Understanding authorized share capital

Authorised share capital is the highest number of shares a company can issue as per its Articles of Association. This limit is decided by the company’s founders or board of directors and can be changed by a special resolution from the shareholders.

The authorised share capital is key in a company’s corporate governance. It sets the amount of money a company can get from selling its shares. This impacts the company’s ability to grow, take on new business, and expand.

You may also like: What is equity share capital? [Explained]

Authorized share capital significance

The main reason for having an authorized share capital limit is to safeguard shareholders’ interests. By capping the number of shares that can be issued, the company makes sure existing shareholders don’t lose their share value with the issue of new shares. This also helps keep a steady ownership structure and avoid hostile takeovers or other unwanted ownership changes.

If a company’s authorized share capital is too low, it might not be able to issue new shares for extra capital, limiting its growth or new business chances. On the other hand, if it’s too high, it could be seen as overvaluation or financial instability, which is not good.

In different places, authorized share capital is also known as “authorized stock,” “authorized shares,” or “authorized capital stock.”

Terms related to authorized share capital

Authorized share capital refers to the total value of shares a company can issue to raise funds. It consists of three parts: subscribed capital, paid-up capital, and issued capital.

Subscribed capital

When a company launches an Initial Public Offering (IPO), interested buyers agree to purchase shares from the company’s treasury. The capital calculated based on these commitments is termed as subscribed capital. Major buyers usually include foreign institutional investors, domestic institutional investors and high net worth individuals.

Paid-up capital

After the subscription phase, the company invites these interested buyers to pay either partial or the full amount for the shares they committed to buy. The total money collected through this is called the paid-up capital. In simple terms, paid-up capital is the portion of subscribed capital for which the company has received payment.

Issued capital

Post receiving the payments, the company issues shares to the shareholders. The money received during this phase is termed as issued capital. The shares are sold to various types of shareholders like retail investors, institutional investors and so on. Once the shares are issued, shareholders have the choice to either keep the shares or sell them.

Also Read: Working capital – the what, how, and why of business lifelines

Let’s look at the picture below to understand authorised share capital better.

Authorized share capital example

Take a company that can issue up to 1,00,000 shares at ₹10 each. This sets the authorized share capital at ₹10,00,000. The company chooses to release only 10,000 shares and asks interested shareholders to pay ₹5 per share to show their agreement. When all 10,000 shares are subscribed, the paid up capital reaches ₹50,000. Upon issuing all these shares to the shareholders, it’s called the issued capital.

Different stages of capital related to the example of authorized share capital provided

This table provides a breakdown of the different stages of capital mentioned in the example, showing the relation between the amount in rupees and the number of shares involved at each stage.

Also Read: The Capital Asset Pricing Model (CAPM) – Explained

Final words

Authorized share capital is key to a company’s corporate governance structure. It sets the max number of shares a company can issue, impacting the company’s capacity to raise capital, grow, and expand. By having a fitting authorized share capital limit, companies can safeguard shareholder interests, keep a steady ownership structure, and set themselves up for long-term success.