Share capital and authorized share capital are two important concepts in the world of finance and business. While they are related, they are not the same thing. In this article, we will explore the difference between share capital and authorized share capital, and why they are important for businesses.
Introduction
In the intricate world of business and finance, legal terminology often confuses individuals who are not well-versed in the subject. Two terms that are commonly used in the context of corporate finance are Share Capital and Authorised Share Capital.
While they may seem similar, they serve distinct purposes and play differing roles in a company’s financial structure and operations. In this article, we will explore and demystify the difference between Share Capital and Authorized Share Capital.
Share Capital
Share capital is the total amount of money that a company raises by issuing shares to its shareholders. When a company is formed, it issues shares to its founders and investors in exchange for their investment. The total value of these shares is the share capital of the company.
For example, if a company issues 100 shares at ₹10 per share, its share capital would be ₹1,000. This means that the company has raised ₹1,000 from its shareholders.
Share capital is an important metric for investors and analysts, as it gives an indication of the financial health of the company. A company with a high share capital is generally considered to be financially stable and well-capitalized, while a company with a low share capital may be seen as risky or undercapitalized.
Types of Share Capital
Authorized Share Capital: Authorized Share Capital, often referred to as “Registered Capital” or “Nominal Capital,” is the maximum value of shares a company is legally allowed to issue to its shareholders. This amount is mentioned in the company’s Memorandum of Association (MoA) during its incorporation and is typically higher than the initial capital required to start operations. It acts as a cap on the total value of shares that can be issued.
Issued Share Capital: Issued Share Capital is the portion of the Authorized Share Capital that a company has actually allotted and distributed to shareholders. This represents the total value of shares that have been issued to investors.
Subscribed Share Capital: Subscribed Share Capital is a subset of Issued Share Capital, indicating the value of shares for which shareholders have agreed to pay but might not have paid in full yet. It represents the commitment of shareholders to invest in the company.
Paid-up Share Capital: Paid-up Share Capital is the portion of the Subscribed Share Capital for which shareholders have made full payment. It is the actual capital the company has received from its shareholders.
Authorized Share Capital
Authorized share capital, on the other hand, is the maximum amount of share capital that a company is authorized to issue to its shareholders. This is the maximum amount of money that a company can raise by issuing shares.
This authorized share capital is set out in a company’s memorandum of association, which is a legal document that sets out the company’s objectives and rules for operation. The memorandum of association is filed with the Registrar of Companies when the company is formed, and any changes to the authorized share capital must be approved by the shareholders and filed with the Registrar of Companies.
For example, if a company has an authorized share capital of ₹10,000, it can issue shares up to a total value of ₹10,000. If the company has already issued ₹1,000 worth of shares, it can issue up to ₹9,000 more in shares before it reaches its authorized share capital limit.
Key Aspects of Authorized Share Capital
Flexibility: Companies often set their Authorized Share Capital higher than their immediate capital requirements. This provides flexibility for future fundraising and expansion without the need for frequent amendments to the MoA.
Shareholder Approval: Increasing the Authorized Share Capital usually requires approval from existing shareholders through a special resolution passed in a general meeting.
Regulatory Compliance: Any change in Authorized Share Capital must be filed with the RoC and is subject to regulatory scrutiny and compliance.
Share Capital vs. Authorized Share Capital: Key Differences
Now that we have a clearer understanding of these terms, let’s highlight the key differences between Share Capital and Authorized Share Capital:
Definition: Share Capital is the actual capital raised by issuing shares, whereas Authorized Share Capital is the maximum capital a company can legally issue as per its Memorandum of Association.
Purpose: Share Capital represents the actual funds invested by shareholders, while Authorized Share Capital acts as a legal constraint on the company’s ability to issue shares beyond a specified limit.
Disclosure: Share Capital is the capital issued and allocated to shareholders, which is disclosed in the balance sheet. Authorized Share Capital, on the other hand, is a regulatory declaration mentioned in the MoA and filed with the RoC but does not appear on the balance sheet.
Flexibility: Share Capital is the result of actual transactions and can vary based on the company’s fundraising activities. Authorized Share Capital, once declared, can only be changed through a formal and regulated process.
Regulatory Implications: Violating the limit set by Authorized Share Capital can lead to regulatory penalties and legal repercussions, while Share Capital represents the company’s financial reality.
Why is Authorized Share Capital Important?
Authorized share capital is important for several reasons. Firstly, it gives a company flexibility in terms of raising capital. If a company needs to raise more money, it can issue more shares up to its authorized share capital limit. This can be a quicker and easier way to raise capital than taking out a loan or issuing bonds.
Secondly, authorized share capital can help to protect the interests of existing shareholders. Setting a limit on the amount of share capital that a company can issue, ensures that the existing shareholders are not diluted by the issuance of new shares. This means that the existing shareholders will maintain their proportional ownership of the company.
Finally, the authorized share capital can help to prevent hostile takeovers. If a company has a high authorized share capital, it can issue new shares to existing shareholders in order to dilute the ownership of any potential acquirers. This can make it more difficult for a hostile bidder to gain control of the company.
Share Capital vs. Authorized Share Capital
The main difference between share capital and authorized share capital is that share capital is the actual amount of money that a company has raised by issuing shares, while authorized share capital is the maximum amount of share capital that a company is authorized to issue.
Share capital is an important metric for investors and analysts, as it gives an indication of the financial health of the company. Authorized share capital, on the other hand, is important for giving a company flexibility in terms of raising capital, protecting the interests of existing shareholders, and preventing hostile takeovers.
Conclusion
In the complex landscape of corporate finance and business compliance, distinguishing between Share Capital and Authorized Share Capital is essential. While Share Capital embodies the actual ownership and financial foundation of a company, Authorized Share Capital sets the legal boundaries for equity issuance.
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