increases the amount of fee required to be paid to MCA also increases.
1. For each lakh of additional share Capital, Rs 1 lakh to 5 lakhs; Charges per lakh of authorized Capital is Rs. 4000.
2. For each lakh of additional share Capital, Rs 5 lakh to 50 lakhs; Charges per lakh of authorized is Rs. 3000.
3. For each lakh of additional share Capital, Rs 50 lakh to 1 Crore; Charges per lakh of authorized Capital is Rs. 1000.
4. For each lakh of additional share Capital, Above Rs. 1 crore; charges are Rs. 750 per lakh of authorized capital.
But if we talk about startup entrepreneurs, they need a bent to remain a minimal amount of authorized capital of Rs. 1 lakh so as to avoid any extra spending. However, big established companies tend to retain a high amount of authorized capital so as to avoid repeated interference of state organizations in their work again and again.
Guidelines for authorized capital
Certain words may result in a change within the authorized capital of a corporation such as:
1. Rs. 5 lakhs for using words like Hindustan, Bharat, as well as India in the company’s name.
2. Rs. 10 lakhs for words like Enterprise, Products, Business, and Manufacturing in the company’s name.
3. Rs. 50 lakhs for words such as International, Global, Continental, Universal, Intercontinental, Asiatic, and Asian in the company’s name.
4. Rs. 50 Lakhs for words like Bharat, Hindustan, India because the primary word of the name of the company.
5. Rs. 1 Crore for using words like International, Global, Universal, Continental, Intercontinental, Asiatic, Asia because the primary word of the name of the company.
6. Rs. 5 Crore for using word Corporation anywhere within the name of the company.
People often get confused between authorized share capital and issued share capital but you would like to understand that they are two various things. Issued share capital is the quantity of capital that is funded by the company’s shareholders and it can never be authorized share capital.
Now that you just have a transparent understanding of what authorized share capital is and therefore the way it works for company registration, go and choose a good name for your company keeping in mind the above-stated facts.!