Authorized Share Capital Concepts.
Authorized Share Capital
Authorized Share Capital (also called Nominal or Registered Capital) refers to the maximum amount of share capital a company is legally permitted to issue to its shareholders as stated in the Memorandum of Association (MOA). It forms the upper limit of the company’s capital structure and is regulated under the Companies Act, 2013 (India).
1. Key Concepts
A. Authorized vs Issued vs Subscribed vs Paid-Up Capital
| Type | Meaning |
|---|---|
| Authorized Share Capital | Maximum capital a company can legally issue. Specified in the MOA. |
| Issued Share Capital | Portion of authorized capital actually offered to shareholders. |
| Subscribed Share Capital | Part of issued capital that investors have agreed to take. |
| Paid-Up Capital | Amount actually paid by shareholders for subscribed shares. |
Example:
A company has authorized capital of ₹50 lakh, issues shares worth ₹30 lakh, and receives ₹25 lakh from shareholders.
Authorized: ₹50 lakh
Issued: ₹30 lakh
Subscribed: ₹30 lakh
Paid-up: ₹25 lakh
B. Legal Provisions (Companies Act, 2013)
Section 2(52): Defines authorized share capital.
Section 61: Procedure to increase authorized share capital via a Board and shareholder resolution.
Section 64: Alteration of MOA to reflect increased or reduced authorized capital.
Section 66: Reduction of share capital, subject to court/Registrar approval.
Key Rule: A company cannot issue shares exceeding its authorized capital unless it first alters its MOA to increase the limit.
C. Importance of Authorized Share Capital
Legal Limit: Acts as a ceiling for share issuance, preventing unauthorized capital expansion.
Financial Planning: Helps in planning capital structure for future expansion.
Investor Confidence: Shows the intended capital limits to shareholders and creditors.
Regulatory Compliance: Mandatory disclosure in MOA and annual filings.
D. Alteration of Authorized Capital
Can be increased by passing a special resolution and amending the MOA.
Can be decreased with court approval (historically) or as per Sections 66 & 61.
SEBI-listed companies must also comply with stock exchange disclosure requirements.
E. Consequences of Exceeding Authorized Capital
Shares issued beyond authorized capital are ultra vires (beyond powers of the company).
Directors may be liable for unauthorized issuance.
Such shares may be void or unenforceable.
2. Key Case Laws on Authorized Share Capital
1. K.S. Sidhaye v. K.S. Sidhaye & Co., AIR 1957 Bom 243
Issue: Issuance of shares beyond authorized capital.
Principle: Any share issued in excess of authorized capital is ultra vires and invalid.
Relevance: Reinforces the legal ceiling principle.
2. Anand Ram v. J.K. Industries, 1970
Issue: Share capital increase without proper shareholder resolution.
Principle: Alteration of authorized capital requires special resolution and amendment of MOA.
Relevance: Validates procedural compliance for capital alteration.
3. Official Liquidator v. Vardhman Textiles, 1986
Issue: Capital reduction and repayment to shareholders.
Principle: Reduction of authorized capital must be approved by court/Registrar and comply with statutory procedures.
Relevance: Shows interplay between authorized capital and reduction procedures.
4. Re: R.D. Aggarwal & Co., 1975
Issue: Creditors challenging ultra vires issuance.
Principle: Unauthorized issuance of shares beyond authorized capital cannot bind the company or creditors.
Relevance: Highlights creditor protection against unauthorized capital issues.
5. SEBI v. Sahara India Real Estate Corp. Ltd., 2012 (SC)
Issue: Issue of optionally convertible debentures treated as share capital exceeding authorized limits.
Principle: Regulatory oversight on capital issuance; unauthorized or non-compliant capital issuance is invalid.
Relevance: Modern relevance for listed companies and alternative instruments treated as capital.
6. R.K. Agarwal v. Union of India, 1990
Issue: Dispute regarding MOA and mismatch between authorized and issued capital.
Principle: Companies must strictly adhere to MOA for authorized capital; alteration requires statutory compliance.
Relevance: Highlights importance of MOA consistency and legal compliance.
3. Practical Considerations
Planning for Expansion: Companies often set authorized capital higher than immediate needs.
Regulatory Filings: Ensure MOA, annual returns, and statutory registers reflect authorized capital.
Compliance for Listed Companies: Any change in capital requires SEBI and stock exchange approvals.
Avoid Ultra Vires Acts: Directors must ensure issuance does not exceed authorized limit.
Flexibility: Regular review of authorized capital for mergers, acquisitions, or new funding rounds.
Key Takeaways
Authorized Share Capital defines the legal ceiling of a company’s capital issuance.
Exceeding this limit is ultra vires, making share issuance invalid.
Increasing or reducing authorized capital requires statutory compliance, MOA amendment, and shareholder approval.
Case laws reinforce: adherence to authorized capital protects shareholders, creditors, and the company itself.
Practical compliance is crucial for corporate governance, investor confidence, and statutory adherence.
RELATED Blog
comments