To incorporate a company in India, the authorised capital must be at least a certain amount. Depending on the number of shares issued to the public or to the promoter’s family, it can vary from company to company.
Authorised Capital: What Is It?
To start a new business, a company needs authorised share capital. An individual or group can raise this money. Investing, operating costs, and other expenditures can then be decided by the company.
Private limited companies are one of three types of companies that can be formed. They have 1-50 shareholders who, under the Companies Act 2013, are not personally liable for any losses. Based on whether the company trades or not, the amount varies.
How Does It Work?
A company’s authorised capital is the amount with which it begins operations. Investors will be able to purchase shares of the company for the initial investment amount.
A proprietor can start a business simultaneously as both shareholder and owner, but this is the only exception. The authorized capital must not exceed 50 lakhs, or the company must register with the RoC and acquire a certificate from the RoC stating they have met all requirements related to the start of the business.
The payment can be made in cash or through a bank draft or check payable on demand, but checks must be cleared before applying for registration.
Authorised Capital: When Should Entrepreneurs Consider It?
India’s private limited companies are among the most popular forms of business. A private limited company must have at least one member and authorised capital.
When forming a company, the authorised capital determines how much money can be raised by issuing shares with different rights. This mechanism aims to give investors some input into a company’s management and its goals. By ensuring that nobody controls too much of the company’s direction, disagreements and power struggles can be avoided over time.
How Do Authorised Capitals Differ?
The nominal value, the number, and the par value of shares are the types of authorised capital. The nominal value of a share is the amount it would cost to purchase it from a company. Shares are the number of shares in a company. Each claim is assigned a monetary value called a par value.
What is the process of raising authorized capital?
Shares can be issued or private placements can be used to raise authorised capital. Shareholders have the power to vote on major decisions when a company issues shares. Dividends are paid to investors when a private placement is used, but they don’t have voting power.
Assume one wants to raise authorised capital through a private placement. If one wishes to raise funds in a particular industry or sector, one must adhere to SEBI (Securities Exchange Board of India) regulations.
When raising funds from equity investors, why should you choose this route instead of share capital or preference shares?
Equity investors most commonly raise funds through share capital and preference shares. Thirdly, authorized capital is becoming increasingly popular. How does this form of financing benefit you?
How risky is it? In terms of company formation, this form of financing has many advantages. Your founders maintain complete control over the company’s decisions since authorised capital doesn’t carry any voting rights (unlike share capital or preference shares).
Furthermore, the board can decide how much money goes into tips and how much goes back into the business, so cash flow can remain positive even in lean times. As a final benefit, registering your company with authorized capital requires less money upfront as compared to other forms of fundraising.
What Is the Best Method for Determining How Much Authorised Capital to Raise?
A company’s authorized capital is the amount of money it can raise from investors and lenders. In addition, the official capital limits the company’s liabilities. Therefore, it can affect the amount of cash you need and the type of debt financing you can obtain. You should not raise too much capital when you are just starting out because this will limit your future funding options.
Alternatively, if your business has been successful or is likely to become profitable soon, raising more authorised capital may give you more options and flexibility when seeking funding.
Would you be able to provide a practical example of how this concept might have been useful to you in your daily life?
I have often found myself needing external funding as a small business owner. I personally believe that being self-reliant is better than being dependent on others.
Finding the right investor can sometimes be difficult, and it can take time. By seeking out private investors willing to buy shares in my company, I might be able to solve this problem.
The amount of shares they will own, the percentage of voting rights, etc., are necessary for me to decide how to proceed.
In the event that you are starting a Private Limited Company in India for the first time or have already done so, the first thing you should do is to check the minimum authorised capital requirements mandated by the Ministry of Corporate Affairs.