Authorized Capital

The Articles of Association and Memorandum of Association serve as essential legal documents that outline the internal structure and regulations of a company. Among the various provisions within these documents, the authorized capital holds significant importance. Authorized capital refers to the maximum amount of capital a company can raise through the issuance of equity and preference shares.

Defining Authorized Capital

Authorized capital, also known as registered capital or nominal capital, represents the maximum value of shares that a company can issue to shareholders. It is specified in the company’s Articles of Association or Memorandum of Association and acts as a legal limit for raising funds through share issuance. The authorized capital is typically expressed as a monetary value or a fixed number of shares.

The Role of Articles of Association and Memorandum of Association

The Articles of Association and Memorandum of Association collectively form the constitution of a company. These documents outline the company’s objectives, rules, regulations, and internal governance. The authorized capital is mentioned in either or both of these documents, providing a clear framework for the company’s share capital structure.

Importance of Authorized Capital

• Fundraising Flexibility: By defining the authorized capital, a company establishes the maximum amount it can raise from issuing shares. This empowers the company to plan and execute its capital raising strategies effectively. It allows the company to adapt to changing financial requirements and seek additional funds when necessary.
• Investor Confidence: The authorized capital reflects the company’s potential for growth and expansion. Potential investors often evaluate the authorized capital to assess the company’s capacity to generate future capital. A higher authorized capital may attract more investors, signaling the company’s ability to accommodate future investments.
• Legal Compliance: Specifying the authorized capital in the Articles of Association or Memorandum of Association ensures compliance with legal requirements. It enables the company to operate within the boundaries set by corporate law and maintain transparency in its financial operations.

Modifying Authorized Capital

Companies may seek to modify their authorized capital due to various reasons, such as expansion plans, mergers, or restructuring. The process of altering authorized capital typically involves obtaining shareholder approval, amending the Articles of Association, and complying with legal formalities.