Reason for increase in authorised capital

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Querist : Anonymous

Querist : Anonymous (Querist)

28 May 2013 How are Companies benefited by increase in their authorized capital?

CA Kapil Verma

CA Kapil Verma (Expert)
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28 May 2013 Banks prefer to give loan depending on the authorised capital. The ideal debt equity ratio is 2:1. So if you increase the authorised capital, you will get the loans in the above proportion. But you need to incur certain costs at the ROC for increasing the share capital.

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CS SIDDHARTHA BANIK

CS SIDDHARTHA BANIK (Expert)
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28 May 2013 Apart from the point mentioned above, a company can be banifitted by the following way if it increse its authorise capital:
1) It will be able to raise funds by issuing of equity capital to the extent of gap between paid up and authorised capital, subject to the applicable provisions of law;

2) It can reduce it's dependence on bank loans etc.;

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Querist : Anonymous

Querist : Anonymous (Querist)

03 June 2013 Dear Experts, Thank You for the replies.

I wanted to know practical reasons like stated by Mr. Verma. Are there any more such reasons?

I wanted to know these as I am currently doing analysis on a number of companies w.r.t. to components in their balance sheet.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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20 July 2025 Great question! Increasing authorized capital can have several practical benefits for companies beyond just meeting regulatory requirements. Let me summarize and add a few more reasons based on your query and practical business scenarios.

Practical Benefits of Increasing Authorized Capital:
Ability to Raise More Equity Capital
Authorized capital sets the maximum limit of shares a company can issue.
Increasing it allows the company to issue more shares to raise fresh equity capital when needed.
This helps fund expansion, new projects, or acquisitions without seeking external debt.
Improved Debt-Equity Ratio
Banks and financial institutions prefer lending to companies with a healthy debt-to-equity ratio (often around 2:1).
Increasing authorized capital allows issuing more equity, improving this ratio and enhancing loan eligibility.
Reduced Dependence on Debt
By raising more equity, companies can reduce reliance on costly bank loans and borrowings.
This lowers interest expenses and financial risk.
Better Market Perception
A higher authorized capital can signal growth plans and financial strength to investors, lenders, and stakeholders.
It reflects capacity to expand shareholding and capital base, improving credibility.
Flexibility in Employee Stock Options
Companies can issue shares for Employee Stock Option Plans (ESOPs) or other incentive schemes.
Increasing authorized capital creates room for these issuances without further amendments.
Facilitates Mergers and Acquisitions
When acquiring other businesses, companies may issue shares as part of the consideration.
Higher authorized capital allows such share-based transactions without needing immediate amendments.
Avoid Frequent Legal Compliance
If the authorized capital is low, companies may have to frequently amend it as business grows.
Increasing it upfront reduces administrative burden and fees payable to Registrar of Companies (ROC).

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