The article explains to the reader the concept of authorised share capital and the intricacies associated with it.
Do you know that the capital invested in a joint holding company can be divided into small units? However, it is important to note that each particular share has a face value, for that matter of fact. Therefore share capital refers to the capital raised by a company to consolidate its financial position. The stakeholders can accrue share capital through infusing capital or raising public issues under defined circumstances. At any given time, share capital represents the total value of shares allotted to the various stakeholders.
An authorized stock is the maximum number of shares that a corporation can legally issue, as specified in its articles of incorporation. In shareholders’ equity, capital stock is the number of common and preferred shares that a company is authorized to issue.
What is Authorized Share Capital?
Authorised share capital remains the total amount of stake that the company can consider to allow stakeholders access. However, the amount remains as specified in the articles of association. At times, the authorised share capital can also be called ‘authorised stock’, ‘authorised shares’, or ‘authorised capital stock’.
It isn’t possible to raise shares to shareholders beyond the authorised share capital of a company. Therefore, companies are commonly registered with capital that goes way beyond their current financing needs and isn’t completely used by management.
At the same time, the company should be able to issue additional stock. However, this can be done later if the organisation needs to raise capital quickly.
Meaning of Authorised Capital:
The Authorized Capital, also known as registered or nominal capital, refers to the maximum share capital a company can issue to shareholders in accordance with its constitutional documents. Shares represent units of overall capital and are used to raise funds from the public.
An Example of an Authorized Share Capital
If a company has an authorised share capital of 500,000 shares, you should consider the share value of each unit. Several shares multiplied by the value of shares can assure you of the share capital under consideration. However, share capital is allotted as per statutory requirements. At the same time, shares are sometimes kept in the treasury to maintain control of the capital. It’s sensible not to do this, as stated by the stakeholders.
If the company were to sell all of these shares, then the shareholders would have more influence over the decisions which the company makes.
Moreover, if this company was a start-up, keeping the authorised share capital high while the actually issued capital remains low may allow for additional financing rounds from investors.
How Authorized Share Capital Works?
One of the best ways to float share capital is to file its articles of incorporation within a particular location. However, this can be the same state wherein the company operates. Specific issues related to this are understood as follows.
- This corporate charter includes critical information about the company,
- Such information can relate to the name and other details, while stakeholding can happen at the company’s discretion
- Authorised shares do not take into consideration the issued or the paid-up capital
- The company is mostly liable to issue additional shares if need be
- If a company, on the other hand, wants to increase authorised share capital, it has to amend its corporate charter. This can usually require a vote from its shareholders.
- Stakeholder approval can help in more number of shares being issued at any given point in time.
- Issuance of more shares can dilute the ownership of its current investors.
What Does It Mean for Individual Investors?
An individual investor might not be concerned with the concept of the authorised share capital at any given point in time. On the other hand, the value of a company’s outstanding shares is what’s used to calculate its market capitalisation. It’s also what determines just how much ownership each share offers.
Therefore what is the relevance of the company’s authorised share at any given point in time? A company’s authorized share capital may become more relevant if the board of directors wants to amend the articles of incorporation to increase it. In such a case, as a stakeholder, you might be considered for an absolute right to vote, in case you are looking at any change in the stakeholding pattern in a given context.
And if you’re ever curious about whether a company you’re invested in might choose to increase its authorised shares, consult its articles of incorporation and latest quarterly report to find the difference between its authorised shares and shares outstanding.
You might find that, as with the case of Microsoft, the company’s outstanding shares represent only a small portion of its authorised shares. In that case, it’s unlikely that any particular stakeholder may vote anytime to bring about an amendment by the number of shares.
Types of Share Capitals
The term “share capital” often means slightly different things depending on the context. When discussing the amount of money a company can legally raise through the sale of stock. There are several categories of share capital. Accountants have a much narrower definition.
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Authorized Share Capital
It is important to note that, any company can raise equity capital, but before that, it needs to obtain permission to execute a stock sale if required. At the same time, the company needs to specify the amount linked to equity shares which need to be floated. However, since a company can take a decision on the maximum amount of capital to be raised, it can be allotted as authorised capital in terms of stakeholdings. However, at any given point in time, the number of shares that need to be issued can be unlimited. But, the board of directors do have the right to put an upper limit on the value of shares to be sold.
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Issued Share Capital
Many experts have distinguished the difference between authorised and issued share capital. By election, the value of shares allotted by the company can contribute towards issued share capital.
Pros and Cons of High Authorized Share Capital
Authorized share capital refers to the maximum number of shares that a company is legally allowed to issue to its shareholders. Here are the pros and cons of having a high authorized share capital:
Pros
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Flexibility for Future Growth
A high authorized share capital provides flexibility for future growth and expansion. It allows the company to issue additional shares without requiring any changes to its constitutional documents. This can be beneficial when the company needs to raise capital for new projects or acquisitions.
