Authorized Capital & Paid up Capital

 What is Authorized Capital?

Authorized Capital, also known as authorized share capital or nominal capital, is the maximum amount of share capital that a company is allowed to issue to shareholders as per its corporate charter. This limit is set during the incorporation of the company and can be increased with approval from shareholders and regulatory bodies, depending on the jurisdiction.

Example:

If a company has an authorized capital of $1 million, it means it can issue shares up to that value, although it may choose to issue less initially, such as $500,000 worth of shares, keeping the remaining $500,000 available for future needs.

Maximum Limit of authorized capital

The maximum limit of authorized capital is the total value of shares that a company is legally permitted to issue according to its articles of incorporation or corporate charter. This limit can be set at any amount initially agreed upon by the company’s founders and approved by relevant authorities, but it can also be increased later if necessary, following certain legal procedures.

Important Points About the Maximum Limit of Authorized Capital:

1. Initial Setup: At the time of incorporation, a company defines its authorized capital as a predetermined maximum. This amount can vary significantly depending on the company's size, goals, and financial strategy.

2. Flexibility to Issue Shares: A high authorized capital gives the company flexibility to issue more shares as it grows or needs additional funding, without having to frequently alter the capital structure.

3. Increasing Authorized Capital: If a company’s business expansion requires raising more capital than initially authorized, it can seek shareholder approval and regulatory permission to increase the authorized capital. This process often involves amending the company's articles of incorporation.

4. Unissued Shares: Even if a company has a high authorized capital, it does not have to issue all shares at once. A portion may remain unissued as a reserve for future needs, such as fundraising, employee stock options, or acquisitions.

Example:

If a company has set its authorized capital at $10 million, it can issue shares up to a value of $10 million, even if it initially chooses to issue only $5 million. The remaining $5 million provides flexibility for future share issuance without exceeding the maximum authorized limit.

Issued vs. Unissued Shares Authorized Capital

In the context of authorized capital, issued shares and unissued shares refer to the shares a company can issue to shareholders and the shares it has not yet issued, respectively. Here's how they differ:

1. Issued Shares

• Definition: Issued shares are the shares that a company has actually sold or distributed to its shareholders. These are part of the authorized capital but represent the portion of it that has been made available to investors.
• Characteristics:
  • These shares are fully paid or partly paid (depending on the payment terms set by the company).
  • Issued shares are what shareholders own and are reflected in the shareholders’ equity on the balance sheet.
  • Once issued, the company cannot re-issue these shares without going through a process like buybacks or new issuance.
• Example: If a company has an authorized capital of $10 million (1 million shares at $10 each) and it has issued 500,000 shares, the issued capital would be $5 million.

2. Unissued Shares

• Definition: Unissued shares are the portion of the authorized capital that has been approved for issuance by the company but has not yet been sold or allocated to shareholders.
• Characteristics:
  • These shares exist in the company's corporate charter but are not yet in the hands of shareholders.
  • The company can issue these shares at any point in the future, provided it doesn't exceed the total authorized capital.
  • Unissued shares allow the company flexibility to raise funds by issuing new shares without changing the authorized capital limit.
• Example: In the same example, if the company has authorized 1 million shares but has only issued 500,000 shares, then 500,000 shares remain unissued. These shares can be issued in the future for raising capital or for other purposes.

Relationship with Authorized Capital

• Authorized Capital refers to the total number of shares a company is allowed to issue.
  • Issued Shares are part of this authorized capital that has been made available to shareholders.
  • Unissued Shares are part of the authorized capital that has not been issued yet.
  The sum of issued and unissued shares will always equal the authorized capital.

Example Breakdown:

If a company has authorized capital of 1 million shares, priced at $10 per share, the total authorized capital would be $10 million.

• Issued Shares: If the company has issued 600,000 shares, then the issued capital is $6 million (600,000 x $10).
• Unissued Shares: The remaining 400,000 shares are unissued, representing $4 million of the authorized capital.

Amendment Process of Authorized Capital

The amendment process of authorized capital involves legally increasing or decreasing the maximum amount of capital a company is allowed to issue as per its corporate charter or articles of incorporation. This process generally requires approval from the company’s shareholders, and may also involve regulatory approvals depending on the jurisdiction.

Here’s a step-by-step overview of how the amendment process works:

1. Board of Directors’ Proposal

• Initial Step: The board of directors proposes an increase (or decrease) in the authorized capital. This can be based on business needs, such as raising capital for expansion, issuing new shares, or other corporate strategies.
• Justification: The proposal must typically include reasons for the increase or decrease, such as funding growth, acquiring assets, or paying off debts.

2. Preparation of a Special Resolution

• Special Resolution: A formal resolution is drafted outlining the proposed change to the authorized capital. A special resolution requires approval by a certain percentage of shareholders (usually a 75% majority in many jurisdictions).
• Details: The resolution will specify the new authorized capital limit, the number of shares to be authorized, and any changes to the nominal value of shares if applicable.

