Introduction
Throughout the incorporation procedure, the terms "authorized capital" and "paid-up capital" will be used. Such business-related terms will be defined in this article, along with a brief explanation of their significance. Through its inaugural capital, the MoA subscribers have poured long-term investment into the company.
The maximum number of shares that a corporation is permitted to distribute to its shareholders is referred to as authorized capital. These investments do not offer a guaranteed rate of return or cash redemption, but they do give the person who holds them a claim on the company's earnings. The amount of allowed capital is stated in the company's Memorandum of Association (MoA). This restricts the quantity of stock capital the company may issue.
What Does Authorized Capital Mean?
The total amount of money that a corporation can spend without further authorization is known as the permitted capital. The conventional method of calculating it is to multiply the share capital by the total number of shares being issued.
A set of authorized capital permits businesses to prevent directors from issuing themselves additional shares and ultimately gaining control of the business. Controlling the amount left over from profit distribution is one of the authorized capital's additional roles.
Companies typically don't sell the entire amount of allowed shares to the general public. A portion of it is set aside in case the business ever needs to raise financing. Unissued share capital is another name for this.
Amount of Shares Authorized
The maximum amount of capital that the company may issue to its subscribers for share capital is called the "authorized capital" and is defined in Section 2(8) of The Companies Act, 2013. It is mentioned in the Memorandum of Association's Capital Clause. Authorized capitalization is used.
Directors' capacity to issue share capital is restricted by Authorized Capital, which may have an impact on control over the company. It's also employed to stop gains from being turned into stock capital. However, only a portion of the permissible share capital allocated has been issued. A portion of it is set aside as a safety net in case more capital is needed under difficult circumstances. The Authorized Capital Meaning establishes the maximum amount of available capital for the business.
Features of Authorized share capital
Both the Memorandum of Association and the Articles of Association of a corporation predetermine the permissible capital.
The entire number of shares that a corporation can issue to its shareholders is known as the authorized share capital. Additionally, the nominal value of each share is predetermined.
When determining a company's net worth, the permitted capital is not taken into account.
The public may purchase fewer shares from a corporation than the total authorized capital.
After the company's incorporation, it may be modified at any moment.
If a business increases its allowed capital, it will be required to pay increased fees to the Registrar of Companies.
The process to increase authorized share capital
Companies typically elect to raise authorized capital when a large infusion of capital is required to expand the business. Your business can also ask for extra credit from banks and other banks in conjunction with an increase in permitted capital.
Step 1: Examine the articles of incorporation
The allowed capital can be changed by following the instructions in your company's articles of association and memorandum of association. A legal document known as the Articles of Association (AoA) contains information about the company's objectives, internal policies, and rules, among other things. The bylaws, among other things, are included in the Memorandum of Association (MoA).
Every company must include the authorized capital it will require throughout its existence when drafting the Articles of Association. Typically, it has a provision that permits changing the approved capital.
Therefore, the first step in changing the authorized capital is to see if the AoA and MoA permit it. As mentioned before, the Articles of Association must cover any changes to the company's share capital. The company's Articles of Association (AoA) will need to be updated to add a section addressing share capital expansion if the current AoA does not.
You must update the Articles of Association if a clause to adjust authorized capital is missing from the document. By adopting a special resolution, these adjustments must be made as required by section 14 of the Companies Act of 2013.
Step 2: The Board of Directors' approval
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. The board should approve the amended Articles of Association provision regarding authorized capital.
The board must adopt a regular motion to summon an EGM after it has given its approval to the AoA modifications. The directors, shareholders, and auditors of the company must get notice of the EGM's specifics. Please be aware that the notification convening an EGM must be delivered 21 days before the scheduled meeting date. However, if you need to hold the EGM sooner than 21 days, 95% of the shareholders must agree in writing or by email. According to Section 173(3) of the Company Law of 2013, the Board of Directors must convene to increase the authorized share capital as stated in the company's articles of association. This meeting's objective is to request approval from the Board of Directors to raise the authorized share capital.
Step 3: Extraordinary General Meeting
Shareholders must debate the benefits of raising the authorized capital during the EGM before casting a vote. The resolution is approved when at least 50% of the board members vote in favor of raising the authorized capital. You are hereby instructed to vote in support of the EGM notification and the related descriptive statement by Section 102 (1) of the Company Law of 2013.
Conclusion
It takes investment for a new business to get off the ground and start operating. The total sum of money invested by the company's shareholders is known as the share capital. It is the main cap on the amount a business can raise through the selling of stock. The structure of stakeholding inside any organization is strongly related to the idea of permitted share capital. The authorized share capital has several implications for the stakeholding structure inside a company organization. Authorized share capital, on the other hand, differs greatly from issued share capital.
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