What Does Authorised Capital Mean? Definition, Types & Purpose in the Share Market
In the corporate finance, authorised capital holds a significant position as a cornerstone of a company’s capital structure. It serves as a crucial framework that determines the maximum amount of capital a company can raise through the issuance of shares.
In this blog, we delve into the intricacies of authorised capital, understand what is authorised capital of a company is, and explore the legal aspects that may shape a company’s growth trajectory.
What is Authorised Share Capital?
Authorised share capital is also known as “authorised stock,” “authorised shares,” or “authorised capital stock”. The meaning of authorised capital is the maximum amount of capital a company can issue legally or offer based on its corporate charter. The authorised capital is also known as nominal capital or registered capital.
It is a fundamental concept in corporate law and is established during the company’s incorporation process. The authorised capital is specified in the company’s governing documents and must comply with the jurisdiction’s legal requirements in which the company is registered.
Purpose and Significance of Authorised Capital
The nominal capital plays an important role in a company as it helps in:
- Ensuring Flexibility in Capital Structure: Registered capital provides flexibility for a company to structure its capital base. It may allow the company to issue new shares and raise additional funds as needed, subject to compliance with legal regulations and obtaining shareholder approval.
- Facilitating Future Growth: By setting a higher authorised capital, a company can plan for future expansion and accommodate potential funding requirements without frequent amendments to its capital structure. This enables the company to adapt to changing market conditions and seize growth opportunities
- Boosting Investor Confidence: Authorised capital instil confidence in investors by demonstrating the company’s capacity to raise additional capital when necessary. It may signal the company’s preparedness to support its growth plans, pursue strategic initiatives, and meet financial obligations, enhancing investor trust and attracting potential stakeholders.
- Regulatory Compliance: Adhering to the authorised share capital limit ensures compliance with regulatory provisions. By maintaining the authorised capital at the prescribed level, the company fulfils legal obligations and maintains transparency in its capitalization structure.
- Safeguarding Shareholder Interests: Nominal capital safeguards the interests of existing shareholders by restricting the issuance of shares without their consent. It helps protect their ownership rights and prevents dilution of their holdings.
How Does the Authorised Share Capital Work?
Filing articles of incorporation is an effective way to introduce share capital and can be done in the state of business. These specific difficulties may include:
- This corporate charter contains important information about the firm, including its name and other specifics. Therefore, shareholding may happen at the corporation’s discretion.
- When determining authorised shares, issued or paid-up capital may not be considered, and the corporation can issue more shares as needed.
- On the other hand, if a company wants to increase its authorised share capital, it usually has to modify its corporate charter. This process may require approval from the company’s shareholders.
- Stakeholder approval may enable the issuance of additional shares, potentially diluting the shareholding of existing investors
- The shareholding of its present investors may be diluted if further shares are issued.
What is the Difference Between Authorised and Paid Up Capital?
Authorised Capital refers to the maximum amount of capital a company can legally issue to shareholders. It is the total value of shares that a company can offer and can change only by following legal procedures.
Paid-up Capital, on the other hand, is the actual amount of capital that the shareholders have paid to the company. It represents the portion of authorised capital that the company has issued and for which shareholders have paid. However, any significant changes in the authorised capital needs require the submission of post facto information to the Registrar of Companies (ROC).
For example, a company’s nominal capital is ₹10 crores. This means the company can issue a maximum of 10 lakh shares of ₹10 each. However, the company may not have issued all the shares yet. If the company has only issued 5 lakh shares, then the paid-up capital will be ₹50 lakhs.
Key Difference Between Nominal Share Capital and Paid Up Capital
Key differences between company authorised capital and paid up capital:
| Features | Authorised Capital | Paid-Up Capital |
|---|---|---|
| Definition | The maximum amount of shares that a company is authorised to issue. | The amount of money that has been received by the company from shareholders in exchange for shares. |
| Mentioned in | The authorised capital of a company is mentioned in the Memorandum of Association (MoA). | The paid-up share capital of a company is mentioned on the Share certificate. |
| Can be increased or decreased | Yes | No |
| Can be more than paid-up capital | No | Yes |
| Importance | Protects the interests of shareholders. | Represents the amount of money that the company has raised from shareholders. |
What is Subscribed Capital?
