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Understanding Authorized Share Capital: A Key Element in Company Formation
- Authorized share capital
- Share capital
- Company formation
- Memorandum of Association (MOA)
- Company registration
- Increase authorized share capital
Types of Share Capital
1
Authorized Share Capital
The total maximum share capital a company is allowed to raise. This amount is mentioned in the company's MOA (Memorandum of Association) and can be increased or decreased through a special resolution.
2
Issued Share Capital
This is the portion of the authorized capital that the company has actually issued to the shareholders. It may be less than the authorized capital but cannot exceed it.
3
Paid-Up Capital
This refers to the amount of money that shareholders have actually paid for the shares they own. It is part of the issued share capital, representing the value paid by the shareholders.
4
Unpaid Capital
This is the portion of the issued share capital for which shareholders have committed but have not yet paid.
Understanding Authorized Share Capital: A Key Element in Company Formation
When starting a company in India, one of the critical decisions you’ll need to make is determining the authorized share capital. It refers to the maximum amount of capital that a company can raise through the issuance of shares to its shareholders. Authorized share capital sets the framework for the company's financial structure and plays a vital role in its growth, expansion, and overall corporate governance.
How to Increase Authorized Share Capital?
- Board Resolution: The company’s board of directors must approve the proposal to increase the authorized share capital.
- Shareholder Approval: A special resolution must be passed in a general meeting to approve the increase in authorized capital.
- Amend the Memorandum of Association (MOA): After the special resolution is passed, the MOA needs to be amended to reflect the new authorized share capital.
- File with Registrar: Once the amendment is done, it must be filed with the Registrar of Companies (ROC) to make the increase in authorized share capital official.
Why is Authorized Share Capital Important?
Defines Company’s Financial Structure
The authorized share capital helps define the structure of the company’s equity and impacts decisions related to issuing new shares in the future.
Impact on Fundraising
Companies with higher authorized share capital may find it easier to raise funds through additional shares, making it an essential factor for startups looking for capital.
Legal Requirement
The Companies Act, 2013 mandates that every company must specify its authorized share capital. This is a requirement for registering the company, and any changes in the capital structure need to be approved by the board and shareholders.
Shareholder Equity
Authorized share capital determines the ownership distribution of the company. The more shares issued, the more equity is distributed among shareholders.
Affects Company Valuation
The share capital structure can influence the company’s perceived value in the market. Investors often assess the capital structure to gauge potential growth and risk.
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