Understanding the financial structure of a company is crucial for investors, stakeholders, and anyone involved in the corporate world. Two terms that often come up in this context are "authorized capital" and "issued capital". While they might seem similar, there's a significant difference between authorized and issued share capital. This post aims to provide a better understanding of these terms.
What is Share Capital?
Share capital is the maximum amount of capital that a company can raise from its shareholders in exchange for shares. It represents the ownership of a company and can be broken down into various types, including authorized, issued, subscribed, and paid-up capital.
Authorized Share Capital (or Authorized Capital)
Authorized capital, also known as nominal capital or authorized share capital, is the maximum capital that a company is permitted to issue to its shareholders. This amount is mentioned in the company's memorandum of association (MOA) during incorporation. The MOA is a key document that outlines the company's purpose and the maximum amount of capital it can raise.
The value of the shares, i.e., the per-share value, multiplied by the number of shares the company can issue gives the authorized capital. For instance, if a company has an authorized capital of Rs 1 million with a value of shares being Rs 10, it means the company can issue up to 100,000 shares.
Issued Capital
Issued capital refers to the part of the authorized capital that has been offered to the public for subscription. It's the capital that a company has actually issued to the public or existing shareholders. Not all authorized capital is issued to the public. The issued capital can be less than or equal to the authorized capital but never more.
For instance, if a company has an authorized capital of Rs 1 million but only issues shares worth Rs 500,000, then Rs 500,000 is the issued capital.
Difference Explained: Authorised vs Issued Share Capital
The primary difference between authorized capital and issued capital is the amount of capital a company is registered to issue vs the capital actually issued by the company.
Disclosure Requirement
As per the Companies Act, enterprises must disclose both their authorized and issued capital in their balance sheets. This disclosure helps shareholders and potential investors gauge the company’s capital size and its potential to raise additional capital in the future.
Alteration
A company can alter its authorized capital with the approval of its shareholders and by amending its MOA. However, the issued capital can be changed only when the company issues more shares to the public or buys back its shares.
Stamp Duty
When a company is registered, it pays stamp duty on its authorized capital, not on its issued or subscribed capital.
Subscription
While authorized capital sets the limit, the issued capital is what shareholders subscribe to. The difference between authorized capital and issued capital can be seen as the company's reserve that it can tap into when it needs to raise additional funds.
Rights and Dividend
Dividend distribution is based on the issued capital, as these are the shares held by the shareholders.
Other Types of Share Capital
Subscribed Capital
This is the part of the issued capital that investors have subscribed to. It can be less than or equal to the issued capital.
Paid-up Capital
It's the amount of money the company has received from shareholders who have fully paid for their shares. It can be less than the subscribed capital if all shares are not fully paid for.
Why Does This Matter?
Understanding the difference between authorized and issued share capital is crucial for investors. It provides insights into the company’s growth potential, its ability to raise additional capital, and its financial health. For instance, if a company has a significant gap between its authorized and issued capital, it might indicate the potential for future share issues or expansions.
Moreover, regulatory bodies like stock exchanges may have specific requirements. For instance, the London Stock Exchange or other major exchanges might have stipulations about the disclosure of authorized and issued capital.
Conclusion
In the corporate world, terms like authorized and issued share capital, while technical, are fundamental. They provide insights into a company's financial structure, its potential for growth, and its current financial standing. Whether you're a company director, a majority shareholder, or an investor, understanding these terms is crucial for making informed decisions. Always ensure that you consult the company’s MOA, articles of association, and other relevant documents for a comprehensive view of its capital structure.
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