Shareholders’ subscriptions are called subscribed capital. Subscribed capital represents a portion of the authorised capital company’s authorised capital that shareholders commit to purchasing. They are also a part of Initial Public Offering (IPO). When individuals or entities subscribe to the capital, they may express their intent to buy a certain number of shares in the company. Therefore, the subscribed capital represents the maximum amount of capital that shareholders are obligated to contribute. However, it’s essential to note that the actual payment might occur in instalments or at a later date, as specified by the company’s policies and regulations.
Key Components of Authorised Capital
The main elements comprising authorised share capital are:
- Authorised Shares: This refers to the maximum number of shares a company can legally issue. It is specified in the company’s Articles of Incorporation (AoA) or Memorandum of Association (MoA).
- Par Value per Share: The par value can represent the nominal value assigned to each share and set a minimum issuance price. However, the par value may not necessarily reflect the market value of the shares.
- Total Value: Nominal capital usually denotes the maximum capital a company can raise through share issuance. It is calculated by multiplying the number of authorised shares by the par value per share.
How to Calculate the Authorised Capital?
To calculate the authorised capital, you need two components: Authorised Shares and Par Value Per Share.
Once you have these two values, multiply the number of authorised shares by the par value per share to calculate the nominal capital.
| Authorised Capital Formula = Number of Authorised Shares × Par Value per Share |
Let’s understand how to calculate authorised share capital with the help of an example.
Suppose, a corporation decides to authorise 10,00,000 shares as per its Articles of Incorporation and the par value is ₹10 per share.
So, in this case, the authorised share capital would be ₹1,00,00,000
Authorised Capital = 10,00,000 shares × ₹10 per share
Process of Determining Authorised Capital
To determine how authorised capital is decided, let’s follow a systematic process that takes into account various factors. Here’s an outline of the process:
Factors to Consider in Determining Authorised Capital
There are certain factors that companies need to consider while determining authorised share capital. Some of these factors are:
- Business plan and growth strategy
- Capital requirements for expansion, investments, and operational needs
- Industry and market factors
- Legal and regulatory considerations
- Shareholder considerations
Role of the Company’s Growth Plans and Funding Requirements
A company’s growth plan and funding requirements significantly impact nominal capital. Here are some things to consider before determining the authorised capital:
- Evaluate the company’s growth plans and funding requirements.
- Assess the financial needs for future expansion and investment.
- Consider the potential funding sources and capital structure required to support the growth plans.
Compliance with Legal Regulations and Shareholder Approval
Here are a few things that companies can consider on the compliance front before determining their authorised capital:
- Understand the legal and regulatory requirements related to authorised share capital.
- Ensure compliance with jurisdiction-specific laws and regulations.
- Obtain necessary approvals from shareholders through a general meeting or resolution.
- File required documents and forms with the appropriate regulatory authorities.
In short, by carefully considering these factors, understanding the company’s growth plans and funding requirements, and complying with legal regulations, a company can determine an appropriate nominal capital that supports its future growth and financial needs.
Example of Authorised Share Capital
Consider a company with an authorised share capital of 10 million shares at a par value of ₹10 each, totalling ₹100 million. This means the company has the authority to issue shares worth ₹100 million, even if it has not yet issued the entire amount.
How Do Public and Private Companies Raise Authorised Capital?
Both public and private companies have different avenues for raising authorised share capital. Let’s find out how these companies do that:
Public Companies
Public companies raise authorised capital via:
- Initial Public Offering (IPO): Public companies can raise authorised capital by conducting an IPO. They offer shares to the general public, allowing individuals and institutional investors to purchase shares and become company shareholders. Additionally, the funds raised through the IPO contribute to the company’s registered capital.
- Follow-on Public Offering (FPO): Public companies can also raise additional authorised share capital through a FPO offering. This involves issuing additional shares to the public after the initial listing. It also provides an opportunity for the company to raise further funds for expansion or other purposes.
Private Companies
Private companies raise authorised capital via:
- Private Placement: Private companies can raise nominal capital through private placements. In this method, the company offers shares to a select group of investors, such as venture capitalists, private equity firms, or accredited investors. Private placements are usually not available to the general public. Moreover, these are governed by specific regulations in each jurisdiction.
- Rights Issue: Private companies may opt for a rights issue to raise authorised share capital. In this approach, existing shareholders are given the right to purchase additional company shares at a predetermined price. This allows the company to raise capital from its existing shareholders in proportion to their existing holdings.
