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Authorized Capital is the maximum limit of share capital of a company that is issued and stated in its memorandum of association (MOA) or its articles of association (AOA). The Authorised capital is part of its memorandum known as a constitutional document under the capital clause. At the time of Incorporation, the company submits a formal document to the Registrar of companies (ROC) to incorporate the company.
The amount of share capital may change in future when the shares are issued to the public. There is a specific limit on the amount of share capital that cannot be exceeded for raising money from the public.
The maximum limit of the capital for which shares can be issued by the company to its members. The initial capital of the company is mentioned in the Memorandum of Association of the company. The company can increase the capital at any point in time with shareholders' approval and by paying an additional fee to the Registrar of Companies (ROC).
As per the Companies Act, 2013, the calculation is given as the addition of Issued Capital and Unissued Capital under the Capital clause in the Memorandum of Association (MOA). The benefits of nominal share capital are that the company can focus on its business expansion without borrowing money and obtaining finances from banks or financial institutions. The company can offer more payment to its investors, shareholders, directors and employees with an increase in cash flow. The company’s overall net worth is improved when more share capital is added.
The authorised capital limits the ability of directors to allot new shares which are imposed on the company having effects on the control over the company. The company can issue shares up to the nominal capital amount mentioned in the memorandum of association and not as per its will.
The primary two benefits of authorised capital are
For example, a company has 10000 shareholders. These 10000 shareholders have control over the company’s operations and take major decisions on behalf of the company. The company issues additional 5000 shares and now, there are a total of 15000 shares. Hence, the decision-making power and control is distributed between the 15000 shareholders.
The steps followed for increasing the authorised share capital are as follows:
Check whether the articles of association of the company contain a provision authorizing it to increase its authorized capital. In case of no such provision in articles then appropriate steps are required to be taken to amend the articles.
Notice of a General meeting shall be given at least before clear 21 days before the actual date of a general meeting in writing, by hand or by ordinary post or by speed post, or by e-mail or a shorter notice can be issued with the consent of at least majority in number and ninety-five percent of such part of the paid-up share capital of the company assigning a right to vote in the meeting.
The notice shall specify the day, date, time and full address of the venue of the meeting and contain a statement on the business of increase in authorized capital to be transacted at the meeting.
On the fixed day and pass an ordinary resolution for increasing the Authorized share capital and make suitable changes in the Memorandum of Association (MOA).
File a notice of alteration of share capital with the registrar in E-Form SH-7 with the prescribed fee within 30 days of such alteration. The Form is to be filled on the MCA website with the following details
Pay the e-stamp duty on the increased amount of authorized capital through MCA, if applicable.
Every alteration made in the Memorandum of association and Articles of Association of the company shall be noted in every copy of the same.
The following are the different types of capital in a private or public company
The Authorised Capital is the total capital that a company accepts from its investors by issuing shares that are mentioned in the memorandum of association.
It is also called the nominal capital because with this capital a company is registered. As per the Companies Act, 2013, the calculation of authorized capital is given under the Capital clause in the Memorandum of Association.
The company can increase the capital with the purpose of issuing more shares, although a company is not allowed to issue shares which are exceeding the limit of authorised share capital in any case. It is an addition of Issued share capital and unissued share capital.
The Issued Capital is part of authorised share capital which is issued to the public for subscription. The issuance of shares is called allotment or allocation. After the allotment of shares, a subscriber becomes a shareholder. It is an addition of subscribed capital and unsubscribed capital which is part of authorized capital.
The Subscribed Capital is part of the issued capital which has been allotted to the public. It is not compulsory to fully subscribe to the issued capital by the public. It is part of the issued capital for which the application is received from the public by the company.
When the share has been issued and purchased by investors, these shares are called Outstanding shares. The issuing of shares gives the ownership in the company. The unsubscribed share capital is called the Treasury shares.
The Called-Up Capital is part of the Subscribed Capital and includes the amount paid by the shareholder. The authorized capital denotes the maximum amount of capital.
The company does not receive the full amount of capital at a time. It calls upon the part of subscribed capital when needed in installments. The remaining portion of the Subscribed Capital is known as uncalled capital.
The part of called-up capital paid by the shareholder is called Paid-up capital. It is not required that the amount known by the company is paid by the shareholder or not.
The shareholder may pay half the amount of the called-up capital which is called reserved capital. The term reserved means to keep an amount in the treasury of the company.
The Companies Amendment Act, 2015 has notified, there is no requirement for minimum paid-up capital for public companies. This means that the formation of the company can be done with any amount.
The paid-up capital is always less than or can be equal to the authorised share capital at any time and the company is not allowed to issue shares beyond the company’s authorised share capital.
The key difference between authorized capital and paid-up capital are as follows:
In case of any changes in the Authorized capital and paid-up capital, the registrar of Companies (ROC) needs to be updated. The details will be reflected in the Company master data on the MCA portal and will also be available for the public to view the data.
Pay the e-stamp duty on the increased amount of authorized capital through MCA.
The forms MGT-14 and SH-7 are filed with the registrar after payment of stamp duty and prescribed fees.
In addition to registration or incorporation, a business may require other registrations depending on the business activity undertaken. Talk to an Advisor to find out registrations your business may require post registration.
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