What does a company do when it needs to raise more shares than existence in the market? It needs to first check its documents of incorporation to check the ceiling on issuing capital. This ceiling is the Authorized capital – commonly also called as Registered capital or Nominal Capital.
Minimum Capital Across Countries
There is a minimum Nominal Capital in most countries however, matured economies such as U.S.A, UK, Australia, Austria have no minimum authorized capital requirements at all.
Countries like Singapore prescribe a requirement of one dollar in the currency of the shareholder’s choice unless a specific amount of capital is required for a license. Russia has requirement for 100,000 Russian rubles for a public joint-stock company and 10,000 Russian rubles for a non-public joint – stock company.
Australia repealed the authorized capital in 2001 followed by United Kingdom in 2006.
Importance of Minimum and Maximum Capital
Many countries with strong governance requires just 1 unit of the local currency. Thus, authorized capital can be seen as a way for government and company regulators to ensure genuine businesses thrive. This is dependent upon the strength of the legal recourse systems in the country. This requirement is to ensure no fly-by-night operators can create fraud companies and cheat people. Of course for certain institutions of monetary importance such as insurance, banks and other financial institutions, a minimum capital requirement is a must as these “companies” accept public deposits and invest in the market. Here the capital requirements are prescribed beforehand. The minimum capital is usually in the form of Paid-Up capital. The authorized capital will be still higher.
In spite of these company regulations, certain stock exchanges do require a minimum authorized capital for the stock to be allowed to trade on their exchange. Thus, companies with a long-term perspective prefer to allot an authorized capital limit. London Stock Exchange for example, requires a public limited company to have an authorized capital of at least £50,000 to allow listing.
The number of shares finally issued to the public and private placement are “ISSUED SHARES”. The remaining “unused” capital from this lot of Authorized Shares are called “Outstanding Shares”. They can be issued anytime later by the management.
An Authorized capital can be especially useful in the situation of a “Hostile Takeover”. This happens when another company or group of individuals try to garner the issued shares of a company and try to gain the controlling stake without approval from the Board of Directors or other major shareholders. In such a scenario, the company can either buy-back shares from the market or issue more of outstanding shares to gain higher stake.
Changes in Authorized Capital
The ceiling of authorized capital can be changes with a majority of shareholders’ vote. Increasing the authorized capital can be used to alter the balance of control by ways of increasing the paid-up shares. management would usually go for this length procedure to reduce the profit sharing with the shareholders or increase its controlling stake in the company. The company can decide to issue the newly authorized and issued shares at face value rather than market value. This will be done purely for the purpose of gaining more control.