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Understanding Authorized Capital for a Private Limited Company

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Authorized Capital for a Private Limited Company

The maximum share capital for which shares may be issued by a firm is known as authorized capital. In the company’s memorandum of association, the initial permitted capital is often stated as Rs. 1 lakh. With the consent of the shareholders and by paying an additional charge to the Registrar of Companies, the business may at any moment increase its capital.

As an example, if ABC Private Limited Corporation has an authorized capital of Rs. 10 lakhs, it means that it is permitted to issue shares to its investors for up to Rs. 10 lakhs. ABC Private Limited Company is unable to issue its investors’ shares valued at Rs. 11 lakhs. But, since the firm hasn’t issued more shares than its authorized capital, it can still only issue investor shares for Rs. 5 lakhs.

Points to remember

  • The company’s “issued share capital” refers to the capital that is permitted to be issued.
  • The shareholder’s approval is required for any changes to the authorized capital.

The corporation typically does not utilize all of its permitted capital. This is done to leave some flexibility for the potential future issuance of more stock in an emergency.

Purpose of an Authorized Capital

It is used to restrict the power of directors to distribute new shares, which could have an impact on the company’s ability to govern its direction. Also, it serves to maintain the balance of profit distribution. A small portion of the authorized capital is frequently not utilized in its entirety and is instead maintained as a safety net in case more funding is ever required.

Salient features of an Authorized Capital

The following is a quick discussion of some of the characteristics of an authorized share capital that can be recognized and set it apart from other share capitals:

· Provide trust and reliability

Companies frequently list themselves on the stock market to gain the public’s trust so they can raise money by selling shares. It is the most dependable and trustworthy method of obtaining outside funding for the business.

· It remains with the company

The share capital stays with the company up until liquidation, where it can be put to better use.

· Shareholders get rights

One also acquires the authority to choose the company’s management when they purchase shares from a certain corporation.

· Dividend payout

The most advantageous aspect of shares is that they provide investors with a portion of the company’s earnings in the form of dividends. The shareholder’s investment determines the dividend amount.

Different Types of Capitals

The following provides a quick discussion of the various capitals (apart from an authorized capital):

· Issued Capital

The number of shares given to shareholders is known as the “issued capital,” and it has a straightforward restriction: the issued capital cannot exceed the authorized capital.

· Subscribed Capital

The sum that the public has subscribed for when a company issues capital is referred to as “subscribed capital.” So if you try to understand with an example, it will be like if a company issues 1000 shares at each ₹10 face value and the subscribed share is only 500, then the total subscribed capital will be 500*10 equals to ₹5000.

· Called up Capital

It is called up capital when a shareholder owns a certain percentage of a company’s share capital but only pays the portion that has been called up by the business.

· Paid-up Capital

It is the price a shareholder pays to purchase a share of a specific business.

· Uncalled Capital

The balance of the total capital that has not been called by the business to pay the shareholders is known as “uncalled capital.”

· Reserve Capital

It is the amount of capital a business has on hand while it hasn’t yet been liquidated.

Advantages 

A few advantages are briefly discussed below.

  • No burden of monthly payments

Capital companies can raise money anytime they need to with the use of shares without worrying about interest or additional costs. However, they must make installment payments for loans. The extra earnings can then be paid out as dividends to shareholders if that is what they choose to do.

  • They get more freedom to use their capital

Companies that raise capital through stock have complete discretion over how to use the money. Even promoters can occasionally leave the company by raising shares. Nonetheless, the majority of businesses use these funds for expansion and future endeavors.

  • Fundraising has no set rules

A corporation is free to decide when and how many shares it wants to issue, as well as how much money it wants to raise. Only the portion of the available funds that the company actually needs can be drawn.

  • Lower risk

Compared to borrowing money, raising money with shares carries an extremely low risk. A shareholder cannot force a bank into bankruptcy, unlike banks. However, in the case of loans, the business may declare bankruptcy if it is unable to pay back its debts.

