Tushit Pandey
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The purpose of this article is to make authorized shares easier to understand so that finance teams, employees, and founders can decide on equity structures with confidence. Although these ideas are universal, different jurisdictions have different requirements. Before changing authorized capital or issuing new shares, always get advice from your legal or compliance advisor.
Every business begins with a modest concept and a modest capital structure: a small number of employees and a small number of shares. However, the clear early picture becomes a web of choices as the company expands, raises capital, issues ESOPs, hires new founders, reorganizes ownership, or converts instruments.
One idea, authorized shares, is at the heart of that web and shapes everything you are permitted to do.
This is where the story starts if you've ever wondered why your business "can't issue more equity without a special resolution" or why your attorney keeps bringing up "authorized capital."
The maximum number of shares that a company may lawfully issue in accordance with its Memorandum of Association (MoA) is known as authorized shares. Consider it the ceiling. You may issue fewer shares than this cap, but you cannot exceed it without the shareholders' formal consent.
This is not merely theory. The Companies Act of 2013 codifies it, and the MCA's master data guidelines explicitly reference it.
To put it simply, the first question you need to address if you want to raise money, increase the size of your ESOP pool , or change ownership, is: Do we have enough authorized capital?
When a funding round is about to conclude, and someone unexpectedly discovers that the company lacks the authorized headroom to issue new shares, most founders discover this the hard way. Until a resolution is reached, nothing happens.
Your permission slip is authorized capital.
The portion of that permission that you have actually utilized is called paid-up capital.
When people discuss authorized capital and paid-up capital, they are actually discussing potential versus reality.
Shares issued and paid for constitute paid-up capital.
Authorized capital is the maximum number of shares you can issue.
You have space to develop because of the difference.
Surprisingly, a lot of early-stage entrepreneurs don't realize this.
Many newly incorporated private companies misjudge their initial authorized capital, which can result in avoidable compliance work and delay their first fundraising, according to corporate-governance and startup advisory reports.
This is significant because you cannot issue new equity to investors if your paid-up capital exceeds your authorized limit.
Many growth decisions run afoul of the law if authorized capital isn't increased first.
Almost always, expanding businesses reach a point where they require additional headroom.
The standard starting capital for a private company is ₹1 lakh. They give the founders some shares. They then raise a round of seeds. After that, they wish to establish an ESOP pool. Suddenly, because the authorized limit is too low, half of the year's planned deals cannot move forward.
This is not uncommon.
Over 55% of private companies increase their authorized share capital within the first three years of incorporation as they start raising money, according to MCA data trends.
It's not costly or difficult to increase authorized capital, but it does require-
You're stuck until this is finished.
Although this process occurs at every stage, from early seed rounds to pre-IPO transitions, founders frequently believe it is exclusive to larger businesses.
Before 2015, private companies were required by Indian law to have a minimum authorized capital of ₹1 lakh. There is no longer a statutory minimum authorized capital for private companies in India as a result of the removal of this rule.
This update is confirmed in the Companies (Amendment) Act, 2015 documentation.
Nonetheless, the majority of businesses still start with token authorized capital (between ₹1 and ₹5 lakh) and raise it as necessary. Starting too low can disrupt fundraising, but starting low makes incorporation less expensive.
A useful guideline that founders adhere to is -
Based on the anticipated equity activity over the next 18 to 24 months, set authorized capital.
You've never witnessed a founder scramble during a fundraiser when an investor's share allotment cannot be executed because of a missing authorized capital increase, if you believe this to be merely "compliance."
It's tense.
It's embarrassing.
Deal timelines may also be delayed by weeks as a result.
Workers sense it as well.
Imagine getting an ESOP letter and being informed that the company must first increase authorized shares before your options can be distributed. It causes uncertainty, anxiety, and occasionally mistrust.
Shares that are authorized sound like paperwork.
However, in practice, they have an impact on
For this reason, established businesses plan authorized capital in a proactive rather than a reactive manner.
Suppose your company has
You simply cannot issue shares.
You must first increase authorised capital; otherwise, the issuance is void.
This happens in real life far more than people admit.
Although authorized shares are hidden in your company's Memorandum of Agreement, they influence all significant equity-related decisions. Founders can prevent last-minute crises, postponed fundraising, and needless panic by knowing the difference between authorized and paid-up capital.
Authorized shares dictate what is legally feasible, whether you're getting ready to hire staff, issue ESOPs, raise money, or reorganize your ownership. Additionally, raising that ceiling at the appropriate moment keeps growth smooth and avoids operational obstacles.
Plan when you're unsure. The growth of authorized capital should always be marginally faster than that of your business.
They are the maximum number of shares a company is legally allowed to issue as defined in its Memorandum of Association.
Paid-up capital is the portion of authorized capital that has actually been issued and paid for. Authorized capital is the total potential.
Through a board resolution, shareholder approval, amendment of the MoA, and filing the required forms with the MCA.
No. Since 2015, the minimum requirement has been removed.
To ensure there’s enough headroom for fundraises, ESOP issuances, share conversions, and other equity events.
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