Here are key terms you should know when understanding authorised share capital:
- Authorised Share Capital: The maximum amount of share capital that a company is legally allowed to issue to shareholders, as specified in its memorandum of association.
- Issued Share Capital: The portion of authorised capital that has actually been allotted to shareholders. This reflects the shares currently in circulation.
- Subscribed Share Capital: The part of the issued capital that investors have agreed to buy and pay for. It represents the commitment from shareholders.
- Paid-up Share Capital: The amount of money the company has received from shareholders for the issued shares. It may be less than the subscribed capital if payments are pending.
- Nominal Value: Also known as face value or par value, it is the original value of a share as stated in the company's charter documents.
- Share Premium: The excess amount received by the company over and above the nominal value of its shares.
- Treasury Shares: Shares that were issued and later bought back by the company. These are not considered while calculating paid-up capital.
- Reserve Capital: A part of uncalled capital reserved to be called only in the event of winding up the company.
- Subscribed Capital:
Subscribed capital refers to the portion of a company’s authorised capital allocated and offered to investors through the issuance of shares that are a part of the company’s IPO. It represents the total value of shares that shareholders have agreed to purchase, whether they have paid for them or not.
- Paid-up Capital:
Paid-up capital represents a portion of the authorised capital that shareholders have subscribed to and paid for and can be less than or equal to the company's authorised capital.
- Issued Capital:
Issued capital depicts the actual quantum of shares issued to the company’s shareholders. This number is usually lower than the authorised capital and can be equal to or less than the subscribed capital.
- Special Considerations:
While a company’s shares or stock outstanding will change depending on whether it buys back or issues more shares, the authorised capital will not increase even after a stock split (or some other dilutive measure). The shareholders set the authorised capital, which cannot increase without their approval.
Additional read: What is Split Stock
Significance of authorised capital
In the world of corporate finance and business operations, authorised capital is important for several reasons.
- Legal framework: Authorised capital represents the maximum amount of capital a company can legally raise by issuing shares. It sets the upper limit prescribed by the company’s charter documents, such as its MOA, and provides a legal framework within which the company can operate.
- Investor confidence: Having substantial authorised capital indicates that the company can raise additional funds if needed, instilling confidence in potential investors and lenders. These additional funds may be necessary for expansion, acquisitions, or managing unexpected financial challenges.
- Flexibility: Companies can adjust their authorised capital levels over time by increasing or decreasing them through formal processes. This flexibility allows them to adapt to changing financial needs and market conditions. For instance, if a company plans a significant expansion, it can increase its authorised capital to accommodate the issuance of more shares.
- Credibility and reputation: A higher authorised capital can enhance a company’s reputation in the eyes of investors, partners, and customers. It may be seen as a sign of stability and long-term viability, which can attract investment and business opportunities.
- Regulatory compliance: Many jurisdictions require companies to have a minimum authorised share capital to maintain their legal status. Adhering to these requirements is essential to remain in good standing with regulatory authorities.
- Protecting shareholder interests: Authorised capital safeguards existing shareholders by limiting the extent to which new shares can be issued without their approval. This can help prevent dilution of ownership and protect the interests of current shareholders.
How does the authorised share capital work?
Typically, authorised share capital limits are determined during the process of incorporation by filing articles of incorporation or a corporate charter. These papers outline essential information about the company, including its name, purpose, and details of its authorised share capital. Issued or paid-up capital is not considered when determining the authorised share capital of a company.
If a company wants to increase its authorised share capital, it has to amend its articles of incorporation or corporate charter. However, this usually requires approval from the existing shareholders. Once approved, the company issues more shares than the initially authorised limit. However, issuing of additional shares has several implications. Additional shares can potentially dilute the shareholding of existing investors, affecting their investment value.
Key components of authorised capital
Following are the key components of authorised share capital:
Authorised shares:
Authorised shares are simply the maximum number of shares a company can legally issue. The limit on authorised shares is outlined in a company’s Memorandum of Association (MoA) or Articles of Incorporation.
Par value per share:
The nominal value assigned to each share as per the company’s charter is known as the par value per share. It is important to note that par value may not be the market value of the shares.
How to calculate the authorised capital?
Authorised share capital is calculated by considering the total number of shares a company is allowed to issue and the nominal value assigned to each share. This figure represents the company’s total potential capital as approved in its founding documents. It indicates the maximum amount a company can raise by issuing shares, though it may not always issue the entire amount at once, leaving room for future expansion or fundraising.
Authorised capital = Number of authorised shares x Par value per share
Let’s take an example to understand these calculations better. Let’s say corporation ‘ABC’ has decided to authorise 15,00,000 shares. As per its Articles of Incorporation, the par value of each share is set at Rs. 20. In this case, the authorised share capital will be Rs. 3,00,00,000 (15,00,000 shares x Rs. 20/share).
Example of Authorised Share Capital
Imagine a company in India with an authorised share capital of ₹1 crore, comprising 10 lakh equity shares at a face value of ₹10 each. However, it issues only 1 lakh shares initially, leaving 9 lakh shares in reserve. While it may seem the company is missing out on ₹90 lakh, this approach is strategic. As a startup, the firm retains a higher authorised capital but issues fewer shares to accommodate future funding rounds without seeking further shareholder approval. Issuing more shares later allows it to raise capital swiftly when required. If the company were to split stock or amend its capital structure, it might face delays or resistance. Holding back shares simplifies future expansion and investor onboarding.
Conclusion
Authorised share capital is the maximum value of shares a company can legally issue to its shareholders, as stated in its Memorandum of Association. It indicates the potential size of the company, and the company can issue shares up to this authorised capital to raise funds for future financing needs.
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