Are you an investor looking forward to investing in the share of a company? By reading this article, you will be able to know about the authorised share capital.
What Is Meant by Authorised Share Capital: When a company issues stock to raise money, the amount of the money is known as share capital. The amount of share capital may change with time if the stock is issued for public offering. There is a specific limit on the amount of share capital that cannot be exceeded while raising money from public offerings. The amount above which a company cannot issue shares is known as authorised share capital. But the maximum amount which has been imposed as a limitation may change with the shareholders’ approval.
KEY LESSONS
- The maximum amount of shares that a corporation is legally permitted to issue or offer in accordance with its corporate charter is referred to as authorised share capital, also known as authorised stock, authorised shares, or authorised capital stock.
- Potential shareholders have committed to purchase subscribed capital, which is a percentage of the authorised capital, from the company’s treasury, frequently as part of the company’s initial public offering (IPO).
- Businesses frequently reserve a portion of their authorised share capital for upcoming financial requirements.
- Without shareholder consent, a firm cannot expand its authorised share capital.
What is Authorised Share Capital?
Every company has imposed a limitation while raising share capital for public offerings, known as authorised share capital. In simple language, When the company is allowed to raise a certain amount of capital through a public offering is known as its authorised capital.
But the company may issue a new offer to raise the new amount of share capital and to expand the amount on the balance sheet.
Before raising the share capital, the company must obtain permission to execute the sale of shares. The company has to define the total amount of share capital it wants to raise, and the face value of the share is known as par value.
This authorisation does not bar in issuing of the shares. But it puts a limit on raising money by selling the share.
Why was the Authorised Capital Abolished?
Under the Companies Act 2006, authorised share capital was abolished. Due to the following reasons, the authorised capital was abolished:
- The authorised share capital was considered to be the artificial ceiling
- The artificial ceiling could be raised or reduced as per the wishes of the shareholders
- The absence of an appropriate reason for the requirement of a ceiling on issuing a company’s share.
The eradication of authorised capital led the attention of the investors to the issued capital. It helps the proper valuation of the share. Due to the authorised capital, a considerable gap may arise between the original price and the issued share price, which may cause difficulty for the investors to determine the initial value of the share. But issued capital helps the investors measure the share’s actual price against the issued share price, and it helps to neutralise misleading factors.
What Happens Without the Authorised Capital?
After the Companies (Amendment) Act, 2005, the companies need not have to mention the authorised capital. After the amendment, shares of a company have no nominal value. The authorised capital and par value are directly related to capital maintenance. It was introduced to restrict the issue of shares at a very low value or discount. After the abolishment of authorised capital, there is no prohibition against issuing shares at a low price.
Authorised Share Capital Under the Companies Amendment Act 2006
Under the Companies Amendment Act 2006, the company will not require to define the authorised share capital. However, the following scenarios arise under this Amendment Act:
- The company’s directors are allowed to issue shares by board resolution
- Shareholders can restrict directors from allotting share
- Shareholders can include the provision in the Articles of Association of the company
- No requirement to state the authorised capital in the constitutional documents
- While allotting the share or making any changes, the company has to file a statement
- The statement will include the total number of shares of the company.
Directors will be able to issue shares only with the shareholders’ authorisation. However, this rule does not apply to private companies with only one share capital class, and directors of these companies can issue shares without the resolution of the shareholders.
Authorised Share Capital Under the Companies Act, 1985
Under this act, the company must state
- If it has any authorised but unissued share capital
- Authorisation of the shareholders was required to issue share.
Subsequent Changes Made After 2009
From October 1, 2009, a new provision regarding authorised capital was included. Under this provision, authorised share capital would be included in the provision of the Articles of Association, and it included the number of shares to be allotted by the company. Although the authorised share capital is part of the Articles, the company can revoke or change authorised share capital with ordinary resolution.
What is Issued Capital?
Issued capital is the total value of the shares offered to sell to investors. The par or nominal value of the share capital cannot exceed the value of the authorised capital. Issued share capital also consists of the paid-up share capital. Paid-up share capital is the amount that has already been paid to the company’s shareholders, which is always less than the amount of authorised capital.
At the time of incorporation of the company, the paid-up capital should be paid immediately and credited to the company’s bank account. When a company cannot function as expected, the shareholders can claim the unused paid-up capital. Even a small amount of paid-up capital is a cause of concern for the company’s investors. The Company Amendment Act, 2015 reduced the minimum requirement for paid-up capital.
Rules Related to Issued Capital
Issued share capital is important in determining a company’s relationship with another company. For example, under Section 5 (1), a company becomes a subordinate of another company if the latter holds more than half of the issued share capital.
Under section 5 (1) of the Stamp Duties Act, stamp duty is not payable when a company acquires more than 90% of the issued share capital of another company in a merger and acquisition situation.
In the case of a company’s public offerings, the shareholder’s approval is necessary. In the case of the issuance of shares, the authorisation of shareholders is required for making any changes in the share capital. Rule 806 of the SGX Listing Manual includes a provision of the general mandate, which must be obtained from the shareholders to allow the directors to approve the new securities. The general mandate acts as the limitation on the issuance of the share capital. As per this rule, not more than 50% of the share capital can be issued.
Example of Authorised Share Capital
To grasp the concept better, consider this example: Imagine you’re baking a cake. The Authorised Share Capital is akin to the total quantity of ingredients you have at your disposal. It signifies the maximum amount of capital that a company can raise through the issuance of shares. Just as you can’t bake a larger cake than what your ingredients allow, a company can’t raise more capital than its authorised limit.
Understanding the Difference: Authorised vs. Paid-up Capital
Now, let’s differentiate between Authorised and Paid-up Capital. We can relate this to our cake-baking analogy.
The Authorised Share Capital is the total amount of ingredients you have at your disposal, while the Paid-up Capital is the portion of those ingredients that you’ve actually used in baking the cake.
In business terms, Paid-up Capital represents the money that shareholders have already contributed to the company.
Conclusion
Authorised share capital helps prevent the directors from allotting new shares, which may affect their control over the company. The company can keep a small percentage of authorised capital for safety purposes when the whole amount of authorised capital is not used. The shareholders’ approval is required to make changes in official capital.
FAQs
What is the formula for Authorised share capital?
Calculating Authorised Share Capital isn't complicated. It's the total number of authorized shares multiplied by the face value of each share. The formula is: Authorised Share Capital = Number of Authorized Shares × Face Value per Share.
What is Authorised share capital under the Companies Act?
Under the Companies Act, the Authorised Share Capital represents the maximum amount a company can raise. It is disclosed in the company's memorandum of association.
What is the limit of Authorised share capital?
The limit varies and depends on the company's needs and plans. A company can increase its Authorised Share Capital by altering its MOA and AOA.
What is minimum authorised capital?
The initial authorized capital of the company is specified in the Memorandum of Association and is typically Rs. 1 lakh.
What is the minimum Authorised share?
The minimum Authorised Share Capital required to start a private limited company is Rs. 1 lakh. If the face value of 1 share is Rs.100 then 1000 Authorised share is required.
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