2. Attracting Investors
A higher authorized share capital can make a company more attractive to potential investors. It signals that the company can raise additional funds if needed, which can instil confidence in investors and potentially lead to a higher valuation.
3. Facilitating Stock Splits
A high authorized share capital makes it easier for a company to carry out stock splits. Stock splits increase the number of shares outstanding while proportionally reducing the share price. This can make the shares more affordable to a broader range of investors and increase liquidity.
Cons:
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Dilution of Ownership
A high authorized share capital can lead to dilution of ownership for existing shareholders. If the company issues additional shares, the ownership percentage of existing shareholders decreases, potentially reducing their control and voting power.
2. Market Perception
Investors may perceive a high authorized share capital as a sign that the company plans to issue a large number of shares in the future, which could dilute the value of existing shares. This perception may negatively impact the company’s stock price.
3. Regulatory Compliance
A higher authorized share capital may subject the company to additional regulatory requirements and fees. For example, some jurisdictions impose higher filing fees or taxes based on the authorized share capital of a company.
Importance of Authorized Share Capital
Authorized share capital is an essential concept in corporate law and plays a crucial role in the functioning of a company. Here are some reasons why authorized share capital is important:
Legal Requirement: Many jurisdictions require companies to specify their authorized share capital in their constitutional documents, such as the articles of incorporation or memorandum of association. It is a legal requirement that helps define the company’s maximum capacity to issue shares.
Capital Flexibility: Authorized share capital provides flexibility for a company to raise capital in the future. It allows the company to issue additional shares without the need for complex and time-consuming legal procedures. This flexibility is particularly valuable when a company needs to raise funds for expansion, acquisitions, or other business opportunities.
Investor Confidence: The authorized share capital can influence investor confidence in a company. A higher authorized share capital indicates that the company has the potential to raise additional funds if needed, which can attract investors and contribute to the company’s overall credibility.
Corporate Governance: Authorized share capital helps establish the framework for corporate governance. It sets the boundaries within which the company can issue shares and ensures that any share issuances are within the legal limits defined by the authorized share capital.
Difference Between Authorized and Paid-up Capital
Authorized share capital and paid-up capital are two distinct concepts related to a company’s share structure. Here’s the difference between the two:
Authorized Share Capital: Authorized share capital, also known as authorized capital or registered capital, refers to the maximum number of shares that a company is legally allowed to issue to its shareholders. It is specified in the company’s constitutional documents and represents the upper limit of the company’s share issuance capacity.
Paid-up Capital: Paid-up capital, also known as issued and fully paid capital, represents the portion of the authorized share capital that has been issued to shareholders and for which they have made full payment. It is the actual amount of capital that the company has received from shareholders in exchange for the issued shares.
Conclusion
The concept of authorised share capital is closely associated with the pattern of stake holding within any organisation whatsoever. Several aspects are associated with authorised share capital within the structure of stake holding within a business organisation. However, authorised share capital is far different from issued share capital. You can keep an eye on Vakilsearch’s website for more information related to the topic.
FAQs
What is Authorized Share Capital with Example?
Authorized share capital refers to the maximum number of shares that a company is legally allowed to issue to its shareholders. For example, if a company has an authorized share capital of 1,000,000 shares, it means that the company can issue up to 1,000,000 worth of shares to its shareholders.
What do you understand by the terms authorized capital?
Authorized capital, also known as authorized share capital or registered capital, refers to the maximum number of shares that a company is legally allowed to issue to its shareholders. It is specified in the company's constitutional documents, such as the articles of incorporation or memorandum of association.
How is authorized share capital calculated?
Authorized share capital is determined by the company during its incorporation or through an amendment to its constitutional documents. The calculation of authorized share capital is not based on a specific formula but rather on the company's needs, growth plans, and regulatory requirements. The company typically determines the number of shares it needs to fulfil its objectives and sets the authorized share capital accordingly.
Why is Authorized Share Capital important?
Authorized share capital is important for several reasons: Legal Requirement: Many jurisdictions require companies to specify their authorized share capital in their constitutional documents. It is a legal requirement that helps define the company's maximum capacity to issue shares. Capital Flexibility: Authorized share capital provides flexibility for a company to raise capital in the future. It allows the company to issue additional shares without the need for complex and time-consuming legal procedures. Investor Confidence: The authorized share capital can influence investor confidence in a company. A higher authorized share capital indicates that the company has the potential to raise additional funds if needed, which can attract investors and contribute to the company's overall credibility. Corporate Governance: Authorized share capital helps establish the framework for corporate governance. It sets the boundaries within which the company can issue shares and ensures that any share issuances are within the legal limits defined by the authorized share capital.
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