For private limited companies, Authorised capital is an important concept to consider when planning to raise further capital. It sets a limit on the maximum amount of share capital a company can raise through the issuance of shares. This provides flexibility to the company to issue further shares in the future to raise capital without having to amend the company's MOA.
Setting the Authorised Capital
When a private limited company is registered, the founders must state the amount of Authorised capital in the company's Memorandum of Association. The authorised capital is also known as nominal capital or registered capital. This sets an maximum limit on how many shares can be issued. For example, if the Authorised capital is Rs. 10 lakhs, the company can issue a maximum of 10 lakh shares of ₹10 each.
It is important to set the Authorised capital high enough to allow for future growth and expansion of the company. Typically, companies set Authorised capital between 5-10 times the amount of initial paid-up capital. So if the paid-up capital is Rs. 2 lakhs, the Authorised capital may be set at Rs. 10-20 lakhs.
Issuing Shares
The company can issue shares in tranches over time up to the amount of Authorised capital to raise funds as needed for growth. Only the issued and paid-up capital represents the amount actually contributed by shareholders. company’s issued capital cannot exceed the authorized capital.
Increasing Authorised Capital
The Companies Act, 2013 allows companies to increase their authorised capital, the maximum limit for raising funds through issuing shares. This process requires shareholder approval through an ordinary resolution at an extraordinary general meeting. Companies typically resort to this when anticipating future funding needs exceeding the current limit. Following approval, the company must file the e-Form SH-7 with the Registrar of Companies (ROC) within 30 days of passing of resolution in the EGM to reflect the increased limit.
Reducing Authorised Capital
The Authorised capital cannot be reduced without a court order. This protects shareholders and creditors from potential impacts if the capital is reduced arbitrarily.
Compliance Requirements
Companies must clearly distinguish between Authorised, issued and paid-up capital in their financial statements and annual returns. There are no tax implications for Authorised capital. But stamp duty is payable when Authorised capital is increased through alteration .
Determining the Right Amount
Setting adequate Authorised capital provides flexibility for meeting future capital needs of your company. Consult with professionals like chartered accountants and company secretary to determine the appropriate amount at the time of incorporation. Periodic review and increase of Authorised capital also enables growth at key phases of your company's lifecycle.
As your trusted advisors, the expert team at JJ Tax can help you
determine the right Authorised capital for your company. We assist at company incorporation by advising
on capital requirements for your business plan. We also provide ongoing support with issuance of shares,
increasing Authorised capital, and ensuring compliance in financial statements and filings.
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