Authorized Capital

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Authorized Capital Meaning

Authorized share capital is the maximum number of units of shares a company can issue, as mentioned in the memorandum of association or the articles of incorporation. It is helpful to raise capital from the general public. Usually, only a percentage of the total authorized capital stock is issued, and the rest is set aside as a buffer to raise additional capital when required.

Authorized Capital

Also known as nominal capital or registered capital, it is used to restrict the ability of the company's directors to allot additional shares, which might affect the company's control. Additionally, it is a preventive action to ensure any shifts in profit distribution balance do not occur.

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  • Authorized capital refers to the highest shares a company can issue to its shareholders. It is mentioned in the constitutional documents of the company.
  • The number of shares issued cannot be more than the authorized or registered capital. It is always lesser than or equal to the registered capital.
  • Only a limited amount of registered capital is issued to ensure the organization has enough buffer capital for the future financial needs of the organization.
  • The existing shareholders of the organization must authorize any amendments or alterations in the registered capital through voting.

Authorized Share Capital Explained

Authorized capital is the total capital that is issuable to the public. It accounts for every share in different categories that the company can choose to issue as per the company’s capital requirement.

Stock exchanges may expect a basic authorized capital for the company's listing on the exchange. However, the minimum capital depends on the jurisdiction of the company. For example, in the United States, there are no minimum capital requirements for the company to be listed. In contrast, the London Stock Exchange expects the company to have a minimum capital of 700,000 pounds.

It is essential to note that the number of issued or outstanding shares can be significantly lesser than the total authorized capital stock. This difference in the number of shares allows the company to raise funds in times of necessity rather than raising excess funds and underutilizing them.

Moreover, shareholders can ask for more shares to be issued from the registered capital at the annual shareholders’ meeting, provided a majority of them vote in favor of the change.

There are no restrictions regarding the volume of shares that are authorized. Corporations can choose the quantum of shares they would like to issue right from the Initial Public Offering (IPO) to any other instance where they would like to issue additional shares to raise capital for their requirements.

The authorized or registered capital is a culmination of all shares, such as common, restricted, and preferred shares. Therefore, it can be significantly higher than the number of issued or outstanding shares.

Examples

Let us understand the concept better with the help of the examples below:

Example #1

Spartan Enterprises is a startup company that deals in furniture and home décor. In the five years since its inception, they have managed to secure large deals with leading furniture and décor companies across the United States.

They decided to go public to meet their capital requirement for additional factories, workforce, and geographical footprint expansion.

The company's authorized share capital comprised 500,000 common shares at $2 each, totaling $1 million. However, Spartan Enterprises decided to issue 150,000 shares, giving them an additional capital of $300,000.

While most people cited this decision of not issuing a higher amount as a "missed opportunity," the company's directors felt they would have enough shares left for their future requirements and could raise capital as and when required.

Example #2

ObsEva SA, a biopharmaceutical company, headquartered out of Switzerland and listed on NASDAQ as OBSV, specializes in developing oral compounds for conditions relating to women's reproductive health from conception to birth.

To ensure their future equity plans and plans for their subsidiary companies are on track, they increased their share capital from 85,220,471 to 108,620,471 shares by issuing 23,400,000 shares out of their authorized capital.

How To Increase?

The authorized capital is a culmination of all categories of shares that the company can issue. First, the existing shareholders must approve any changes relating to the capital size. Before the process reaches that stage, there are a few important considerations to follow, a few of which are discussed below:

  • Articles of Association - Before the board can take this process forward, it is essential to check if the Articles of Association (AOA) allow an increase in the registered capital. If not, a board meeting with the directors must pass a unanimous decision in favor of amending the contents of the AOA.
  • Board Meeting - Once it is clear that the Articles of Association allow an increase of the authorized share capital, the board must pass this decision through voting from the shareholders at the annual shareholders meeting.
  • Send Notice - If the capital increase occurs after the annual shareholders meeting, the company must call for an extraordinary general meeting. In addition, the company has to send out notices to shareholders with the agenda mentioned, explanations, and the resolutions that must be passed to modify the Memorandum of Association and AOA.
  • Passing the Resolution - The resolution is discussed in the meeting and is voted for or against by the shareholders. The process is taken forward if the majority shareholders vote in favor of the resolution.
  • Filing - Within 30 days of the resolution being passed, the board must file the necessary papers and pay the requisition fees to increase the company's registered capital.

Authorized Capital vs Paid Up Capital vs Issued Capital

It is crucial to remember the concepts concerning paid-up capital, issued capital and subscribed capital to understand the concept of authorized capital. Therefore, let us discuss these concepts to facilitate better understanding through the points below:

#1 - Authorized Capital

  • The maximum capital against which the company is allowed to issue shares is referred to as authorized capital.
  • The basic authorized capital and its intricate details are mentioned in the constitutional documents.
  • Any alteration to capital can be done only by abiding by the procedure authorized by law and by the approval of the existing shareholders.
  • A company cannot issue shares beyond its registered capital unless necessary alterations occur.

#2 - Paid Up Capital

  • Paid-up capital is the amount the company's shares have been issued, and the shareholders have paid the payment for the same.
  • It might be lesser than or equal to the company's registered capital.
  • The company can carry it out through private placements or a public issue.
  • It is helpful to calculate the net worth of the company.

#3 - Issued Capital

  • Issued capital refers to the part of authorized capital that is issued to the public for purchase or subscription.
  • It is based on the present financial needs of the company.
  • As long as the issued capital does not exceed the registered capital, there is no need for amendments in the constitutional papers.
  • The declaration of issued capital is published during the Initial Public Offering of the company’s shares.

Frequently Asked Questions (FAQs)

1. How to compute authorized capital stock?

The computation depends on the authorized capital formula:- Authorized capital stock = No. Of shares outstanding * Value per share. The calculation gives the equation of the company’s total authorized share capital as it is the culmination of every share in different categories.

2. Who decides authorized capital?

The decision on the size of the authorized or registered capital happens while framing the constitutional paper of the organization, like the Articles of Association (AOA) or Memorandum of Association (MOA). The existing shareholders must approve any amendments or alterations, provided the amendment is allowed by the constitutional papers of the company.

3. How to check company authorized capital?

The company’s authorized capital is mentioned in the constitutional papers under the "capital clause" heading. Therefore, another way of deriving the registered capital is to use the authorized capital formula discussed above to calculate the company's registered capital.