Authorized Capital

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.

Authorized Capital of a Company

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.

Purpose of Authorized Capital

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

1. A company doesn’t use the whole amount of its authorised share capital as in the future it might take up a new project instead of borrowing money from a financial institution and raising money from the market.
2. To dilute the power of voting of existing shareholders.
3. The net worth is improved when an increase in authorized Capital is done. This results in increasing the borrowing capital of the company.

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.

Process to Increase in Authorized Share Capital

The steps followed for increasing the authorised share capital are as follows:

Step 1 : Check the Article of Association of the Company

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.

Step 2 : Convene the meeting of the Board of Directors for passing Board resolutions

• To consider and approve an increase of authorized share capital and altering the Memorandum of association (MOA) which is subjected to the approval of shareholders in the General meeting.
• To fix the day, date, time and place for conducting the general meeting of the company
• To approve the draft notice of the General meeting with an explanatory statement annexed to the notice as per the requirement of the relevant section of the Companies Act, 2013.
• To authorize the director or company secretary to sign and issue a notice of increase in authorized capital in the General Meeting, for taking up such necessary action to effect the Board resolution.

Step 3 : Convene General meeting

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.

Step 4 : Hold the General 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).

Step 5 : File Form SH-7 with the Registrar

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

• Details of the company, including its CIN no.
• Type of Resolution
• Date of the meeting
• The service request number of Form MGT-14 has already been filled
• Details regarding the amount of original authorized capital and amount of new authorized share capital
• Details concerning the disintegration of the additional share capital
• Particulars regarding the Stamp duty fees paid
• Digital Signatures and DINs as necessary

The following attachments are given in the documents are to be provided as:

• Certified True copy of the ordinary resolution for an increase in the authorized share capital
• Copy of Altered MOA (change made in Capital clause)
• Copy of Altered AOA, if any
• Shorter notice consent, if required
• Any other required document, if applicable.

Step 6 : Payment of E-stamp duty

Pay the e-stamp duty on the increased amount of authorized capital through MCA, if applicable.

Step 7 : Alteration in every copy of MOA and AOA

Every alteration made in the Memorandum of association and Articles of Association of the company shall be noted in every copy of the same.

Types of Capital in a company

The following are the different types of capital in a private or public company

1. Authorised Share Capital

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.

2. Issued 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.

3. Subscribed 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.

4. Called-Up Capital

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.

5. Paid-up 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.

Difference Between Authorised Capital and Paid-up capital

The key difference between authorized capital and paid-up capital are as follows:

• The maximum number of shares any company can issue is called as
• Authorised Capital. In simple terms, it limits the whole number of shares that a company can issue to the general public. On the other hand, the amount of shares the company issues to the members is called Paid-up Capital.
• The Nominal Capital is mentioned in the Memorandum of Association (MOA) of the Company under the ‘Capital Clause’. It is decided prior to the incorporation of the company.
• There are required legal compliances in case to increase the authorised share capital. Whereas, the Paid-up Capital of a private company can easily increase up to the amount of authorized capital.
• The authorised share capital cannot be zero. However, the Paid-up share capital can be zero.
• The Company can carry out private placements or public issues through paid-up capital. It is also used in the calculation of the net worth of the company.
• For Example, The registered or authorised Capital is Rs. 2 lakhs and shares issued up to an amount of Rs. 1.5 lakhs to shareholders, which means ABC Pvt ltd has issued the shares, not in excess of the maximum limit. The amount of issued capital that is paid up by the shareholders is the paid-up capital.

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.