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Authorized Shares – Overview & How They Work

  • Marisha Bhatt
  • Nov 16 2021
  • 8 minutes
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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.

What are 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.

What is the ideal number of authorized shares for any company?

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. 

What is the procedure for an increase in authorized 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,

  • Section 13 of The Companies Act, 2013
  • Section 61 of The Companies Act, 2013
  • Section 64 of The Companies Act, 2013
  • Rule 15 of Companies (Share Capital and Debentures) Rules, 2014
  • Latest amended regulations as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

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.

  1. The pre-requisite for an increase in the authorized capital of the company is the authorization for the same in the Articles of Association. 
  2. If the articles do not authorize an increase in the authorized capital the same has to be amended vide a resolution.
  3. The next step is to send a notice for the increase in the authorized capital to all the Directors in the Board of Directors.
  4. The intimation of the Board Meeting has to be sent to the Stock Exchange.
  5. After this, the Board will have to convene the Board meeting as scheduled and pass a resolution for the increase in the authorized capital as well as approve the draft for the AGM or the EGM for passing the resolution by the members of the company.
  6. The outcome of the Board meeting has to be uploaded to the stock exchange and the notice for the AGM or EGM has to be sent to the Directors, Members, and Auditors of the company at least 21 days before the meeting is scheduled. 
  7. The notice of the EGM and AGM has to be uploaded on the stock exchange.
  8. The AGM or the EGM has to be convened as scheduled and the resolution of the alteration of the Memorandum of Association (MOA) has to be passed and uploaded on the same day on the stock exchange along with the copy of the altered MOA. 
  9. The company has to then file the required E-Forms with the Registrar of Companies within 30 days of passing the resolution in the AGM or the EGM of the company. 
  10. The company is also required to maintain the altered MOA at the registered office of the company. 

What is the difference between authorized shares, issued shares, and paid-up shares?

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.

Conclusion

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.

FAQs

Who can decide the level of authorized capital for any company?

Shareholders of the company are liable to decide the authorized capital of the company.

What are the consequences of non-compliance with the provisions related to the increase in authorizied shares?

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.

What are the documents needed for an increase in the authorized capital?

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.

 Where is the authorized capital mentioned in the Financial Statements of the company?

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’

Can paid-up capital be more than authorized capital?

No. The issued capital or the paid-up capital cannot increase more than the authorized capital.

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