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What Does Authorised Capital Mean? Definition, Types & Purpose in the Share Market

What Does Authorised Capital Mean? Definition, Types & Purpose in the Share Market
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In the realm of corporate finance, authorised capital holds a significant position as a cornerstone of a company’s capital structure. It serves as a crucial framework that determines the maximum amount of capital a company can raise through the issuance of shares. 

In this blog, we delve into the intricacies of authorised capital, understand what is authorised capital of a company, and explore the legal aspects that may shape a company’s growth trajectory.

What is Authorized Share Capital?

Authorized share capital is also known as “authorized stock,” “authorized shares,” or “authorized capital stock”. The meaning of authorised capital is the maximum amount of capital a company can issue legally or offer based on its corporate charter. The authorised capital is also known as nominal capital or registered capital. 

It is a fundamental concept in corporate law and is established during the company’s incorporation process. The authorised capital is specified in the company’s governing documents and must comply with the legal requirements of the jurisdiction in which the company is registered.

Purpose and Significance of Authorised Capital

The nominal capital plays an important role in a company as it helps in: 

  • Ensuring Flexibility in Capital Structure: Registered capital provides flexibility for a company to structure its capital base. It may allow the company to issue new shares and raise additional funds as needed, subject to compliance with legal regulations and obtaining shareholder approval.
  • Facilitating Future Growth: By setting a higher authorised capital, a company can plan for future expansion and accommodate potential funding requirements without the need for frequent amendments to its capital structure. Thus, this potentially enables the company to adapt to changing market conditions and seize growth opportunities.
  • Boosting Investor Confidence: Authorized capital instils confidence in investors by demonstrating the company’s capacity to raise additional capital when necessary. It may signal the company’s preparedness to support its growth plans, pursue strategic initiatives, and meet financial obligations, enhancing investor trust and attracting potential stakeholders.
  • Regulatory Compliance: Adhering to the authorised share capital limit ensures compliance with regulatory provisions. By maintaining the authorized capital at the prescribed level, the company fulfils legal obligations. Also, maintains transparency in its capitalization structure.
  • Safeguarding Shareholder Interests: Nominal capital safeguards the interests of existing shareholders by restricting the issuance of shares without their consent. Therefore, it helps protect their ownership rights and prevents dilution of their holdings.

How Does the Authorised Share Capital Work?

Filing articles of incorporation is an effective way to introduce share capital and can be done in the state of business. These specific difficulties may include:

  • This corporate charter contains important information about the firm, including its name and other specifics. Therefore, shareholding may happen at the corporation’s discretion. 
  • When determining authorized shares, issued or paid-up capital may not be taken into consideration. However, the corporation can issue more shares as needed.
  • On the other hand, if a company wants to increase its authorized share capital, it usually has to modify its corporate charter, a process that may require approval from the company’s shareholders.
  • Stakeholder approval may enable the issuance of additional shares, potentially diluting the shareholding of existing investors.
  • The shareholding of its present investors may be diluted if further shares are issued.

What is the Difference Between Authorised and Paid Up Capital?

Authorized Capital refers to the maximum amount of capital that a company is legally allowed to issue to shareholders. It is the total value of shares that a company can offer and can change only by following legal procedures.

Paid-up Capital, on the other hand, is the actual amount of capital that has been paid by the shareholders to the company. It represents the portion of authorised capital that has been issued by the company, and for which shareholders have made payment. However, any significant changes in the authorised capital needs require the submission of post facto information to the Registrar of Companies (ROC).

For example, a company’s nominal capital is ₹10 crores. This means that the company can issue a maximum of 10 lakh shares of ₹10 each. However, the company may not have issued all the shares yet. If the company has only issued 5 lakh shares, then the paid-up capital will be ₹50 lakhs.

Key Difference Between Nominal Share Capital and Paid Up Capital

Key differences between company authorised capital and paid up capital:

FeaturesAuthorised CapitalPaid-Up Capital
DefinitionThe maximum amount of shares that a company is authorised to issue.The amount of money that has been received by the company from shareholders in exchange for shares.
Mentioned inThe authorised capital of a company is mentioned in the Memorandum of Association (MoA)The paid-up share capital of a company is mentioned on the Share certificate
Can be increased or decreasedYesNo
Can be more than paid-up capitalNoYes
ImportanceProtects the interests of shareholders.Represents the amount of money that the company has raised from shareholders.

What is Subscribed Capital? 

