Authorized capital, also referred to as authorized share capital, is the maximum amount of capital that is owned by the company for which it is legally allowed to issue shares to its shareholders. This limit is set in the company’s memorandum of association and serves as a cap on the number of shares a company can issue without seeking further approval so that the company has a hold or command over it to issue these shares as decided as per the MOA (memorandum of association). Increasing the authorized capital provides a company with greater financial flexibility, allowing it to raise more funds, attract investors, and support expansion plans. In this article, we will discuss the various benefits that a company can obtain by increasing authorized capital and how it can positively impact a business and some other aspects.
Benefits of Increasing Authorized Capital
1. Facilitates Business Expansion and Growth
One of the primary reasons for increasing authorized capital is to facilitate business expansion and growth so that the company can ease its business operations. A company planning to scale its operations, enter new markets, or launch new products requires significant financial resources. By increasing authorized capital, a company can issue additional shares to raise some necessary funds for the expansion and growth of a business, ensuring sustainable growth and competitive advantage and making its business expand a wide area network.
2. Attracts More Investors
Investors are more likely to invest in a company that has a higher authorized capital because it provides high financial strength and growth potential. By increasing authorized capital, businesses can issue new shares to attract strategic investors, venture capitalists, or private equity firms. This increased investment potential can help a company secure its necessary funding to pursue the growth of various business opportunities and also enhance its market position at a large level.
3. Enhances Borrowing Capacity
A company with higher authorized capital often enjoys improved credibility with banks and financial institutions. Investors consider a company’s financial potential before approving loans because its high financial potential ensures credibility and a higher authorized capital suggests financial stability and gains for the company. This, in turn, enhances the company’s ability to secure larger loans and better credit terms, enabling it to fund expansion projects, purchase new assets, and meet working capital requirements.
4. Enables Employee Stock Option Plans (ESOPs)
Many companies implement Employee Stock Option Plans (ESOPs) to attract and retain top talent so that the company can grow through creative employees. ESOPs allow employees to purchase company shares at a discounted rate, as per their required interests with the company’s success. However, issuing ESOPs requires additional or expanded shares, which is possible only when the company’s authorized capital is flexible and not limited. By increasing authorized capital, a company can issue sufficient shares to support ESOPs and grow their business, which helps in motivating the employees for work and growth.
5. Provides a Safety Net for Future Capital Requirements
A business’s financial needs keep changing and evolving over time due to rapid changes in the market, economic conditions, strategic objectives and various other financial factors. With the help of prior expansions of the authorized capital, a company ensures that it has the flexibility to raise funds when needed without facing delays or in complex circumstances, which may be caused by legal approvals and procedural formalities or other technical complexities.
6. Strengthens Market Reputation and Credibility
A higher authorized capital helps in gaining a company’s financial strength, stability, long-term vision, and potential, which is an essential element for the financial growth of any business. This enhances the company’s reputation among stakeholders, including customers, suppliers, investors, and business partners. A well-capitalized company is perceived as more reliable, accountable and also capable of fulfilling its obligations and duties, which can lead to better business relationships and opportunities and business growth.
7. Supports Mergers and Acquisitions (M&A)
Mergers and acquisitions are common strategies for business expansion. Companies usually acquire other businesses by offering shares as part of the transaction for the purpose of business. If a company’s authorized capital is low, then it may not be able to provide sufficient shares to make the acquisition. By enhancing the authorized capital, a company can conduct M&A transactions easily and in a more efficient and effective manner, which helps in expanding its market share and operational capabilities.
 8. Reduces the Need for Frequent Capital Amendments
Increasing authorized capital reduces the requirement for often need of amendments to the company’s memorandum of association and other major documents. Each time a company wishes to issue more shares beyond its authorized capital, it must undergo a legal process to increase the limit. In the process of amendment, there is involvement of various elements like regulatory approvals, shareholder consent, and administrative procedures, which may be very time-consuming and costly. By setting a higher authorized capital in advance, a company minimizes the need for frequent amendments, saving time and resources.
9. Facilitates Initial Public Offering (IPO)
Companies planning to go public through an Initial Public Offering (IPO) must issue a substantial number of shares to the public. If the authorized capital is low, the company may not be able to issue enough shares to raise the desired funds for the purpose of business. Increasing authorized capital before an IPO ensures that the company has sufficient capital to issue new shares, attract investors and expand capital inflow during the public offering.
10. Enables Better Corporate Structuring
Businesses with higher authorized capital have greater flexibility in structuring their equity and ownership. A company can issue shares to founders, investors, and other stakeholders without any unwanted restrictions and run their course of business in a smooth manner, ensuring a well-equipped and balanced capital structure. This flexibility plays a very important role in managing ownership dilution, investor relations, and strategic decision-making.
Conclusion
Increasing authorized capital offers a number of benefits for the company’s business, which contribute to a company’s financial strength, growth, market position, and growth potential. From attracting investors and securing loans to facilitating mergers, improving corporate structuring, and maintaining it in a well-managed manner, a higher authorized capital provides businesses with the flexibility needed to achieve their long-term objectives. While increasing authorized capital requires compliance with various legal procedures and regulations to regulate the process of authorising capital and its distributions, it is why highly advisable to consult with legal and financial experts to get the proper understanding of regulations to make wise and well-managed decisions to avoid the unnecessary complexities which may hamper the course of business. Companies aiming for sustainable growth and financial stability should consider increasing their authorized capital as a proactive measure to secure their future success.
Related Services