Alteration of Authorised Capital
When it comes to altering nominal capital, there are a few key aspects to consider:
Circumstances Requiring Alteration
Companies may need to alter their authorised share capital for various reasons, such as
- Expanding their business operations
- Raising additional funds
- Accommodating future growth
- Restructuring their capital structure.
Apart from this, changes in market conditions, mergers, or acquisitions can also prompt the need for alteration.
Procedures and Legal Requirements for Alteration
Altering authorised capital involves a structured process that may typically require shareholder approval. Companies must follow legal procedures and comply with regulatory requirements specific to their jurisdiction. These procedures often include board meetings, drafting resolutions, obtaining shareholder consent through voting, and seeking necessary approvals from regulatory authorities.
Implications and Impact on the Company’s Structure
Alteration of nominal capital can have significant implications for the company’s structure.
It can affect the number of shares that the company can legally issue, the par value or face value of shares, and the company’s overall capitalization. Depending on the alteration, it may also impact the rights and privileges attached to different classes of shares, such as voting rights or dividend preferences.
Therefore, investors should examine the alteration’s implications closely to assess its potential impact on their ownership stake and the company’s financial position.
How Does Authorised Capital Affect Investors?
Authorised capital can have a few effects on investors. Let’s take a look:
- Investment Potential: The nominal capital can reflect a company’s capacity to raise funds by issuing additional shares. A higher authorised capital can mean the company can potentially raise more money in the future. This can be exciting for investors as it suggests potential growth and expansion.
- Ownership Impact: When a company issues new shares to raise capital, it can dilute the ownership of existing shareholders. This means your ownership stake may decrease as new investors come in. It’s important to consider how this dilution may affect your ownership percentage and voting rights.
- Funding Flexibility: A higher authorised share capital gives the company flexibility in raising funds. It can respond to changing market conditions or seize investment opportunities. This flexibility can benefit investors by helping the company secure funds for growth or navigate through challenging times.
- Share Price Stability: Authorised capital may indirectly affect share price stability. A high authorised capital but low issued capital may create uncertainty among investors, as it suggests potential future share issuances. On the other hand, a lower authorised capital may give the company more control over share issuance, which may contribute to price stability.
- Investor Confidence: The authorised capital and other financial indicators influence investor confidence. A well-balanced authorised capital structure, aligned with growth plans and economic needs, inspires confidence in investors. It shows sound financial management and a clear vision for the future.
Can a Company’s Issued Capital Exceed its Authorised Capital?
No, a company’s issued capital cannot exceed the authorised capital.
This is because the authorised capital represents the maximum amount of capital that a company is legally allowed to issue to shareholders. It is set and approved during the company’s incorporation process and is stated in the company’s Articles of Incorporation or Memorandum of Association.
The issued capital, on the other hand, refers to the actual amount of capital that has been issued by the company and allocated to shareholders through the issuance of shares. It cannot exceed the authorised capital because the company is bound by the limits set in its authorised capital.
Therefore, if a company wishes to increase its issued capital beyond the authorised share capital, it would need to go through a formal process of amending authorised capital. In short, they will have to increase authorised capital to increase the issued capital. Thus, this may require shareholder approval and compliance with applicable laws and regulations.
To Wrap It Up…
The authorised capital stands as a fundamental pillar in the financial landscape of a company. It provides a framework for capital structure and empowers businesses with the flexibility to raise funds when needed.
Moreover, the careful consideration of the nominal capital ensures that companies can align their growth plans, meet funding requirements, and comply with legal regulations. Hence, by understanding the nuances of authorised capital, businesses can make informed decisions that fuel their expansion and attract investors.
As always, investors must do their own research and/or consult their financial advisor before investing.
FAQs
Share capital is the total money a company raises by selling shares to investors, representing their ownership stake and funding its growth. Think of it as the company’s piggy bank of investor contributions.
Authorised capital is decided by company founders in the Memorandum of Association (MoA), but can be increased later with shareholder approval.
Authorised capital is the maximum amount a company can legally raise through shares. Paid-up capital is the portion of authorised capital that shareholders have fully contributed to the company.
To check a company’s authorised capital, you can access its official documents, such as the Memorandum of Association (MoA) and Articles of Association (AoA), available on the government’s corporate registry website.
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