Disadvantages

However, every policy has both benefits and drawbacks, some of which are as follows:

  • Ownership reduces

The fact that they lost a piece of ownership is one of the key reasons why many businesses do not want to issue share capital. This is due to the fact that each share has some value to the company; if one person owns a majority of the shares, they may even be able to depose the owner from office.

  • Shareholders expect higher returns

Since the rate of return is not fixed, shareholders constantly want a higher rate of return from the business. Also, as shares are a risky investment, investors strive to get as much as possible.

  • It is not cost-efficient

It is challenging to raise money by selling stock shares. There are several steps and expenses involved. Sometimes businesses need to wait months before getting the go-ahead to start their initial public offering (IPO).

  • There is no tax exemption

After deducting taxes, the corporation pays dividends to shareholders. Nonetheless, businesses that have paid their loan installments can receive a small tax exception in the case of loans.

Authorized capital differs from paid-up capital

Authorized capital and paid-up capital are two of the most significant share capital among the several share capital categories.

The following table summarizes the key distinctions between authorized capital and paid-up capital:

Authorized Capital Paid-up Capital
Authorized capital is the maximum number of shares that a corporation may issue to its shareholders. Paid-up capital is the whole cost of the shares that were issued to the general public.
A firm can increase its authorized capital by getting board’s permission. Authorized capital includes paid-up capital. It can therefore only be raised if the authorized capital is raised.
When determining a company’s net worth, the authorized capital is not taken into account. The paid-up capital is taken into account when determining a company’s net worth.
Never can the authorized capital exceed the paid-up capital. A business may raise as much paid-up capital as is authorized.

 

Calculation of Authorized Capital

Share Capital Formula

There are numerous formulas you can take into consideration to determine the share capital formula. Remember that the par value is the lowest cost a shareholder must pay to acquire one share of the corporation. Moreover, paid-in capital is excess over par value. You get more paid-in capital when you subtract the issue price from par value.

  • Formula 1: Share capital is calculated by multiplying the number of outstanding shares by the issue price per share.
  • Formula 2: Share capital is calculated by multiplying the number of shares by the stock’s par value plus the paid-in capital over par value.

Let’s say, for illustration purposes, that a business issues 100,000 shares at $10 each. The par value of each share is $1. Because you multiply 100,000 shares by $10, the total capital is $1 million. Because you multiply $1 by 100,000 shares, the total par value is $100,000. The difference between $10 and $1 is the increased paid-in capital per share, which is $9. The new paid-in capital is $9 multiplied by 100,000 shares, or $900,000.

Imagine a firm, however, that has a $1 million authorized share capital, divided into a million common shares with a $1 par value. Yet, only 100,000 of the company’s shares are actually issued, leaving 900,000 in the company’s treasury that can be issued in the future. When you consider the business phases, it makes sense, even though the corporation is giving up $900,000 in cash.

Minimum and Maximum Authorized Capital for a Private Limited Company

Simply put, a private limited company’s minimum or maximum authorized capital under the 2013 Companies Act is Rs. 20 lakhs, and they can issue shares without requesting an increase in authorized share capital. The private corporation may have up to 50 lakhs in the capital.

Minimum Capital Requirement

Before, the Companies Act of 2013 required a private limited company to be incorporated with at least INR 100,000 in the capital. The 2015 amending act, however, eliminated the clause.

Let’s use the company XYZ private limited as an example. Its authorized capital is Rs. 5 lakh. This would indicate that this business can grant shareholders shares worth up to Rs. 5 lakhs. The corporation may opt to issue fewer shares than its authorized capital, such as 3 lakhs, but it may not issue more shares than the threshold amount of 5 lakhs.

A Private Limited Company’s Paid-up Capital

On the other hand, paid-up capital refers to the actual sum of money that the business acquires through the issuance of shares to shareholders. As the corporation cannot issue shares over the allowed capital, the paid-up capital is always less than the authorized capital. The paid-up capital thus acquired is frequently used to control the company’s expenses.

When it came to a private limited company’s minimum paid-up capital, there used to be a requirement that it have a capital of $100,000. This would mean that the shareholders should spend at least $100,000 to buy the shares in order to start the firm. The Companies Amendment Act, of 2015, however, eliminated this requirement, making it possible for business owners to incorporate private limited companies without any obstacles.