3. Shareholder Approval

• General Meeting: A general meeting of shareholders (such as an annual general meeting or a specially convened extraordinary general meeting) is called to discuss and vote on the proposed amendment.
• Voting: The shareholders vote on the proposed resolution. The exact majority required varies by jurisdiction and the company’s articles (often around 75% or more of the votes cast).
• Approval: If the resolution passes, the authorized capital can be amended according to the terms set out in the resolution.

4. Amendment to Articles of Incorporation

• Change in Corporate Charter: Following shareholder approval, the company will update its articles of incorporation or corporate charter to reflect the new authorized capital. This is a legal document that outlines the company’s governance structure and limits.
• Filing with Regulatory Authorities: The company must file the amended articles with the relevant government or regulatory authority, such as the Registrar of Companies or a securities regulator. This may include submitting the special resolution and updated charter.
• Fees: The company may need to pay filing fees or other administrative costs associated with the amendment.

5. Issuing New Shares (If Applicable)

• Issuance Process: Once the authorized capital is increased, the company can issue new shares within the new limit. If the amendment is an increase in capital, the company can now issue additional shares to raise funds or fulfill other business needs.
• Compliance: The company must ensure that the new share issuance complies with any regulatory requirements, including disclosure and shareholder rights.

6. Regulatory Approval (If Required)

• Depending on the jurisdiction and the nature of the amendment, regulatory bodies (like the Securities and Exchange Commission or a similar agency) may need to review and approve the changes, particularly if it involves public offerings or impacts shareholder interests.
• For public companies, disclosure to regulators and the public may also be required.

Example of the Process:

Let’s say a company wants to increase its authorized capital from $1 million to $5 million.

1. Board of Directors Proposal: The board agrees on the need to raise additional capital for expansion and proposes increasing the authorized capital.
2. Special Resolution: A resolution is drafted outlining the increase and sent to shareholders for approval.
3. Shareholder Meeting and Vote: A shareholder meeting is called, and shareholders vote. If 75% approve the resolution, the amendment is passed.
4. Amending Articles: The company's articles of incorporation are amended to reflect the new authorized capital of $5 million.
5. Filing with Authorities: The amended articles are filed with the regulatory authorities, completing the legal process.
6. Issuance of Shares: The company can now issue shares up to the new limit of $5 million, raising additional funds as needed.

Paid up Capital

Paid-up capital refers to the amount of capital that a company has received from shareholders in exchange for shares of stock. This is the portion of the company’s issued capital that has been paid for by the shareholders, either in full or in installments.

Key Characteristics of Paid-up Capital:

1. Paid for by Shareholders:

   • Paid-up capital represents the actual funds the company has received from shareholders when they purchase shares. It can be either fully paid or partly paid based on the terms set by the company.

2. Part of Issued Capital:

   • Paid-up capital is a subset of issued capital. It includes the value of shares that the company has issued and for which it has received payment.
   • Issued Capital: Total value of shares issued by the company (including both paid-up and unpaid shares).
   • Paid-up Capital: The actual amount the company has collected from the shareholders, which may not necessarily be the same as the full issued capital if shares are partly paid.

3. Fully Paid-up Capital vs. Partly Paid-up Capital:

   • Fully Paid-up Capital: All the shares issued by the company have been paid for in full by shareholders.
   • Partly Paid-up Capital: Some shares have only been partially paid for, meaning the shareholders owe the company additional amounts in the future, as per the terms of the share issuance.

Example:

If a company has issued 1,000,000 shares with a nominal value of $1 per share:

• Issued Capital: The company may have issued 1,000,000 shares, making the total issued capital $1,000,000.
• Paid-up Capital: If shareholders have paid $800,000 for those shares (in full or installments), the paid-up capital would be $800,000.

Importance of Paid-up Capital:

1. Liquidity: Paid-up capital is important because it represents the funds available to the company for its operational needs, expansion, and other corporate purposes.
2. Shareholder Equity: It is a key part of a company’s equity, contributing to its financial stability and capital base.
3. Company’s Legal Requirement: Some jurisdictions require companies to have a minimum level of paid-up capital to ensure that they can meet their financial obligations and remain solvent.

Paid-up Capital and its Role in Financing:

• Raising Funds: Paid-up capital is a primary means by which a company raises initial funds from its shareholders. This capital is used to finance operations, investments, or debt obligations.
• Company Valuation: A higher paid-up capital may signal a company’s financial strength and could affect its valuation in the market.

Differences between Authorized Capital & Paid up Capital

Feature	Authorized Capital	Paid-up Capital
Definition	Maximum capital the company is allowed to issue	Amount the company has actually received from shareholders
Flexibility	Can be increased or decreased by approval	Fixed once paid for by shareholders
Includes	Issued and unissued shares	Only shares that have been paid for
Legal Limit	Sets the maximum amount of capital to be raised	Reflects the funds available for use by the company
Impact on Operations	No immediate impact on financial operations	Directly affects company’s financial resources