In 2006, Singapore abolished the concept of authorised capital. This streamlined and simplified the evaluation process for investors to evaluate companies. The distinction between authorised and issued share capital can at times be misleading. However, the removal of the concept of authorised capital has made it much easier for companies to distinguish between the two and do business.
In this article, we break down the concepts of authorised and paid-up capital, highlight the differences between the two and discuss the reason behind the abolition of authorised capital.
What is Authorised Capital?
Authorised capital is the maximum number of shares a company can issue multiplied by its par value or the nominal value of one share in the company. This means that if a company decides that it can issue up to a maximum of 100 million shares with a par value of $1, the authorised capital of the company would be $100 million. Prior to the Companies (Amendment) Act 2005, Singapore incorporated companies were required to specify its authorised capital. Given that authorised capital represents unissued shares and there were no accounting entities to record unissued shares, it was required for the authorised capital to be disclosed in the notes to the financial statements.
The concept of authorised capital was abolished by the Companies (Amendment) Act 2005 with effect from 30 January 2006. This means that all references to authorised capital either in the company’s constitution or the articles of association written prior to 30 January 2006 are deemed to be deleted. Further, the related disclosure in the notes to financial statements is no longer necessary.
Why was the concept of authorised capital abolished?
The concept was abolished because authorised capital was considered to be an artificial ceiling which could be easily raised or lowered as per shareholders resolution and a subsequent filing with the Accounting and Corporate Regulatory Authority (ACRA). Further, there was no sound reason for a law to require such a ceiling in the first place. However, as of 30 January 2006, shareholders may still choose to impose a ceiling on a company’s share issues. These provisions must then be included in the company’s articles of association.
Moreover, the abolition of authorised capital gave investors the opportunity to focus solely on a company’s issued capital. This is because a company could be incorporated with an authorised capital of $1 million divided into 1 million shares each with par value of $1 but only issued 2 shares. This means that the issued capital of the company is only $2. The authorised capital of $1 million could seem impressive to the misinformed and be misleading. This means that a company’s capital will not be measured against the par value of the shares but instead against the number of shares issued and the actual capital paid up (ie. issued capital).
What happens now without the concept of authorised capital?
After the introduction of the Companies (Amendment) Act 2005, the shares of a company have no par or nominal value. This applies to all shares whether issued before, on or after entering into force of the amendment. As a corollary, there is no requirement for a company to state the authorised capital.
The concept of par value and authorised capital are related to the rule of capital maintenance. This regime was meant to prohibit the issue of shares far below their minimum value or at a discount. With the abolishment of these two concepts, there is no problem of issuing shares at a discount or at a premium.
What is issued capital?
Issued capital is the aggregate value of the consideration received by a company for all the shares it has issued. There is no minimum issued capital requirement under Singapore law except for certain types of companies such as banks and insurance companies. Given that shares issued by companies incorporated in Singapore have no par value or nominal value, the liabilities of the shareholders instead are measured by the amount of consideration, unpaid on the shares they hold.
Issued capital comprises of paid up share capital, the amount of share capital already paid to the company by the company’s shareholders, and unpaid share capital. In Singapore, the minimum paid-up capital is $1. Upon the company’s incorporation, paid up capital must be paid immediately and deposited into the company’s bank account.
Where a company is unable to function as a going concern and is liquidated, creditors may lay claim to whatever paid up capital which remains unused. This means that having a small paid-up capital of say the minimum $1 may become a cause of concern for investors or other third parties dealing with the company.
What are the rules revolving around issued capital?
Issued share capital can be important in determining a company’s relationship to another. Under s(5)(1)(a) of the Companies Act, a company is deemed to be a subsidiary of another if the latter holds more than half of the issued share capital (excluding preference and treasury shares) of the first-mentioned company.
When more than 90% of the company’s issued share capital is acquired by another in a merger situation or a reconstruction and the consideration for this acquisition is the issue of shares in the former, stamp duty is not payable on any instrument made for the purpose or in connection with the transfer of the undertaking of the shares as per section 15(1) of the Stamp Duties Act. This also applies to foreign companies.
Listing rules might require specific shareholder approval in the case of publicly listed companies and their issued capital. Rule 805 of the SGX Listing Manual deals with changes in share capital and the requirement of shareholder authorisation for such cases which include the issuance of shares. Rule 806 further provides that a general mandate may be obtained at a meeting of shareholders to allow the directors of the company to approve the issue of new securities. The general mandate must limit the aggregate number of shares and convertible securities that will be issued to not more than 50% of the share capital, of which the aggregate number of shares and convertible securities issued other than on a pro rata basis to existing shareholders must not be more than 20% of the total number of issued shares.
Conclusion
Setting up companies is always tedious. Thankfully, the amendments to the Companies Act in 2006 and the abolishment of the authorised capital scheme has streamlined the process for all especially smaller companies who may find this terminology difficult to navigate.
Have any questions?
If you have any questions about paid-up or authorised capital, you can get a Quick Consult with Lau Kah Hee or other lawyers. With Quick Consult, from a transparent, flat fee from $49, a lawyer will call you on the phone within 1-2 days to give you legal advice.
This article is written by Lau Kah Hee from Derrick Wong & Lim BC LLP and edited by Abigail Wong from the Asian Law Students’ Association.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.