Understanding Authorised Capital in Simple Terms

by TeamFinodha | Jun 13, 2023 | FinTech Articles | 0 comments

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Important Keywords: Authorised capital, Registered capital, Nominal capital, Share capital, Control over the company, Profit distribution balance, Share issuance, Memorandum of Understanding (MOU), Constitutional documents, Paid-up capital, Altering authorised capital, Registrar of Companies (ROC).

Headings:

What is Authorised Capital?
Purpose of Authorised Capital
Difference Between Authorised and Paid-Up Capital

Sub-headings:

1.1 Definition and Significance of Authorised Capital
2.1 Limiting Share Issuance and Protecting Control
2.2 Safeguarding Profit Distribution Balance
3.1 Understanding Authorised Capital vs. Paid-Up Capital
3.2 Altering Authorised Capital and Providing Information to ROC

Short Paragraphs:

What is Authorised Capital?
Authorised Capital, also known as registered capital or nominal capital, refers to the maximum amount of share capital that a company is permitted to issue to its shareholders according to its constitutional documents. It serves as a limit on the directors’ authority to allocate new shares and helps maintain control over the company. Shares represent units of the overall capital and are used for raising funds from the public.
Purpose of Authorised Capital:
The primary purpose of authorised capital is twofold. Firstly, it restricts the directors’ ability to issue new shares, preventing any significant changes in the control and ownership structure of the company. Secondly, it helps maintain the balance of profit distribution. In practice, companies often keep a portion of the authorised capital unissued to have room for future fundraising if needed.
Difference Between Authorised and Paid-Up Capital:
3.1 Authorised Capital:
Authorised capital represents the maximum amount of capital for which shares can be issued by a company. This amount is specified in the company’s Memorandum of Understanding (MOU) or constitutional documents. Any alteration to the authorised capital requires a legal procedure, including shareholder approval and payment of additional fees to the Registrar of Companies (ROC).
3.2 Paid-Up Capital:
Paid-up capital, on the other hand, refers to the actual amount of money for which shares have been issued by the company and paid by its shareholders. The paid-up capital can be less than or equal to the authorised capital. Any changes to the authorised capital must be reported to the ROC.

Example:

For instance, ABC Pvt. Ltd. has an authorised capital of Rs. 10 lakhs. However, the company has only issued shares worth Rs. 5 lakhs to its shareholders, leaving room to raise additional capital in the future without increasing the authorised capital. This strategy allows the company to maintain control and flexibility in its capital structure.

Key Takeaways:

Authorised capital is the maximum amount of share capital that a company can issue.
Its purpose is to limit share issuance, protecting control and profit distribution balance.
Authorised capital is mentioned in the company’s constitutional documents.
Paid-up capital represents the amount of money paid by shareholders for the issued shares.
Alterations to authorised capital require legal procedures and approval from shareholders.
Authorised capital provides flexibility for future fundraising without increasing the limit.

Conclusion:

Authorised capital plays a crucial role in determining the maximum amount of share capital that a company can issue. By limiting share issuance and safeguarding control and profit distribution, authorised capital helps maintain stability and balance within the company. Understanding the difference between authorised and paid-up capital is essential for businesses and shareholders to navigate the complexities of capital structure and ensure compliance with legal requirements.