Definition§
Authorized Share Capital is the maximum amount of share capital that a company is authorized to issue to shareholders. This amount is laid down in the company’s memorandum of association. Before the Companies Act 2006, it was mandatory for companies to specify their maximum authorized share capital; however, this requirement has been removed. Now, companies must submit a statement of capital and initial holdings.
Examples§
- Startup: A newly formed tech startup may have an authorized share capital of £1 million, but it might initially issue shares worth only £200,000 to its founders.
- Growth Company: A manufacturing company with an authorized share capital of $10 million might issue $5 million worth of shares during its initial public offering (IPO).
- Multinational Corporation: A large multinational company might authorize a share capital of €50 million but issue shares worth €30 million over several years as part of its expansion strategy.
Frequently Asked Questions§
1. What is the difference between authorized share capital and issued share capital?§
Answer: Authorized share capital is the maximum amount a company can issue, while issued share capital is the actual amount that has been issued to shareholders.
2. Can a company issue shares beyond its authorized share capital?§
Answer: No, a company cannot issue shares beyond its authorized share capital. However, authorization can be increased by amending the company’s memorandum of association.
3. Who decides the authorized share capital of a company?§
Answer: The initial authorized share capital is typically decided by the company’s founders or initial directors and laid down in the memorandum of association at the time of incorporation.
4. How can a company increase its authorized share capital?§
Answer: A company can increase its authorized share capital by passing a resolution and amending its memorandum of association accordingly.
5. Is there a legal requirement to have authorized share capital under the Companies Act 2006?§
Answer: No, there is no legal requirement under the Companies Act 2006 to have a specified authorized share capital. Companies are now required to submit a statement of capital and initial holdings instead.
Related Terms§
- Issued Share Capital: The portion of authorized share capital that has been issued to shareholders.
- Memorandum of Association: A legal document that contains the fundamental conditions upon which a company is incorporated.
- Paid-Up Share Capital: The amount of money for which shares have been issued to shareholders and for which full payment has been received.
Online References§
- UK Government - Companies Act 2006
- Investopedia - Authorized Capital
- Corporate Finance Institute - Authorized Share Capital
Suggested Books for Further Studies§
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Corporate Finance: Theory and Practice” by Aswath Damodaran
- “Company Law” by Alan Dignam and John Lowry
- “Modern Corporate Finance: Theory & Practice” by Donald R. Chambers, Mark D. Willhite, and J. Robert Berton
Accounting Basics: “Authorized Share Capital” Fundamentals Quiz§
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