When we talk about shares the most common type of shares known to the general public are equity shares or preference shares. But not many know that a company has many types of shares in its share capital like issued shares, authorized shares, paid-up shares, etc.
Authorized shares are part of every company. Given below are the meaning and relevant details of authorized shares.
Authorized shares, to explain in simple terms, is the authorized stock or the maximum legally owned stock that is allowed to any company. When a company is started, the management has to decide the maximum number of shares that can be allowed to be issued in any form even before the incorporation of the company. This number includes the minimum number of shares that are to be issued to the founders along with the stock that is to be issued to the general public as well as any additional stock that is to be promised or issued in the future.
Let us consider the following example to understand the concept of Authorized Shares in a better manner.
Company A has Authorized Shares of Rs. 1,00,00,000. Therefore, the maximum number of shares that can be issued by Company A is up to Rs. 1,00,00,000. If the issued capital in the given case is Rs. 80,00,000, the company can further issue shares worth Rs. 20,00,000. The issued capital in such a case will be equal to the Authorized capital.
However, if the company has issued shares worth Rs. 1,50,00,00, it is way beyond the maximum limit allowed as per the Authorized shares. Hence, in this case, the company will not be allowed to issue shares beyond the limit under Authorized shares of the company. If the company wishes to issue more shares beyond the Authorized Shares, they will have to increase the limit of Authorized shares via the prescribed process.
Authorized shares are the maximum ceiling beyond which a company cannot issue shares to the general public or to their employees or founders. This amount of authorized shares is mentioned under the Memorandum of Association under the heading ‘Capital Clause’ as well as in the balance sheet under the head ‘Share Capital’.
The ideal number of Authorized Shares for any company is not standard. It depends on various factors like the nature of the industry (whether it is capital intensive or service-oriented), the scale of operations, target customers, etc. A company should ensure that the maximum number of Authorized Shares are enough to meet the current requirements of the company in terms of promotor’s shares, shares to be issued to the general public as well as for employees in the form of ESOPs. The other important consideration is to consider the margin or scope for the future issue of shares in any form like fresh issue, rights issue, or bonus issue of shares.
An increase in Authorized shares is required for an increase in the paid-up capital of the company beyond the available maximum limit. For an increase in the authorized capital of the company, the company will have to adhere to the rules and regulations laid down by the Companies Act, 2013. The various provisions to be considered in the increase of Authorized shares are,
The above provisions are applicable to all types of companies covered under the Companies Act, 2013 like Public Limited Companies, Private Limited Companies, One Person Company (OPC), Listed Company, Producer Company, etc.
The procedure for an increase in the authorized share of any company is detailed below.
The terms authorized shares, issued shares, and paid-up shares are quite distinct. The basic difference between the three terms is highlighted below.
Authorized Shares | Issued Shares | Paid-up Shares |
Authorized shares are the maximum number of shares that can be issued by a company. It includes all types of shares that can be issued by a company like preference shares, ordinary shares, or restricted shares. | The number of shares actually issued by the company out of the authorized shares is the issued shares. The maximum number of issued shares can be equal to authorized shares and not beyond it. | The number of shares that have been paid-up by the investors or the shareholders out of the issued shares are known as the paid-up shares. The maximum number of paid-up shares is equal to the total shares issued by the company. |
The amount of authorized shares are among the topmost decisions to be taken by the management of the company while starting a business organization. The company has to ensure optimal authorized capital to avoid the perils of undercapitalization or overcapitalization which are equally dangerous for the growth and survival of any company.
Shareholders of the company are liable to decide the authorized capital of the company.
If the company fails to comply with the provisions related to the increase in the authorized shares, then every officer or director in default of the provisions will be liable to a penalty of Rs. 500 per day of the default subject to maximum Rs. 5,00,000 (for a company) and Rs. 1,00,000 for the person in default.
The documents required for an increase in the authorized capital are,
Intimation of the Board meeting to the stock exchange where the company is listed.
The Board resolution
Notice for the AGM or the EGM required to alter the Memorandum of Association.
The ordinary resolution passed in the AGM and EGM.
Altered Memorandum of Association
Other documents as required by law in this regard.
The authorized capital is mentioned in the balance sheet of the company under the head ‘Share Capital’. It is also mentioned in the ‘Memorandum of Association’ under the heading ‘Capital Clause’
No. The issued capital or the paid-up capital cannot increase more than the authorized capital.
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