What is Authorised Capital of a Company?

Introduction

You need funds to start a business. There are multiple ways of raising funds for your business based on the business structure that you choose. If you move forward with online company registration in India, there are short term and long term modes of raising capital. In companies, the capital is share capital. Hence, before you move ahead with starting your company, you need to know what is authorised share capital. Further, since the company has a separate legal existence from its owners, the capital requirements, etc of the company fall on the basis of its MOA. The memorandum of association of a company provides for the maximum limit of funds that a company can raise. This is the meaning of authorised capital. Through this article, you can get an idea on what is authorised capital of the company and the interrelation of authorised and paid up capital. 

What is authorised share capital?

The capital clause of memorandum of association contains the capital amount that a company is free to raise in its lifetime. It is the authorised capital, nominal capital or the registered capital. During the company registration process, it is mandatory for the business owners to provide the details of authorised share capital of the company. The most important factor of authorised capital is that the company cannot raise more capital than the authorised limit.

What is the purpose of authorised capital?

Legal compliance

The authorised share capital or nominal capital refers to the maximum number of shares a company can issue, as per its Memorandum of Association (MOA). The authorised capital serves the purpose of meeting this legal compliance and helps in incorporation of the company. 

Facilitates future issue of shares

It is on the basis of the authorised share capital that the shareholders and directors can decide to bring investment in for the company. So, it means that by keeping the authorised capital value high, you can easily raise funds in the future. 

Breaks down into other types of shares

The meaning of authorised capital states that it is the maximum limit of stock that a particular company can issue. So, all the other types of shares are only a part of the authorised capital. 

Types of capital in a company

Once you understand the meaning of authorised capital, it is evident that all other types of capital are just a part of it. So, let’s also get a brief idea of the other capital types:

Authorised capital

In simplest terms, it is the maximum amount of capital that company can raise. You need to decide this capital limit while submitting the MOA. With that said, post company incorporation, if you feel the need to increase authorised capital, you can apply for the same on MCA portal. 

Issued capital

Now that you know what is authorised capital, you can understand issued capital. It is the part of the capital that the company issues to the subscribers and shareholders.  Generally, a company does not issue the entire amount of authorised capital at once. In such cases, issued capital will be less than the authorised capital. If a company issues all the shares, the authorised capital and issued capital are the same.

Also Read: Who can be a Shareholder in a Company?

Subscribed capital

The part of issued capital that the shareholders actually buy is the subscribed share capital of a company.  It is not necessary that the shareholders or promoters fully subscribe to the Issued Capital. It is a part of the Issued Capital on which the company receives applications. Hence, it is the capital that the promoters or shareholders subscribe to at the time of incorporation or post incorporation of the company.

Called-up capital 

Called-up capital is a part of the subscribed capital that the company calls up. The company does not call the entire subscribed capital at once. It calls the subscribed capital in instalments as and when needed. For example, if a company issues shares with a face value of Rs. 10, it may call up Rs. 6 first. The amount remaining of the Subscribed Capital is called Uncalled Capital. Thus, called-up capital is the fraction of the face value of shares that the shareholders are supposed to pay. These all types of the capital are still a part of what is authorised capital of the company. None of these amounts can be higher than that. 

 Paid-up capital

A part of called-up capital that the shareholders pay is the Paid-up Capital. It is not necessary that the shareholders pay the entire amount of capital called by the company. Hence, the amount of money that the shareholders actually pay is paid up capital.

Also Read: Minimum paid up capital for private company

Reserve capital

Reserve Capital is a portion of a company’s capital that the company can call only during dissolution. A private limited company may decide, by a special resolution, to call up any part of its share capital during dissolution. This type of capital is the reserve capital.

Example of authorised share capital

In India, the authorised capital of a company is mentioned in its Memorandum of Association. Let’s take an example to understand the meaning of authorised capital in a simple manner. 

Dunder Mifflin Pvt Ltd is a company based in India with an authorised capital of Rs. 10,00,000/- (Ten Lakh). Then, its shareholding structure is divided into 1,00,000 equity shares of Rs. 10 each. Hence, Rs 10 is the face value of the shares. So, Dunder Mifflin Private Limited can only issue up to 1,00,000 shares. 

If any time in the future, the company wants to issue more shares than this, they will have to alter the authorised share capital of the company. This will also lead to an alteration in the Memorandum of Association. Once they complete the process to increase capital, they can raise more than 1,00,000 equity shares.  

Also Read: What is Memorandum of Association?

Can issued capital exceed authorised capital?

No. The issued capital of a company cannot exceed its authorised share capital. The reason behind this being the fact that the issued capital is a part of the authorised share capital. Besides, not forgetting that the authorised capital is the upper limit for capital in a company.  You can read more about it in the blog about raising funds in a private company. 

How do companies increase authorised share capital? 

When a private limited company in India starts scaling operations, it will need additional funds. If you find that the amount of funds you require exceeds your authorised and paid up share capital, you can apply for the process to increase authorised capital. As a part of this process the company needs to amend its MOA and AOA after passing a resolution of the board and submitting the form SH-7 on MCA portal. 

How to calculate authorised capital of a company? 

Typically, it is easy to calculate the authorised share capital of a company by determining the total shares it can issue, and the face value of each share. This can be done easily by following this basic formula for calculating it: 

Authorised Share Capital = Number of Shares * Face Value

So, if we continue the example of Dunder Mifflin Private Limited, the owners could calculate its registered capital as follows: 

Authorised Capital = 1,00,000 equity shares * Rs. 10
Thus, 
Authorised Capital = Rs. 10,00,000/-

How to determine the authorised share capital 

As a newbie in the world of business, making certain mistakes will be a part of your journey. However, LegalWiz.in experts are here to make this journey as smooth as possible for you. So, here are some factors that will help you in determining the Authorized Capital of your company: 

Plan of action

Having a strong plan of action before you start your business shows your dedication towards the growth. Moreover, it will also help in making difficult choices, such as determining the authorized capital. When you know where you want to see your business in a few years, you can plan accordingly. 

Capital adequacy

To run a business successfully, you need to ensure that you have adequate working capital. This capital will be useful in hiring employees, and running the overall business operations with any external hustles. So, while determining the nominal capital, it is ideal that you keep a track of your working and other capital requirements. 

Future fundraising requirements 

Whether you want to onboard investors in your company or like to keep it bootstrapped depends entirely upon you. However, if you are planning to go through fundraising rounds, it will be ideal to keep your authorised capital towards the high end. Which makes it important to understand the meaning of authorised capital.

Increase stakeholder confidence

Information of the authorised capital of a company is available on the MCA portal. So, it’s accessible to all various kinds of stakeholders. Having an appropriate limit to the registered capital of your company will increase the stakeholders confidence. 

Conclusion

It is understandable that the concept of share capital can be confusing, especially for young entrepreneurs. However, once you have an idea on what is private limited company and its authorised capital, it becomes easy to start your business journey. LegalWiz.in experts are at your beck and call to help you understand the business economy!