Authorised Capital: Meaning and Example

Ever wondered how a startup transforms into a multinational? It begins with authorized capital. Imagine a fledgling tech company planning to conquer the digital world. Its authorized capital, detailed in its Memorandum of Association, sets the ceiling on how much money it can raise by issuing shares. This financial backbone supports everything from initial operations to expansive growth, laying the groundwork for future success by defining its fundraising capabilities.

Table of Content

• Authorised Capital Meaning
• Who decides the Amount of Authorised Capital?
• Basis of Deciding Authorised Capital 
• Reasons for Issuing Authorised Capital

Authorised Capital Meaning

Authorized capital of the company is also known as registered capital or nominal capital. It is a crucial concept for a company as it determines the limit to which it can issue shares to its shareholders. This limit is established at the time of company formation and can only be increased by following legal procedures. 

It obtains the approval of the regulatory authorities and shareholders. Authorized capital is not the same as issued capital, which refers to the actual amount of capital that has been issued to the shareholders. 

The authorized capital of a company is mentioned in its Memorandum of Association (MoA) under the capital clause. The MoA is a key legal document required for a company's incorporation. It details its constitution and objectives, including the maximum amount of capital the company is authorized to raise through the issuance of shares to its shareholders.

Who decides the Amount of Authorised Capital?

Founders/Initial Promoters: During a company's incorporation, its founders or initial promoters decide its authorized capital. They determine the amount based on the initial funding they believe will be necessary to start and expand the business operations.

Board of Directors: After incorporation, any changes to the authorized capital, such as increases to support expansion or new projects, are proposed by the company's board of directors.

Shareholders' Approval: Any decision to change the authorized capital, as the board proposes, requires the shareholders' approval. This is typically done through a special resolution passed in a general meeting of the shareholders.

Basis of Deciding Authorised Capital 

The authorized capital of a company is decided based on several factors, including the company's long-term financial strategy, potential for growth, funding requirements for future projects, and the need to issue shares to investors or the public. It's a strategic decision that considers current and anticipated capital needs.

Reasons for Issuing Authorised Capital

1. Flexibility for future capital raise: Authorized capital allows a company to issue additional shares without the need for frequent regulatory approvals, providing flexibility for future fundraising.
2. Streamlined process: It streamlines the process of issuing new shares, enabling the company to respond quickly to changing financial needs and market opportunities.
3. Investor and creditor signaling: It signals investors and creditors about the potential size and scale of the company's operations, which can influence their decisions and perceptions.
4. Strategic planning: It enables companies to set a clear upper limit for potential capital expansion, aligning with long-term strategic planning and growth objectives.
5. Regulatory compliance: Authorized capital ensures that the company complies with regulatory requirements regarding issuing shares and capital structure.
6. Potential for mergers and acquisitions: A higher authorized capital can also make the company more attractive for potential mergers, acquisitions, or strategic partnerships, as it demonstrates capacity for expansion and investment.