Differences In Authorized & Issued Share Capital (4 IMP Types)

Investing in the stock market can feel overwhelming, especially with all the terminology involved. One of the foundational concepts that every investor needs to grasp is share capital, the lifeblood of a company’s financial structure. Understanding this concept can help you navigate investment decisions with confidence. This article highlights essential topics related to share capital, ensuring you are well-equipped for your investment journey.

Authorized Capital: The Maximum Share Limit

Defining Authorized Capital

Authorized capital refers to the maximum amount of share capital that a company can issue to shareholders. It acts as a ceiling on the number of shares the company can create. For instance, if a company has authorized capital of ₹10 million and a face value of ₹10 per share, it can issue up to 1 million shares. 

Determining Authorized Capital

To determine a company’s authorized capital, you can look at its annual report or the memorandum of association (MOA). These documents provide details on how many shares a company can issue over its lifetime.

Modifying Authorized Capital

Changing authorized capital requires a formal process. The company needs approval from its board of directors, notify the registrar of companies, and amend the MOA. For example, Reliance Industries increased its authorized capital from ₹1 crore to ₹50,000 crores.

Issued Capital: Shares Actually Issued

Defining Issued Capital

Issued capital is the portion of authorized capital that the company has actually issued to shareholders. If the authorized capital is ₹10 million and the company has issued shares worth ₹5 million, then the issued capital is ₹5 million.

Calculating Issued Capital

To calculate issued capital, simply multiply the number of shares issued by the face value. For instance, if 500,000 shares are issued at a face value of ₹10, the issued capital is ₹5 million.

Issued vs. Authorized Capital

Understanding the relationship between issued and authorized capital is crucial. While authorized capital sets a limit, issued capital reflects the company’s current share distribution. This knowledge is vital for investors as it indicates how much equity is available in the company.

Subscribed Capital: Shares Paid For

Defining Subscribed Capital

Subscribed capital refers to the portion of issued capital that shareholders have agreed to purchase. If a company issues 1 million shares but only 700,000 are taken up by investors, the subscribed capital is ₹7 million.

Calculating Subscribed Capital

To calculate subscribed capital, multiply the number of shares subscribed by the face value. For instance, if 700,000 shares have been subscribed at ₹10 each, the subscribed capital equals ₹7 million.

Impact of Unsubscribed Shares

When shares remain unsubscribed, it can affect the company's financial position. This lack of interest may signal issues and impact future funding efforts.

Understanding Different Types of Share Capital 

Partly Paid Shares

Partly paid shares are those where the total amount is not fully paid by the shareholders at the time of issue. For example, a company may issue shares at a total price of ₹10, but collect only ₹5 initially. This forms a structured payment plan and is often seen in right issues, like those by Reliance Industries.

Bonus Issues

Bonus issues increase the number of shares held without impacting overall value. For instance, if you own 100 shares, a 1:1 bonus issue gives you an additional 100 shares. However, the share price adjusts accordingly, maintaining the same overall investment value.

Sweat Equity

Sweat equity refers to shares given to company employees or directors in exchange for their services or efforts rather than cash. This method helps raise capital while rewarding contributors.

Differential Voting Rights (DVRs)

DVRs allow certain shareholders different voting rights than ordinary shares. They can be crucial in maintaining control of the company while raising funds. Tata Motors recently highlighted their significance in corporate governance.

Right Issues: An In-Depth LookDefining Right Issues

Right issues occur when a company offers shares to existing shareholders at a discounted price to raise funds. This enables current investors to maintain their ownership percentage.

Participating in Right Issues

Shareholders can choose to participate by applying for new shares and paying the required price. They can also decide not to take part, known as non-participation.

Renunciation of Rights

Shareholders may transfer their rights to purchase additional shares to another party. This option, known as renunciation, allows them to benefit from selling their rights while others can invest.

Conclusion

Understanding the various aspects of share capital is essential for making informed investment choices. From authorized and issued capital to right issues and bonus shares, each type plays a significant role in a company's financial strategy. Keep researching and learning about these concepts to enhance your investment decisions and maximize your financial growth.