Capital Amount: How is it Determined?

Capital Amount: How is it Determined?

During its lifetime, a company can issue a maximum of 20 million shares. Shares of a company are issued with a fixed face value or nominal value when the company is formed. An article of association and a memorandum of association are important documents when a company is incorporated. Memorandums of association specify the authorised capital. If the capital amount clause of the memorandum of association is modified, a company cannot issue shares greater than its authorised capital.

It is important to keep a few things in mind when increasing the authorised capital. 

  • An increase in the authorised share capital should be permitted by the articles of association
  • It may not be possible to increase the authorised capital if the articles of association do not permit it. Articles of incorporation must first be altered by the company
  • An existing shareholder meeting can be announced by the company by distributing notices
  • An article of association may be modified by special resolution passed by shareholders
  • A new shareholders’ meeting will be called after the board of directors passes a resolution to change the capital clause in the memorandum of association.
  • An amendment to the memorandum of association requires the final approval of shareholders
  • The company must submit details, along with the prescribed fees, to the registrar after receiving shareholder approval

Amounts of Authorised Capital Are Used for What Purposes?

It is a kind of limit on the amount of shares a company can issue. In accordance with the memorandum of association, shares can only be issued up to the authorised capital amount.

The benefits of Authorised Capital are twofold. In the first place, companies rarely utilize their entire authorized capital, so in the future, if they need funding for new projects, they can raise it from the market instead of taking loans and finance.

In addition, existing shareholders’ power will be diluted. The shareholders of a company, for example, control the company and make important decisions. Let’s say that new shares were issued, resulting in 1500 shareholders. 1500 shareholders take over the decision-making and control of the old 1000 shareholders.

Amount of Authorised Capital: Who Decides?

A memorandum of understanding is signed by the first subscribers of the company. At the time of incorporation, these people determine the amount of authorised capital. A minimum of 1 lakh should be the authorised capital. Putting a maximum on something is not possible. Following the incorporation and issue of shares, a general meeting of shareholders decides any changes or modifications to the authorised capital.   As a result, the amount of authorised capital is determined by the subscribers to the memorandum and the shareholders.

Getting a Better Understanding of Authorised Capital: Paid-Up Share Capital

A company’s capital might be referred to by a variety of names, such as subscribed capital, issued capital, or authorised capital. Most people mistakenly use them interchangeably because they are related to each other. To better understand Authorised Capital, let’s examine their meaning.

Subscribed Capital: What Is It?

In an IPO, the public files share applications to purchase a company’s shares. Subscribed capital refers to the total number of shares applied for by the public.

Issued Capital: What Is It?

A company offers a portion of its authorized capital for public subscription. Share capital is provided by companies.

Paid-up Capital: What Is It?

An amount received by the company for a portion of its share capital. A company’s shareholders invest in it.

A company’s paid-up share capital is created when shareholders purchase shares in an initial public offering to raise funds.

Do not confuse shares traded on stock exchanges or the stock market with shares that are traded on stock exchanges. A shareholder sells shares in these markets to another shareholder and they are secondary markets. As a result of secondary market sales, the company does not receive any money.

A simple example of authorised share capital.

Consider a company ABC with an authorised capital of 2 lakhs shares and a nominal value of Rs 10 on each share. The total authorised capital of ABC is 2 lakhs x 10, which is 20 lakhs. In its initial public offering, the company offered 1 lakh shares to the public. All 1 lakh shares were bought by the public. Using ABC as an example, the maximum authorised capital is 20 lakhs. Paid-up share capital is 1 lakh times 10, which is 10 lakhs received from the public.

The capital clause in the memorandum of XYZ Ltd states that the company has 3 lakhs shares of Rs. 5 each. A total of 4 lakh shares will be issued by the company now. Is it possible for the company to issue shares in excess of its authorised capital?  It can’t issue 4 lakh shares unless it increases its authorised capital.

A comparison of paid-up and authorized capital 

  • A company’s authorised capital is its total number of shares, which includes paid-up shares. A large circle represents official capital, whereas a small circle represents paid-up capital
  • There will always be a difference between the paid-up capital and the authorised capital. There is a fixed limit on how many shares a company can issue
  • The Companies Act 2013 specifies the procedure for increasing the authorised capital for a company. The company must simply issue new shares when it issues paid-up capital
  • An authorised capital requirement of 1 lakh is currently in place. Previously, there was a minimum share capital requirement, however, the requirement has been removed as a result of recent amendments.


Leave a Reply

Your email address will not be published. Required fields are marked *