Let's understand authorised capital along with paid-up share capital. And look up a few examples for better understanding.
The authorised capital is the total number of shares a company can issue during its lifetime. When a company is created, it has a fixed number of shares, each with a fixed face value or nominal value. The authorised capital is mentioned in the official incorporation documents. When a company is incorporated, there are two main documents: memorandum of association and an article of association. The authorised capital is stated in the memorandum of association. A company can never issue shares more than its authorised capital unless they revise its total capacity by modifying the capital amount clause of the memorandum of association.
For increasing the authorised capital, few things are to be kept in mind.
- The article of association should permit an increase in authorised share capital
- If the article of association doesn’t permit enhancement of authorised capital. The company is first required to alter articles
- The company can do so by issuing notice to the existing shareholders for the meeting
- By passing a special resolution by shareholders the article of association can be modified
- After that board of directors will pass a resolution for changing the capital clause in the memorandum of association and again call a shareholders’ meeting
- The final approval from shareholders is important for the modification of the memorandum of association
- After getting shareholder’s approval company is required to file details with the registrar of the company along with the prescribed fees
What Is the Purpose of Authorised Capital?
The authorised capital is a kind of a limit that is imposed on the company. The company cannot issue shares as per its will, and instead, it can issue shares up to the authorised share capital amount mentioned in the memorandum of association.
Authorised Capital has two main benefits. First, companies generally never utilise their complete authorised capital, and thus when in future they want to take up some new projects, instead of taking loans and finance they can raise funds from the market.
Another purpose is to dilute the power of existing shareholders. For example, a company has 1000 shareholders, these 1000 shareholders control the company and take important decisions. Suppose new shares are issued, and now the total number of shareholders has increased to 1500. The decision and control of old 1000 shareholders are distributed to 1500 shareholders.
Who Decides the Amount of Authorised Capital?
The first members of the company are the subscribers of the memorandum. These are the people who decide the amount of authorised capital amount at the time of incorporation of the company. The minimum amount of the authorised capital should not be less than 1lakh. There is no maximum limit. Later on, after the incorporation and issue of shares, any change or modification in authorised capital is decided by shareholders in a general meeting. Thus in short subscribers of the memorandum and shareholders decides the amount of authorised capital.
For a Better Understanding of Authorised Capital Let’s Discuss Paid-up Share Capital and Other Relevant Terms
You might have come across different names for a company’s capital, like subscribed capital, issued capital, and authorised capital. They all are related to each other and few mistakenly use them interchangeably. But let’s look into their meaning; this will help better understand Authorised Capital.
What Is Subscribed Capital?
When a company offers its shares as an initial public offering, the share applications are filed by the public for buying. The total number of shares applied by the public is known as subscribed capital.
What Is Issued Capital?
It is the part of authorised capital that a company offers to the public for subscription. Companies provide a part of their share capital.
What Is Paid-up Capital?
It denotes that part of share capital for which the company received the amount. It is the amount that shareholders invest in a company.
When a company makes an initial public offer to raise funds, the amount paid by the shareholders creates the company’s paid-up share capital.
Don’t get confused with the shares that are being traded in stock exchanges or the stock market. They are secondary markets and shares sold in those markets are sold by one shareholder to another shareholder. The company doesn’t receive any money for the secondary market sale transactions.
Example Explaining Authorised Share Capital.
Suppose a company ABC is incorporated with the authorised capital of 2lakhs shares, and each share’s face value or nominal value is ₹10. Now the total authorised capital of the ABC company is 2lakhs x ₹10, which is ₹20lakhs. Out of these 2 lakhs shares, the company offered 1lakh to the public in an initial public offering. And the public bought all 1lakh shares. So in this example, ₹20lakhs is the authorised capital for ABC company, it is the maximum limit. The paid-up share capital is the 1lakh x ₹10, which is ₹10lakhs received by the public.
Let’s take another example; a company XYZ Ltd has 3lakhs shares of ₹5 each mentioned in the capital clause of their memorandum. Now the company wants to issue 4 lakhs shares. Can the company issue shares more than authorised capital? No, it can’t issue 4lakhs shares unless they increase its authorised capital.
The Difference Between Paid-up Share Capital and Authorised Capital
- The authorised capital is a total number of shares, and paid-up shares are part of it. It is like official capital is a big circle and paid-up capital is a small circle within the big circle
- paid-up capital will always be less than the authorised capital. No company is capable of issuing more shares than the fixed limit
- To increase the authorised capital, the company must follow the procedure led down by the Companies Act 2013. But in the case of paid-up capital, the company is just required to issue new shares
- There is a minimum amount requirement for authorised capital; currently, it is 1lakh. Earlier there was a minimum requirement for paid-up share capital but with recent amendments, the condition has been withdrawn now there is no minimum limit for paid-up capital.
Read More:
