What Is Meant By The Term Authorised Share Capital?

Stocks are issued by companies to raise money, and the amount raised is known as share capital. Stocks issued for public offering may change their share capital over time. Public offerings have a specific limit on the amount of share capital that can be raised. The amount above which a company cannot issue shares is called the authorised share capital. The maximum amount imposed as a limitation can, however, be changed with the shareholders’ approval.

What is Authorised Share Capital?

Whenever a company raises share capital for public offerings, a limit is imposed called the authorised share capital. The amount of capital that a company is allowed to raise through a public offering is called its authorised capital.

However, the company may issue a new offer to raise the new amount of capital and increase its balance sheet.

The company must obtain permission to sell shares before raising capital. The company must define how much share capital it wants to raise, and the face value of each share is known as the par value.

The authorisation does not prevent the issue of shares. The share can still be sold to raise money, but there is a limit.

Why was the Authorised Capital Abolished?

The Companies Act 2006 abolished authorised share capital. The authorised capital was abolished for the following reasons:

  • The authorised share capital was determined by an artificial ceiling
  • In accordance with the shareholders’ wishes, the artificial ceiling could be raised or lowered
  • There is no appropriate reason to require a ceiling on the issue of shares of a company. 

As a result of the eradication of authorised capital, investors focused on the issued capital. A proper valuation of the share is made possible by it. The authorised capital may cause a significant gap between the original price and the issued share price, which may make it difficult for investors to determine the initial value of the shares. The issued share price helps investors measure the share’s actual price against the issued share price and neutralises misleading factors. 

What Happens Without the Authorised Capital?

Following the Companies (Amendment) Act, 2005, companies no longer have to mention their authorised capital. As a result of the amendment, shares of a company have no nominal value.

 A company’s authorised capital and par value are directly related to its capital maintenance. Originally, it was introduced to restrict the issuance of shares at very low prices or discounts. There is no prohibition against issuing shares at a low price now that the authorised capital has been abolished. 

Amount of Authorised Share Capital under the Companies Amendment Act 2006

As a result of the Companies Amendment Act 2006, the company will not need to define its authorised share capital. As a result of this Amendment Act, the following scenarios may arise:

  • Board resolutions allow the company’s directors to issue shares
  • Directors can be prohibited from allocating shares by shareholders
  • The provision can be included in the company’s Articles of Association
  • In the constitutional documents, the authorised capital is not required
  • The company must file a statement when allotting shares or making changes
  • The statement will include the company’s total number of shares.

Directors will only be able to issue shares with the shareholders’ approval. In private companies with one share class, however, this rule does not apply, and directors of these companies can issue shares without shareholder approval. 

In accordance with the Companies Act of 1985, there is an authorized share capital

As a result of this act, the company must state 

  • Its authorised but unissued share capital
  • A shareholder’s authorization was required to issue shares.

Conclusion :

A company’s authorized share capital prevents its directors from allocating new shares, which could interfere with their ability to control the company. The company may retain a small percentage of its authorised capital for safety purposes when it does not use the whole amount. Changes to official capital require the shareholders’ approval.

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