Authorized Share Capital: Definition, and Types

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The term “share capital” is the funds obtained by a company via the sale of shares to the general public. In simple words, share capital is the cash that shareholders have invested in a company. Stockholders get a part of the company’s ownership in this long-term funding source.

What does “authorized share capital” mean?

Authorized share capital is a financial concept that is indicative of the maximum number of shares that a company can issue to its shareholders. It is usually set out in the memorandum of association or the company’s articles of association and is required for a company to be legally recognized.

Companies only use a portion of the authorized share capital, so they can issue additional shares in the future if required urgently. Other than that, companies also do this to maintain a controlling stake in their company.

Understanding authorized share capital

It is necessary to consider authorized capital meaning with regard to paid-up capital, subscribed capital, and issued capital to understand it completely.

These words are not synonyms, even though they are all connected.

1. Subscribed capital

The fraction of the total authorized capital that has been actually issued to investors is known as subscribed capital. It may also be increased over time as the company issues more stock to the public.

2. Paid-up capital

A company’s paid-up capital is the sum of money it has gathered from the proceeds of the sale of its common stock to its shareholders. It is part of the authorized capital and is the sum of all funds that have been actually invested in the company from investors.

Depending on their preferences, these investors may elect to keep the shares or sell them to other investors.

3. Issued capital

Issued capital is part of authorized capital that a corporation has issued. The actual amount of money has been made available to investors or shareholders as an investment opportunity.

The general public, institutional investors, and insiders who get shares as a benefit of their employment can all be considered shareholders. Issued and outstanding shares are both used interchangeably.

Additional Read: Scalping Trading

Example of authorized share capital

If a company “ABC” has an authorized capital of Rs. 50 lakhs and shares have been granted to shareholders up to a sum of Rs. 40 lakhs, which signifies that the company has only issued shares that do not exceed the authorized capital’s maximum amount.

Additionally, it has the authority to issue additional shares in the future totaling Rs. 10 lakhs without increasing the authorized share capital.

However, if “ABC” company offered shares for Rs. 55 lakhs to investors using the same Rs. 50 lakhs of permitted money, this indicates that the company issued shares worth more than the legally authorized capital and was, thus, in violation of the law.

Companies can do this only if they complete the procedure of raising the authorized share capital.

Conclusion

As a corporation buys back or issues additional shares, the number of shares outstanding will change. That being said, without a stock split or other dilutive action, the authorized share capital will not rise.

The maximum amount of authorized share capital may only be raised with the consent of the shareholders who established the limit.

Disclaimer: Investments in securities markets are subject to market risks, read all the related documents carefully before investing.

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