The maximum number of shares a company corporation may issue to its shareholders in accordance with its MOA (Memorandum of Association) bylaws is known as authorised capital. The financial instruments divided into the units of the total capital are termed shares. The company can use these hares to raise money by selling them to the general public.
Why is authorised capital used?
It is used to restrict the power of directors to distribute new shares, which could harm the company's ability to govern its direction. Additionally, it serves to maintain the balance of profit distribution. A small portion of the authorised capital is frequently not utilised as a whole and is preserved as a safety net in case of further funding is required.
The authorized capital mechanism serves to limit or regulate the ability of directors to issue or allocate fresh shares, which could alter the company's control or shift the power dynamics among shareholders. If new shares are distributed at their face value rather than the market value, it could impact the profit distribution equilibrium among existing and new shareholders.
Authorised Capital and Paid-Up Capital: Differences
The maximum amount of share capital that a company is authorized to issue.
It is mentioned in the company's Memorandum of Association (MOA).
Can be increased through a special resolution passed by the shareholders and approval from the regulatory authorities.
Determines the company's borrowing capacity and the maximum amount of capital that can be raised.
Directors cannot issue or allot shares beyond the authorized capital limit without shareholder approval.
Paid up capital
The amount of share capital that has been issued by the company and has been fully paid by the shareholders.
It is mentioned in the company's Articles of Association (AOA).
Cannot exceed the authorized capital of the company.
Determines the actual amount of capital that the company has raised and is available for use.
Affects the company's financial ratios and valuation.
The Advantages of Authorized Capital
Due to the additional revenue generated through stock sales, the company can concentrate on business expansion without borrowing money or receiving funding from other conventional sources.
With more money coming in, the business may pay its investors, shareholders, partners, senior management, employees in equity ownership programmes, founders, and owners more.
The addition of new share capital increases the company's overall net worth. The corporation can now borrow more money as a result.
Authorised Capital of Public Companies
As a condition of listing on a stock exchange, corporations may be required to have a certain amount of approved share capital. For example, to be listed on the London Stock Exchange (LSE), a public limited company (PLC) must have at least £700,000 in authorised capital.
The authorised capital may be more than the number of trading shares. In this scenario, the shares issued to the general public and the company's employees are referred to as "outstanding shares."