Introduction
The maximum number of shares that a business may issue to its shareholders is known as authorised share capital. It is essential to a business's capital structure since it establishes the business's capacity to raise cash from the market. A business may want to increase its authorised share capital for a number of reasons, including funding new initiatives, acquiring new assets, or expanding. However, a corporation should take into account a number of considerations before making such a decision. We'll talk about the things a business has to think about in this post before opting to raise its authorised share capital.
What is Authorized Share Capital?
The maximum amount of shares that a business is permitted by law to issue to its shareholders is known as authorised share capital. The company's constitutional papers, including the Memorandum of Association, specify this capital amount. To increase authorised share capital, these papers must be changed to allow for the issuing of shares in excess of the present ceiling.
Why Is Authorised Share Capital Being Increased?
A business may want to increase its authorised share capital for a number of reasons, including funding new initiatives, acquiring new assets, or expanding. A firm can raise money from the market by issuing new shares and increasing its authorised share capital. It also gives the business the freedom to issue more shares at a later date without needing to change its articles of incorporation.
What Should Be Taken into Account Before Choosing to Raise the Authorised Share Capital?
A business should think about the following aspects before opting to raise its authorised share capital:
Capital Needs for Expanding Businesses
Giving the business enough cash to fulfil its expansion goals is one of the main justifications for raising authorised share capital. Businesses may need more money as they grow in order to invest in new initiatives, acquisitions, R&D, or expanding their markets. By issuing additional shares, the corporation can access these money by increasing its authorised share capital.
Stability of Finances
Another crucial element to take into account when choosing whether to increase a company's authorised share capital is its financial health. A financially sound business could be able to finance its operations without needing a greater authorised share capital.
Approval by Shareholders
Generally, the capital has to be approved by current shareholders by a resolution adopted at a public meeting. It is crucial to communicate clearly and openly with shareholders about the purposes, advantages, and possible effects of share capital. It facilitates the seamless acquisition of required permissions, minimises opposition, and upholds confidence.
Diluting the Ownership
It is important to assess the possible dilution of ownership and control prior to opting to augment the authorised share capital. The ownership percentages of current shareholders may decline proportionately when new shares are issued. Decision-making procedures and operational control inside the organisation may be impacted by this dilution. As a result, companies must carefully weigh the impact on current shareholders against the requirement for cash.
Trends in the Market and Industry
Market and industry developments should be examined by enterprises prior to determining whether to raise authorised share capital. Determining if more capital is required may be made easier with an understanding of the competitive environment, growth potential, and state of the market. It is critical to assess the possible return on investment and balance it with the risks and expenses of raising funds.
Administrative and Legal Aspects to Take into Account
Administrative and legal procedures are involved. If a company modifies its constitution, it must abide by all applicable laws, rules, and corporate governance specifications. To avoid any legal complexities or non-compliance difficulties, it is imperative to obtain legal assistance and make sure that the right paperwork and files are made.
Conclusion
A business should carefully weigh all the relevant criteria before deciding to increase its share capital. The business should make sure it conforms with all legal standards and has the backing of its shareholders. The effect that the dilution of ownership will have on the company's current shareholders should also be taken into account. A firm can decide whether to increase its authorised share capital by taking these variables into account.