Shareholders’ subscriptions are called subscribed capital. Subscribed capital represents a portion of the authorised capital company’s authorized capital that shareholders commit to purchasing. They are also a part of Initial Public Offering (IPO). When individuals or entities subscribe to the capital, they may express their intent to buy a certain number of shares in the company. Therefore, the subscribed capital represents the maximum amount of capital that shareholders are obligated to contribute. However, it’s essential to note that the actual payment might occur in installments or at a later date, as specified by the company’s policies and regulations.

Key Components of Authorized Capital

The main elements comprising authorized share capital are:

  • Authorised Shares: This refers to the maximum number of shares a company can legally issue. It is specified in the company’s Articles of Incorporation (AoA) or Memorandum of Association (MoA).
  • Par Value per Share: The par value can represent the nominal value assigned to each share and sets a minimum issuance price. Keep in mind that par value may not necessarily reflect the market value of the shares.
  • Total Value: Nominal capital usually denotes the maximum amount of capital a company can raise through share issuance. You can calculate it by multiplying the number of authorised shares by the par value per share.

How to Calculate the Authorized Capital?

To calculate the authorized capital, you need two components: Authorised Shares and Par Value Per Share.

Once you have these two values, simply multiply the number of authorised shares by the par value per share to calculate the nominal capital.

Authorised Capital Formula = Number of Authorised Shares × Par Value per Share

Let’s understand how to calculate authorized share capital with the help of an example. 

Suppose, a corporation decides to authorize 10,00,000 shares as per its Articles of Incorporation and the par value is ₹10 per share.

So, in this case, the authorised share capital would be ₹1,00,00,000

Authorized Capital = 10,00,000 shares × ₹10 per share

Process of Determining Authorised Capital

To determine how authorised capital is decided, let’s follow a systematic process that takes into account various factors. Here’s an outline of the process:

Factors to Consider in Determining Authorized Capital

There are certain factors that companies need to consider while determining authorised share capital. Some of these factors are: 

  • Business plan and growth strategy
  • Capital requirements for expansion, investments, and operational needs
  • Industry and market factors
  • Legal and regulatory considerations
  • Shareholder considerations

Role of the Company’s Growth Plans and Funding Requirements

A company’s growth plan and funding requirements have a significant impact on nominal capital. Here are some things to consider before determining the authorized capital:

  • Evaluate the company’s growth plans and funding requirements.
  • Assess the financial needs for future expansion and investment.
  • Consider the potential funding sources and capital structure required to support the growth plans.

Compliance with Legal Regulations and Shareholder Approval

Here are a few things that companies can consider on the compliance front before determining their authorised capital: 

  • Understand the legal and regulatory requirements related to authorised share capital.
  • Ensure compliance with jurisdiction-specific laws and regulations.
  • Obtain necessary approvals from shareholders through a general meeting or resolution.
  • File required documents and forms with the appropriate regulatory authorities.

In short, by carefully considering these factors, understanding the company’s growth plans and funding requirements, and complying with legal regulations, a company can determine an appropriate nominal capital that supports its future growth and financial needs.

Example of Authorized Share Capital

Consider a company with an authorized share capital of 10 million shares at a par value of ₹10 each, totalling ₹100 million. This means the company has the authority to issue shares worth ₹100 million, even if it has not issued the entire amount at present.

How Do Public and Private Companies Raise Authorised Capital?

Both public and private companies have different avenues for raising authorized share capital. Let’s find out how these companies do that:

Public Companies

Public companies raise authorised capital via:

  • Initial Public Offering (IPO): Public companies can raise authorised capital by conducting an IPO. They offer shares to the general public, allowing individuals and institutional investors to purchase shares and become shareholders of the company. Additionally, the funds raised through the IPO contribute to the registered capital of the company.
  • Follow-on Public Offering (FPO): Public companies can also raise additional authorised share capital through a FPO offering. This involves issuing additional shares to the public after the initial listing. It also provides an opportunity for the company to raise further funds for expansion or other purposes.

Private Companies

Private companies raise authorised capital via:

  • Private Placement: Private companies can raise nominal capital through private placements. In this method, the company offers shares to a select group of investors, such as venture capitalists, private equity firms, or accredited investors. Private placements are usually not available to the general public. Moreover, these are governed by specific regulations in each jurisdiction.
  • Rights Issue: Private companies may opt for a rights issue to raise authorised share capital. In this approach, existing shareholders are given the right to purchase additional shares of the company at a predetermined price. This allows the company to raise capital from its existing shareholders in proportion to their existing holdings.

