Compliances for Change in Authorised Capital of a Company

Updated on September 04, 2023 06:10:52 AM

In today's dynamic and ever-changing business landscape, companies must possess the flexibility to adapt and grow in order to meet new challenges and capitalize on emerging opportunities. One crucial aspect of this adaptability is the ability to change the authorised capital of a company.

Authorised capital, also known as registered capital or nominal capital, represents the maximum amount of capital that a company is permitted to issue to its shareholders. In this post, we will delve into the compliances of changing the authorised capital of a company and explore the necessary steps involved in this process.

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What is Authorised Capital of Company?

Authorised capital, also known as registered capital or nominal capital, is the maximum amount of capital that a company can issue to its shareholders. It is a statutory requirement and is defined in the company's memorandum of association. The authorised capital establishes the financial capacity of the company and determines its potential for expansion, acquisitions, and raising funds.

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Reasons for Changing Authorised Capital

a) Expansion: As a company experiences growth and aims to seize new opportunities, it may require additional capital to support its expansion plans. Whether it involves entering new markets, developing innovative products or services, or investing in infrastructure, expanding the authorised capital allows the company to access a larger pool of funds.

b) Fundraising: Increasing the authorised capital provides a company with the flexibility to raise funds by issuing new shares or attracting new investors. When a company needs to raise capital for various purposes such as funding new projects, expanding operations, or strengthening its financial position, altering the authorised capital becomes a viable option. funds while ensuring a wider participation of investors and potentially increasing its market value.

2. Impact on Shareholders and Stakeholders:

Changing authorised capital can have implications for both shareholders and stakeholders associated with the company. It is important to consider and communicate these potential impacts transparently:

a) Shareholders' Rights and Ownership: Altering the authorised capital can affect shareholders' rights and ownership percentages. Depending on the specific circumstances, increasing authorised capital may result in the issuance of new shares, which could potentially dilute the ownership stake of existing shareholders. Shareholders have a vested interest in understanding how the change in authorised capital may affect their ownership rights, voting power, and potential earnings per share.

b) Stakeholder Trust and Perception:Changes in authorised capital can influence stakeholder perception and trust in the company. Stakeholders such as employees, customers, suppliers, and the broader community may be impacted indirectly by the alteration. Transparency and effective communication are essential to maintain trust and minimize any negative perceptions. Companies should clearly communicate the reasons behind changing authorised capital, the potential benefits it brings, and how it aligns with the company's long-term objectives.

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Procedure To Change Authorised Capital

The process of changing authorised capital typically involves the following steps:

Step 1: Board Resolution

The first step is for the board of directors to pass a resolution recommending the alteration of the authorised capital. The board resolution should outline the reasons for the change and propose the new authorised capital amount. This resolution serves as a formal decision by the board, indicating their support for the alteration.

Step 2: Shareholders' Approval

Once the board resolution is passed, it must be presented to the shareholders for approval. The specific requirements for shareholder approval may vary depending on the jurisdiction and the company's articles of association. In some cases, a simple majority of shareholders may be sufficient, while in others, a special resolution requiring a higher threshold of approval may be necessary. It is crucial to follow the legal and regulatory requirements regarding shareholder meetings, voting procedures, and notice periods.

Step 3: Filing Documentation

After obtaining the approval of the shareholders, the next step is to prepare and file the necessary documentation with the relevant regulatory authorities. This typically includes the alteration of the memorandum of association, which is a legal document that governs the company's structure and operations. The required documentation may vary depending on the jurisdiction and specific legal requirements. It is essential to carefully review the regulations and consult with legal professionals to ensure that all necessary forms, applications, and supporting documents are accurately prepared.

Step 4: Regulatory Compliance

Compliance with legal and regulatory requirements is critical throughout the process of changing authorised capital. It is important to understand and adhere to the specific timelines, filing fees, and any other obligations set by the regulatory authorities. Failure to comply with these requirements may lead to delays, penalties, or even the rejection of the alteration. Companies should ensure that all necessary fees are paid, forms are properly filled out, and documentation is submitted within the prescribed timelines.

Step 5: Certificate of Registration

Upon successful review of the submitted documents, the regulatory authority will issue a Certificate of Registration, confirming the change in authorised capital. This certificate serves as an official acknowledgment that the alteration has been registered and approved by the authorities. It is an important document that should be kept as part of the company's legal records.

By following these steps, companies can navigate the process of changing authorised capital in a compliant and legally sound manner. It is crucial to seek professional advice from legal experts and ensure adherence to local laws, regulations, and procedures specific to the jurisdiction where the company is incorporated. Taking a meticulous approach and ensuring accuracy in the required documentation will help facilitate a smooth and successful alteration of the authorised capital.

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Conclusion

The ability to change authorised capital is a vital mechanism that enables companies to adapt and grow according to evolving business requirements. By understanding the process involved, companies can effectively manage their capital structure, comply with legal obligations, and seize opportunities for expansion and fundraising.

It is advisable to seek professional advice and ensure compliance with local laws and regulations when embarking on the journey of altering the authorised capital of a company.

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Frequently Asked Questions

What is authorised capital?

Authorised capital refers to the maximum amount of capital that a company is legally permitted to issue to its shareholders. It is defined in the company's memorandum of association and establishes the financial capacity and potential for expansion of the company.

Why would a company need to change its authorised capital?

Companies may need to change their authorised capital for various reasons, including expansion plans, fundraising requirements, compliance with regulatory changes, or adjustments due to mergers, acquisitions, or restructurings.

What is the process for changing authorised capital?

The process typically involves steps such as passing a board resolution, obtaining shareholders' approval, preparing and filing necessary documentation with regulatory authorities, ensuring regulatory compliance, and obtaining a Certificate of Registration confirming the change.

Can authorised capital be decreased?

Yes, authorised capital can be decreased through a similar process as increasing it. The company must follow the necessary steps, including obtaining board and shareholder approval and filing the required documentation with the regulatory authorities.

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