Prior to the amendment, it was mandatory to deposit the stipulated ₹100,000 in the company’s bank account. Now that the provision is repealed, it’s merely enough to state the paid capital on the papers.

As a result of this provision, many businesses have begun to favor private limited corporations over other corporate forms like limited liability partnership (LLP) enterprises because acquiring financing in the latter is extremely difficult. Due to its limited liability, favorable tax treatment, and high level of client credibility, a private limited company has traditionally been preferred. The mandate to eliminate the minimum capital requirement has undoubtedly broadened the scope of private limited companies and given them a little advantage over other corporate organizations.

Process of Altering Authorized Capital

The company’s board of directors must approve any adjustments to the authorized capital. To call a meeting, you must notify every board member in writing. The meeting must be announced seven days in advance, and the notification must include the agenda’s specifics.

How to Alter the Authorized Share Capital of a Company?

Verify Articles of Association of the Company

Before starting the processes for doing so, it is crucial to review the Articles of Association (AOA) to make sure that there is a clause linked to the increase of the authorized share capital in the Articles of Association. If there is no such provision, the company must first modify its AOA.

Note: The majority of AOAs have language allowing for an increase in the company’s authorized share capital.

Convene a Board Meeting

A board meeting must be convened, and notice to the director must be given, in order to increase the company’s authorized share capital. The Board of Directors shall, at the meeting, give its approval to the increase in the authorized share capital.

After going through the entire process, a date should be set for an extraordinary general meeting to be held in order to get shareholder approval for raising the authorized share capital and amending the company’s memorandum of association.

Once the Board of Directors has given its blessing, the company secretary can finally notify the shareholders of the next extraordinary general meeting. The notice of the extraordinary general meeting should be distributed to all of the company’s shareholders, directors, and auditors based on approval.

Extraordinary General Meeting

Hold the extraordinary general meeting and get the approval of the shareholders to increase the authorized share capital at the time, place, and on date mentioned in the notification.

An ordinary resolution must be passed by the shareholders in order for the permitted capital to be increased.

File Form SH7

Following the passage of the ordinary resolution at the extraordinary general meeting, the corporation has 30 days to file Form SH7. The required paperwork is mentioned below. The required government fee for the allowed capital must also be included.

  1. The notice for the special general meeting
  2. An authorized true copy of the ordinary resolution
  3. The changed memorandum of association (which depicts the higher authorized capital)

The registrar would approve the filing and enhance the authorized share capital of the business if the procedure outlined in the Companies Act and the Companies Regulations was followed. The MCA portal will show the updated authorized share capital.

Distribution of Shares

The paid-up share capital of the firm may also be increased by issuing additional equity shares after the permitted share capital has been raised.

Conclusion

Entrepreneurs who want to launch a new business should understand the distinction between authorized capital and paid-up capital. To incorporate a business and raise capital, it is essential to understand these distinctions. The following is a summary of the distinctive characteristics of an authorized capital:

  • A company’s articles of association and memorandum of association both specify the permissible capital in advance.
  • The entire number of shares that a corporation may offer its shareholders is known as the authorized share capital. Also, the nominal value of each share is predetermined.
  • When determining a company’s net worth, authorized capital is not taken into account.
  • A corporation is free to issue fewer public shares than the total authorized capital.
  • It may be altered at any moment following the company’s establishment.
  • If a company raises the authorized capital, it will be required to pay increased fees to the Registrar of Companies.

 

So, it is evident that the funds raised by selling investor shares are the authorized capital. The investor gains ownership of a portion of the corporation after purchasing shares. Many businesses issue shares because they have some extremely strong benefits, but some choose not to do so due to some drawbacks. The decision to raise money or not rests with the company and its board of directors.

Hence, in today’s international business environment, having a fundamental understanding of the word “authorized capital” is crucial, particularly for someone who is ready to float their own private limited company.

We really hope that all interested readers who want to start their own private limited companies in the near future will find the main points stressed in this blog regarding the significance of an approved capital structure helpful.

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FAQ  on Authorized Capital for a Private Limited Company

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