Authorized/Paid-up Capital

#1
Hi all, I have a quick question. I am analyzing a private company and I had a few questions:

It has revenues of Rs.5cr and having a steady growth rate. But in the balance sheet, it has authorized and paid up capital of only 37,500 shares @ Rs.10/share face value. Is this normal for a company? To have such low number of shares authorized and paid up? Does it affect the standing of the company in any way, or it doesn't really matter? I am guessing that they have been spending their cash or income on investments and hence kept it low.

And they have valued the company at Rs.12.5cr essentially make the per share value at Rs.3,333, and hence a premium of Rs.3,323. I am just wondering if this is justifiable, or they have to increase the authorized share cap to make the values per share more reasonable.

Will appreciate your responses! Looking forward.

Thanks!
 

aryan.

Active Member
#2
And they have valued the company at Rs.12.5cr essentially make the per share value at Rs.3,333, and hence a premium of Rs.3,323. I am just wondering if this is justifiable, or they have to increase the authorized share cap to make the values per share more reasonable.

Dont just look at the price of the share and say that its reasonable or unreasonable. e.g If someone is selling you one share for 50 Rs and one share of another company for 5000 Rs what does that tell you. That tells you absolutely nothing.

And they have valued the company at Rs.12.5cr
Which valuation model are they using??
 
#3
Hi Aryan,

Thanks for replying.

So, if I got you right, you are saying it doesn't really matter at what price and premium they are valuing their shares as long as it seems reasonable?

They have valued it based on market sentiments, future projects, growth trends, and assumptions and a simple dcf model. It's a small company having Rs.3-5cr of revenue every year and about 5-7% of net income, so I am not sure, how detailed they have got into it.

My main concern was, does it reflect negatively on the company at all if they have only 37,500 shares, but the premium is Rs.3,323 instead of a higher number of shares? Or it better for the company to raise the authorized and paid up capital to a more significant number, lets say around 2-2.5cr? Does it make any difference to the company and the shareholders? I am not very sure of the rules and regulations on this.

Thanks in advance for the replies.
 
#4
Hi all, I have a quick question. I am analyzing a private company and I had a few questions:

It has revenues of Rs.5cr and having a steady growth rate. But in the balance sheet, it has authorized and paid up capital of only 37,500 shares @ Rs.10/share face value. Is this normal for a company? To have such low number of shares authorized and paid up? Does it affect the standing of the company in any way, or it doesn't really matter? I am guessing that they have been spending their cash or income on investments and hence kept it low.

And they have valued the company at Rs.12.5cr essentially make the per share value at Rs.3,333, and hence a premium of Rs.3,323. I am just wondering if this is justifiable, or they have to increase the authorized share cap to make the values per share more reasonable.

Will appreciate your responses! Looking forward.

Thanks!
better you would have mentioned the name of the company mentioning listing details (if any?). It appears that company is not listed on any exchange.

What matters is the EPS and book value. premium should be sen in line with these only. Another thing that matters is PEG rato. Many time higher P/E is justified with PEG falling in comfort zone.
Next thing to see is Cash flow. If company is not from finance industry, cash flow from operations should be positive.
 
#5
Hi Avadhoot,

Sorry I should have mentioned the company is private. It's actually my friend's company. So I hope you don't mind that I don't want to disclose to name for privacy reasons. We were just discussing this issue and I had concerns that he has such a small number of shares that any valuation he gives to the company will end up with the shares having a high premium which maybe would not look very reasonable if he is looking for investors (which is his plan). So, I was of the opinion that he should try and increase the authorized shares to maybe atleast 15-20lakhs. Am I right with thing thinking? I am just concerned that maybe investors might be turned off with such high premiums and small number of shares.

Is there any norm or rule saying that if you are a Rs.Xcr company, you need to have Y number of authorized shares or anything like that?
 
#6
Hi Avadhoot,

So, I was of the opinion that he should try and increase the authorized shares to maybe atleast 15-20lakhs. Am I right with thing thinking? I am just concerned that maybe investors might be turned off with such high premiums and small number of shares.
If company has got value and growth potential, venture capitalist shall flock to grab it.

Is there any norm or rule saying that if you are a Rs.Xcr company, you need to have Y number of authorized shares or anything like that?
well private limited company requires at least Rs. 1 lakh authorized share capital.
But if name includes words like global, international, Asia etc then minimum authorized capital should be 1 crore.
And there is different authorized share capital requirement according to the words falling in the name of the company.
 
#7
So, if I understand correct, investors are not really bothered about the no. of shares or paid up or authorized or premiums as long as they see potential in its growth and they will invest.

Your second point, so no. of authorized shares doesn't really matter with regards to the company's standings or operations or even performance. Just because you have Xcrs revenue or valued at Xcr, doesn't mean you need to have Y amount of shares otherwise the company is not good. Am I correct in this as well?

Appreciate your responses.
 
#8
So, if I understand correct, investors are not really bothered about the no. of shares or paid up or authorized or premiums as long as they see potential in its growth and they will invest.
yes,especially venture capitalist one's.

Your second point, so no. of authorized shares doesn't really matter with regards to the company's standings or operations or even performance. Just because you have Xcrs revenue or valued at Xcr, doesn't mean you need to have Y amount of shares otherwise the company is not good. Am I correct in this as well?
Take the example of the Facebook, Mark and his few friends started it.
Goldman Sachs seeing value in it invested 500 million $ in it.
Authorized capital can be raised at will. in case of listed company share holders' approval is required but as the company concerned is a private one, all the part-owners should concur at the decision of raising authorized capital.
 

aryan.

Active Member
#10
So, if I understand correct, investors are not really bothered about the no. of shares or paid up or authorized or premiums as long as they see potential in its growth and they will invest.
Yes but you forgot one important point is the current valuation in this case 12.5 cr is it reasonable or is the company undervalued or overvalued.
 

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