Alteration of Authorised Capital

When it comes to altering nominal capital, there are a few key aspects to consider:

Circumstances Requiring Alteration

Companies may need to alter their authorised share capital for various reasons, such as 

  • Expanding their business operations
  • Raising additional funds
  • Accommodating future growth
  • Restructuring their capital structure. 

Apart from this, changes in market conditions, mergers, or acquisitions can also prompt the need for alteration.

Procedures and Legal Requirements for Alteration

Altering authorised capital involves a structured process that may typically require shareholder approval. Companies must follow legal procedures and comply with regulatory requirements specific to their jurisdiction. These procedures often involve convening board meetings, drafting resolutions, obtaining shareholder consent through voting, and seeking necessary approvals from regulatory authorities.

Implications and Impact on the Company’s Structure

Alteration of nominal capital can have significant implications for the company’s structure. 

It can affect the number of shares that the company can legally issue, the par value or face value of shares, and the overall capitalization of the company. Additionally, depending on the alteration, it may also impact the rights and privileges attached to different classes of shares, such as voting rights or dividend preferences. 

Therefore, investors should closely examine the implications of the alteration to assess its potential impact on their ownership stake and the company’s financial position.

How Does Authorised Capital Affect Investors?

Authorized capital can have a few effects on investors. Let’s take a look:

  • Investment Potential: The nominal capital can reflect a company’s capacity to raise funds by issuing additional shares. A higher authorised capital can mean the company can potentially raise more money in the future. This can be exciting for investors as it suggests potential growth and expansion.
  • Ownership Impact: When a company issues new shares to raise capital, it can dilute the ownership of existing shareholders. This means your ownership stake may decrease as new investors come in. It’s important to consider how this dilution may affect your ownership percentage and voting rights.
  • Funding Flexibility: A higher authorized share capital gives the company flexibility in raising funds. It can respond to changing market conditions or seize investment opportunities. This flexibility can benefit investors by helping the company secure funds for growth or navigate through challenging times.
  • Share Price Stability: The authorised capital may indirectly affect share price stability. A high authorised capital but low issued capital may create uncertainty among investors, as it suggests potential future share issuances. On the other hand, a lower authorised capital may give more control to the company over share issuance, which may contribute to price stability.
  • Investor Confidence: The authorised capital, along with other financial indicators can influence investor confidence. A well-balanced authorised capital structure, aligned with growth plans and financial needs, inspires confidence in investors. It shows sound financial management and a clear vision for the future.

Can a Company’s Issued Capital Exceed its Authorised Capital?

No, a company’s issued capital cannot exceed the authorized capital. 

This is because the authorised capital represents the maximum amount of capital that a company is legally allowed to issue to shareholders. It is set and approved during the company’s incorporation process and is stated in the company’s Articles of Incorporation or Memorandum of Association.

The issued capital, on the other hand, refers to the actual amount of capital that has been issued by the company and allocated to shareholders through the issuance of shares. It cannot exceed the authorised capital because the company is bound by the limits set in its authorised capital.

Therefore, if a company wishes to increase its issued capital beyond the authorised share capital, it would need to go through a formal process of amending authorised capital. In short, they will have to increase authorised capital to increase the issued capital. Thus, this may require shareholder approval and compliance with applicable laws and regulations.

To Wrap It Up…

The authorised capital stands as a fundamental pillar in the financial landscape of a company. It provides a framework for capital structure and empowers businesses with the flexibility to raise funds when needed. 

Moreover, the careful consideration of the nominal capital ensures that companies can align their growth plans, meet funding requirements, and comply with legal regulations. Hence, by understanding the nuances of authorized capital, businesses can make informed decisions that fuel their expansion and attract investors.

As always, investors must do their own research and/or consult their financial advisor before investing.

FAQs

1. What is share capital?

Share capital is the total money a company raises by selling shares to investors, representing their ownership stake and funding its growth. Think of it as the company’s piggy bank of investor contributions.

2. Who decides authorised capital?

Authorized capital is decided by company founders in the Memorandum of Association (MoA). However, can be increased later with shareholder approval.

3. What is authorised capital and paid-up capital?

Authorized capital is the maximum amount a company can legally raise through shares. Paid-up capital is the portion of authorized capital that shareholders have fully contributed to the company.

4. How to check company authorized capital?

To check a company’s authorized capital, you can access its official documents. Such as the Memorandum of Association (MoA) and Articles of Association (AoA), available on the government’s corporate registry website.

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