A company is an artificial person whose management is done as per its constitution which we know as Memorandum of Association (MoA). So, the company’s MoA defines everything including the maximum amount that the company can raise from the general public by the issuance of shares. That upper limit stated with regard to the share capital is called Authorized capital.
Authorized Capital refers to the share capital with which a joint-stock company is registered On the other hand, the issued capital is the share capital actually offered for sale by the company to the general public.
What is Share Capital?
As we know that the capital of a joint-stock company is divided into small units which are known as shares. And each share carries a face value. Share Capital refers to the capital which a company raises by issuing shares at the given face value.
In simple words, the amount contributed by the shareholders by subscribing to the company’s shares towards the face value is collectively known as Share Capital. It represents the total nominal value of shares issued by the company.
This post talks about the difference between authorized capital and issued capital.
Content: Authorized Capital Vs Issued Capital
|Basis for Comparison||Authorized Capital||Issued Capital|
|Meaning||Authorized Capital implies the maximum ceiling of share capital which can be raised by a company from the public by issuing shares.||Issued Capital is a part of the authorized capital, which is offered to the general public for subscription.|
|Based on||Present and Future Needs||Present needs|
|Declaration||Prior to the company's incorporation.||When the company brings IPO.|
|Stamp Duty||Paid on authorized capital||Not paid on issued capital|
|Registration Fee||Registration fee of the company is based on authorized capital.||Issued capital is not a basis for registration fees.|
|Change in Memorandum of Association||To make any change in the amount of authorized capital first of all Memorandum of Association needs to be altered.||There is no need to alter the Memorandum of Association to make changes in the issued capital.|
|Disclosure in the memorandum of association||It must be disclosed in the memorandum of association of the company||It is not required to be disclosed in the memorandum of association of the company.|
Definition of Authorized Capital
Authorized Capital refers to the amount of share capital, which the company registers itself with the registrar of companies, and is authorized to issue by its Memorandum of Association. This means that it is the maximum amount of capital that the company, through its MoA takes power to issue during its lifetime.
A statement of authorized capital needs to be made on the statutory form as well as it should be registered with the Registrar of Companies. This capital is divided into shares whose denominational value is determined by the company’s promoters. This capital is not issued in full.
Characteristics of Authorized Capital
- It is the maximum ceiling which the company is permitted to raise and more than that cannot be raised unless the company’s capital clause is altered as per the relevant provisions of the Company’s Act, 2013.
- Authorized Capital is the registered capital as it is the capital with which the company is registered with the Registrar or which is registered in the constitutional document of the firm and sets a limit of the maximum amount of capital.
- It is the nominal capital because the amount is not the actual amount raised by the company.
- It is divided into shares of definite value, i.e. shares of different denominations like Rs. 10, Rs. 100.
- Authorized capital has to be laid out in the charter document of the company, i.e. memorandum of association under the head capital clause.
- For making changes, i.e. enhancement or reduction, in the authorized capital of the company, a prescribed procedure must be followed and approval of relevant authority and shareholders must be taken.
- It is fixed by the company’s promoters and is not subscribed at the time of the company’s incorporation.
Authorized capital is not completely issued by the company so that additional capital can be raised in the future, at different stages based on the need and demand. Also, a portion of shares is kept in the company’s treasury to preserve the controlling interest.
Tee Ltd. has been incorporated with an authorized capital of Rs. 1,00,00,000 which is divided into 2,00,000 shares of Rs. 50 each.
Also Read: Difference Between Share and Stock
Definition of Issued Capital
Issued Capital implies the nominal value of that portion of authorized capital which is subscribed by the signatories to the memorandum of association and allotted for cash or for consideration other than cash, and allotted as bonus shares. It is the capital that a company issues from time to time for subscription.
Basically, a company does not issue its entire authorized share capital to the general public, i.e. only a part of it is offered for subscription and allotment to investors. Therefore, that portion of the company’s authorized capital which is actually issued, to the general public for subscription is called issued capital. It represents the nominal value of share capital issued to members
Here, it must be noted that it is not necessary to issue the entire authorized capital in one go. Therefore, the company can raise additional capital whenever there is a need for additional funding.
What is included in issued capital?
It includes shares allotted to the:
- General public
- Institutional investors
- Signatories to the memorandum of association
- Vendors for consideration other than cash as fully or partly paid shares in exchange for the assets acquired by the firm.
- Shares allotted as bonus Shares
- Existing shareholders by way of right issue
What is not included in issued capital?
- Shares offered to the public, but not subscribed by the public.
Key Differences Between Authorized Capital and Issued Capital
As we have understood the meaning of the two types of share capital in detail, now we will understand the difference between authorized capital and issued capital:
- Authorized Capital refers to the face value of the shares which a joint-stock company is permitted to issue, by its memorandum of association. The term ‘face value’ refers to the amount stated on the share certificate. On the other hand, Issued capital refers to the capital raised by the company by actually issuing shares to the public for subscription and allotment.
- Authorized Capital is declared prior to the incorporation of the company, whereas issued capital is declared when the company brings IPO.
- Stamp duty paid by the company is based on the amount of authorized capital, whereas issued capital does not form the basis for calculating stamp duty.
- Authorized Capital is mandatory to be disclosed in the company’s memorandum of association at the time of the company’s incorporation. Conversely, in the case of issued capital, there is no disclosure requirement, at the time of incorporation
- The registration fees of the company are based on the authorized capital, whereas the registration fees of the company are not based on issued capital.
- The decision regarding the amount of authorized capital is generally based on the present and future needs of the enterprise, whereas only the present needs of the company are considered at the time of deciding issued capital.
- For making any change in the authorized capital, the company’s memorandum of association needs to be altered. Further, changes in authorized capital can be done by following a proper procedure, prescribed in the Companies Act and it must be approved by majority shareholders. As against, no alteration in the memorandum of association is required whenever there is a change in issued capital.
- Authorized capital must be disclosed in the memorandum of association of the company under the Capital Clause. There are six clauses in MoA, one of which is the capital clause. Conversely, disclosure of issued capital in the memorandum of association of the company is not at all required.
Below are some cases given for which you need to calculate authorized capital and issued capital:
Case 1: Grey Ltd. was founded with a capital of ₹ 50,00,000 divided into shares of ₹ 20 each. The company offered entire shares to the public for subscription.
Case 2: Grey Ltd. was established with a capital of ₹ 20,00,00,000 divided into shares of ₹ 100 each. It offered 80% shares to the general public for subscription.
|Types of Capital||Case I||Case II|
|Authorized Capital||₹ 50,00,000||₹ 20,00,00,000|
|Issued Capital||₹ 50,00,000||₹ 16,00,00,000|
Frequently Asked Questions (FAQs)
- Can both authorized capital and issued capital be the same?
Yes, both authorized capital and issued capital can be the same when the whole authorized capital is issued to the public.
- What is unissued capital?
Unissued capital refers to that portion of the authorized capital that is not yet issued to the general public for subscription. This portion can be offered for sale to the public in the future, at a later date.
- What is the Registrar of Companies?
Registrar of Companies (ROC) is the body authorized for the registration of companies.
Also Read: Difference Between Members and Shareholders
So, with the above discussion, you might have observed what differentiates between authorized capital and issued capital is the unissued capital, which can be issued to the public as and when required. every company has a maximum registered amount above which it cannot raise money, that amount is termed as authorized capital.