Authorized capital

3 Key Takeaways

• Authorized capital is the maximum amount of share capital a company can issue.
• It is typically specified in the company’s Articles of Association or Memorandum of Association.
• Authorized capital can be increased or decreased with shareholder approval.

What is Authorized Capital?

Authorized capital represents the total value of shares that a company is allowed to issue to raise funds from investors. It is the maximum amount of equity financing a company can obtain by selling shares of its stock. Authorized capital is often divided into different classes of shares, such as common stock and preferred stock, each with specific rights and privileges.

Importance of Authorized Capital

• Fundraising: Authorized capital sets the limit for how much equity financing a company can raise through share issuance.
• Flexibility: It provides companies with flexibility in raising capital, allowing them to issue shares as needed to fund growth and operations.
• Investor Confidence: A company with sufficient authorized capital can signal its financial stability and potential for growth to investors.
• Regulatory Compliance: Authorized capital is a legal requirement for companies and is subject to regulatory oversight.

How Authorized Capital Works

1. Establishment: The authorized capital of a company is typically specified in its Articles of Association or Memorandum of Association, which are legal documents that define the company’s structure and operations.
2. Share Issuance: Companies can issue shares up to the limit of their authorized capital to raise funds from investors.
3. Increase or Decrease: The authorized capital can be increased or decreased through shareholder approval and by following the necessary legal procedures.
4. Unissued Capital: The portion of authorized capital that has not been issued is known as unissued capital, which can be used for future share issuances.

Real-World Applications

Authorized capital is a crucial concept for companies seeking to raise equity financing. It provides them with a framework for issuing shares and raising capital from investors, while also ensuring compliance with legal and regulatory requirements. When a company wants to increase its authorized capital, it typically needs to obtain shareholder approval through a special resolution. This process allows shareholders to have a say in the company’s fundraising activities and ensure that their interests are protected.