Companies Act Section 2(8) Authorised Capital

Understanding Authorized Capital in Companies Act, 2013

Authorized Capital (Section 2(8))

Authorized capital, also known as registered capital or nominal capital, refers to the maximum amount of share capital that a company is authorized by its Memorandum of Association (MoA) to issue to shareholders. It represents the upper limit of capital that a company can raise through the issuance of shares.

Key Features and Components:

1. Limitation: 

The authorized capital sets the ceiling on the amount of capital that a company can issue. 

It does not necessarily represent the amount of capital that has been subscribed (i.e., actually issued to shareholders).

2. Flexibility: 

Companies often start with a modest authorized capital, which can be increased over time through a process of alteration of the MoA, subject to approval by shareholders and filing with the Registrar of Companies (RoC).

3. Types of Shares: 

The authorized capital may be divided into different classes of shares, such as equity shares and preference shares, each with its own rights and privileges as defined in the MoA.

4. Issuance: 

Companies issue shares from the authorized capital based on their funding requirements, market conditions, and strategic objectives. 

The actual issuance of shares (subscription) cannot exceed the authorized capital without amending the MoA.

Process of Alteration:

Special Resolution: Any increase or alteration in the authorized capital requires approval by shareholders through a special resolution passed at a general meeting of the company.

Approval by RoC: After passing the resolution, the company must file the resolution and amended MoA with the RoC for registration. 

The increase in authorized capital becomes effective upon registration by the RoC.

Importance:

Capital Flexibility: Authorized capital provides flexibility for companies to raise funds in the future without needing to amend their MoA each time they issue new shares, once the increase is approved.

Investor Confidence: It provides clarity to investors and creditors about the potential size and scope of the company’s operations and its ability to raise additional capital if needed.