Authorized capital and share buybacks are two important concepts related to corporate finance and capital structure. While both involve changes in a company’s capital, they serve different purposes and have distinct implications. Understanding the key differences between increasing authorized capital and share buybacks is important for shareholders, investors, and corporate decision-makers. In this article, we will explore the difference between these two methods.
Authorized capital refers to the maximum amount of capital that a company is authorized to raise through the issuance of shares. It means that the company is increasing the maximum amount of capital that it can raise through the issuance of shares. This is done by amending the company’s articles of association and filing the necessary paperwork with the relevant regulatory authorities.
The following are the benefits of increasing authorized capital:
Share buybacks refer to the repurchasing of a company’s own shares from the open market. This is done by using the company’s existing cash reserves. When a company buys back its own shares, it reduces the number of shares outstanding, which increases the ownership percentage of the remaining shareholders.
Here are the key differences between authorized capital & share buybacks:
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Increasing Authorized Capital |
Share Buybacks |
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The purpose of increased authorized capital is to provide the company with the flexibility to raise additional capital in the future if needed. |
The purpose of share buybacks is to return excess cash to shareholders or to signal to the market that the company’s shares are undervalued. |
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It is generally done in anticipation of future capital needs. |
They are generally done when the company has excess cash on hand. |
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It is relatively inexpensive, as it involves filing paperwork with regulatory authorities. |
It can be more expensive, as the company must purchase its own shares from the open market. |
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It does not affect the ownership percentage of existing shareholders. |
It increases the ownership percentage of the remaining shareholders. |
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It requires amending the company’s articles of association and complying with the relevant regulatory requirements. |
They are subject to legal restrictions and must comply with applicable securities laws. |
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It does not affect the control of the company, as ownership percentages remain unchanged. |
It can increase the control of the remaining shareholders if the repurchased shares are held by a large shareholder. |
In conclusion, while both increasing authorized capital and share buybacks are mechanisms used for capital management, they have distinct differences in terms of purpose, implications, and effects on the company and its shareholders. Increasing authorized capital primarily focuses on raising additional capital for future needs and expansion, potentially diluting existing shareholders’ ownership. On the other hand, share buybacks aim to return excess cash to shareholders, enhance shareholder value, and signal confidence in the company, leading to a reduction in the number of outstanding shares.
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