What is Authorised Share Capital? Definition, Meaning, and More

Learn about Authorised Share Capital, its definition, importance, and how companies can increase it. Understand the significance of Authorised Share Capital for companies and investors.

Authorized Share Capital refers to the highest amount of capital a company is permitted to raise by issuing shares. This limit is outlined in the company's Memorandum of Association (MOA) and any increase beyond this amount requires approval from the shareholders.

Example

Let's take an Indian company, Tata Motors.

Scenario

  • Tata Motors has an authorised share capital of ₹10,00,00,000.
  • This means Tata Motors can issue shares worth up to ₹10,00,00,000.

Until Tata Motors issues shares up to this amount, they have the flexibility to raise more funds through shares. If they want to issue more shares beyond this limit, they need to get approval from their shareholders and modify their MOA.

Importance of Authorised Share Capital

For the Company

  • Fundraising Flexibility: Provides an upper limit for raising funds through equity.
  • Future Expansion: Allows scope for future capital raising.
  • Credibility: Adds credibility when negotiating with investors and creditors.

For Investors

  • Understanding Limits: Helps in understanding the limits of company’s potential equity financing.
  • Investment Decisions: Influences investor decisions by showcasing the company’s capacity to raise funds.

Increasing Authorised Share Capital

Procedure

  1. Board Meeting: Board of Directors proposes an increase.
  2. Shareholder Approval: Special resolution passed in the general meeting.
  3. Amend MOA: Modify the Memorandum of Association.
  4. Registrar of Companies (RoC): File the necessary forms with the RoC.

Example

If Tata Motors wants to increase its authorised share capital from ₹10,00,00,000 to ₹20,00,00,000, they need to:

  1. Hold a board meeting.
  2. Get shareholder approval.
  3. Amend their MOA.
  4. Submit the required forms to the RoC.

Conclusion

Authorised Share Capital is a foundational aspect of a company's financial structure. It defines the maximum equity capital a company can raise, providing flexibility and scope for growth. Both companies and investors need to understand its significance to make informed financial decisions.

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