Increase In Authorised Capital | Pros and Cons
As a business owner, you’re always looking for ways to grow and expand your company. One way to do this is by increasing your authorized capital. This refers to the maximum amount of money that your company is allowed to raise by issuing shares. While increasing your authorized capital can provide many benefits, it also comes with its fair share of drawbacks by Increase in Authorised capital.
In this article, we’ll explore the pros and cons of increasing your company’s authorized capital, so you can make an informed decision about whether or not it’s the right move for your business. From attracting investors to diluting ownership, we’ll cover everything you need to know to make the best decision for your company’s future. So, let’s dive in and see what increasing your authorized capital could mean for your business.
Understanding Authorized Capital
Authorized capital is the maximum amount of money that a company is allowed to raise by issuing shares. This is usually set out in the company’s articles of association. Authorized capital is divided into shares, and each share represents a unit of ownership in the company. When a company issues shares, it is basically selling a portion of the company to investors. The money raised from the sale of shares can be used to fund the company’s growth and expansion.
Authorized capital is different from issued capital, which is the actual amount of capital that has been raised by the company through the sale of shares. The difference between authorized capital and issued capital is known as unissued capital. Companies can issue shares up to the amount of their authorized capital, but they cannot issue shares beyond that limit without increasing their authorized capital.
Why Companies Need to Increase Their Authorized Capital
Businesses may need to increase their authorized capital for various reasons. One reason is to raise more funds for expansion. As a company grows, it may require more capital to finance its operations, and increasing its authorized capital can provide a way to raise the necessary funds. Another reason is to attract investors. Increasing authorized capital can make a company more attractive to investors because it shows that the company has room to grow and expand.
Increasing authorized capital can also provide a company with more flexibility in its operations. For example, a company with a higher authorized capital can issue more shares, which can be used for acquisitions or mergers. It can also be used to attract talent by offering stock options to employees.
Pros of Increasing Authorized Capital
There are several benefits to increasing a company’s authorized capital. Firstly, it provides the company with more flexibility to raise funds. By increasing authorized capital, a company can issue more shares and raise more funds to finance its operations and growth. This can help the company to achieve its business objectives and expand into new markets.
Secondly, increasing authorized capital can make a company more attractive to investors. Investors are always looking for companies that have the potential to grow and provide a good return on their investment. By increasing its authorized capital, a company can show investors that it has room to grow and expand, which can make it more attractive to potential investors.
Lastly, increasing authorized capital can provide a company with more options for financing. For example, a company with a higher authorized capital can issue convertible bonds, which can be converted into shares at a later date. This can provide the company with a way to raise funds without diluting its ownership.
Cons of Increasing Authorized Capital
While there are several benefits to increasing a company’s authorized capital, there are also some drawbacks to consider. One of the main drawbacks is dilution of ownership. When a company issues more shares, the ownership of the company is spread out among more investors. This can dilute the ownership of existing shareholders, which can be a concern for some investors.
Another drawback is the potential for shareholder disputes. When a company issues more shares, it can lead to disagreements among shareholders about the direction of the company. This can lead to disputes and even legal action, which can be costly and time-consuming.
Lastly, increasing authorized capital can also have an impact on the company’s share price. When a company issues more shares, it can dilute the value of existing shares, which can lead to a decrease in the company’s share price. This can be a concern for investors who are looking to maximize the value of their investment.
Impact on Shareholders and Investors
Increasing a company’s authorized capital can have a significant impact on its shareholders and investors. As mentioned earlier, increasing authorized capital can dilute the ownership of existing shareholders. This can be a concern for investors who want to maintain their ownership in the company.
However, increasing authorized capital can also provide an opportunity for existing shareholders to increase their stake in the company. When a company issues more shares, existing shareholders can purchase more shares to maintain their ownership percentage. This can be a good opportunity for investors who believe in the long-term growth potential of the company.
In addition, increasing authorized capital can make a company more attractive to new investors. By showing that the company has room to grow and expand, it can attract new investors who are looking for a good return on their investment.
Legal Requirements for Increasing Authorized Capital
Increasing a company’s authorized capital requires the approval of the company’s board of directors and shareholders. The company must also comply with the legal requirements set out in its articles of association and the Companies Act. This includes filing the necessary paperwork with the relevant authorities and notifying shareholders of the proposed increase in authorized capital.
Steps to Increase Authorized Capital
The process of increasing authorized capital can be complex and time-consuming. The following are the general steps involved in increasing authorized capital:
- Review the company’s articles of association and the Companies Act to ensure compliance with legal requirements.
- Hold a board meeting to propose the increase in authorized capital.
- Call a general meeting of shareholders to approve the proposed increase in authorized capital.
- File the necessary paperwork with the relevant authorities.
- Notify shareholders of the proposed increase in authorized capital.
Alternatives to Increasing Authorized Capital
Increasing authorized capital is not the only way for companies to raise funds. There are several alternatives to consider, such as issuing debt, selling assets, or seeking venture capital funding. Companies should carefully consider their options and choose the one that best suits their business objectives and financial situation.
Examples of Companies that Have Increased Their Authorized Capital
Many companies have increased their authorized capital over the years to finance their growth and expansion. For example, Apple Inc. increased its authorized capital from $2.4 billion to $8 billion in 2013 to support its share buyback program. Facebook Inc. increased its authorized capital from $2 billion to $6 billion in 2014 to fund its acquisition of WhatsApp.
Increasing a company’s authorized capital can provide many benefits, such as more flexibility to raise funds, attracting investors, and providing more options for financing. However, it also comes with its fair share of drawbacks, such as dilution of ownership and potential shareholder disputes. Companies should carefully consider the pros and cons before deciding to increase their authorized capital. Ultimately, the decision should be based on the company’s business objectives and financial situation.
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