Authorized Capital of a Joint-Stock Company

The authorized capital (charter capital) of a joint-stock company (JSC) is one of the key elements of its legal status and financial stability. Under the legislation of the Republic of Uzbekistan, the authorized capital is considered as the aggregate of property rights and obligations of shareholders expressed in shares, and it performs a guarantee function in relation to the company’s creditors.

According to the Law of the Republic of Uzbekistan “On Joint-Stock Companies and Protection of Shareholders’ Rights” (new edition of 2014), the authorized capital is formed from the nominal value of shares placed among shareholders. All shares must have the same nominal value, ensuring equality of shareholders in terms of property rights.

The authorized capital serves as the minimum property security for creditors’ interests, as its amount determines the lower boundary of the company’s assets necessary to cover its liabilities.

Formation of Authorized Capital

• At the stage of establishment of a JSC, all shares must be distributed among the founders. The founding agreement determines the procedure for forming the authorized capital, the types of shares, and the conditions for their payment.
• Formation period: The authorized capital must be fully formed no later than one year from the date of the company’s state registration.
• Minimum amount: It may vary depending on the type of licensed activity of the company. For certain sectors (banking, investment, insurance), specific requirements may be established by law.

Changes to Authorized Capital

• Increase: The capital may be increased through the placement of additional shares. The decision is made by the general meeting of shareholders or by the supervisory board (if such authority is provided in the charter). Additional shares may be placed at the expense of attracted investments, retained earnings, or the company’s own funds.
• Decrease: The capital may be reduced by decreasing the nominal value of shares or by reducing their total number (including buyback and subsequent cancellation). In such cases, creditors have the right to demand early fulfillment of obligations and compensation for losses related to the capital reduction.

Impact on Shareholders’ Rights

• The size of the authorized capital determines the shareholder’s participation in company management and property rights (dividends, share in property upon liquidation).
• When the capital is increased through additional shares, shareholders have preemptive rights to acquire them proportionally to their existing shares.
• A reduction in capital alters the balance of rights and obligations and may limit the company’s ability to raise loans.

Authorized Capital and Net Assets

The law links the size of the authorized capital to the amount of the company’s net assets. If, at the end of the reporting year, the net assets are less than the authorized capital, the company must either reduce the capital to the level of net assets or decide to liquidate.

The authorized capital of a JSC in Uzbekistan performs not only organizational, legal, and financial functions but also serves as an important tool for protecting the interests of creditors and shareholders. It reflects the minimum level of the company’s property liability and serves as the foundation for its economic activities. Legislation provides strict rules for the formation, increase, and reduction of the authorized capital to ensure a balance of interests among all corporate participants.

Formation, Increase, and Reduction of Authorized Capital

Element	Formation	Increase	Reduction
Legal basis	Founding agreement, company charter, Law “On JSCs”	Decision of the general meeting or supervisory board (if authorized by the charter)	Decision of the general meeting of shareholders
Time limits	Full formation within 1 year of state registration	Defined by the decision on additional share issuance	Defined by the general meeting and fixed in the charter
Sources	Founders’ contributions: cash, property, property rights	- Additional shares (investments) - Own capital - Accrued dividends	- Reduction of nominal value - Decrease in number of shares (buyback and cancellation)
Shareholder participation	Founders pay for all shares upon establishment	Existing shareholders have preemptive rights to new shares	All shareholders are affected proportionally
Restrictions	Minimum size may be set for certain licensed activities	- Additional shares only within declared number - Preferred shares ≤ 25% of capital	Cannot be reduced below statutory minimum; creditors may demand early fulfillment
Consequences	Legal status acquired; capital secures property base	Expands financial capacity, attracts investment, increases shareholder rights	Reduces financial base, potential creditor claims, weaker guarantees

 

Methods of Forming Authorized Capital

1. Cash Contributions

Most common method — shareholders contribute funds in national currency (UZS).

Advantages: transparency, liquidity, quick formation of capital.

2. Property Contributions

Contributions may include buildings, equipment, transport, or land (if allowed by law).

Property must be monetarily valued and recorded in founding documents. If the value exceeds 200 times the base calculation value (BCV), independent valuation is required.

3. Property Rights

May include intellectual property (patents, trademarks, copyrights), contractual claims, or long-term usage rights.

Such rights must be monetarily valued and recorded in founding documents.

4. State Assets

If a JSC is created through reorganization of a state enterprise, its authorized capital is based on state property.

Valuation is conducted per Cabinet of Ministers procedure; creation is approved by a state authority.

5. Mixed Method

Combination of cash and property contributions ensures both liquidity and material base.

Comparative Table of Capital Formation Methods

Method	Advantages	Disadvantages
Cash	High liquidity, simple accounting	No immediate material base
Property	Creates material foundation	Requires valuation, potential disputes
Property rights	Enables use of intangible assets	Valuation complexity, low liquidity
State assets	Supports strategic industries	Dependent on state decisions
Mixed	Combines benefits	Complex accounting and control

 

Stages of Authorized Capital Formation

Stage	Description	Legal Basis / Note
1. Decision to establish	Founders decide on size, type, and distribution of shares	Formalized by founding meeting
2. Founding agreement	Defines contributions and share allocation	Required with multiple founders
3. Valuation of contributions	Cash contributions and property valuation	Independent valuation if >200 BCV
4. Payment for shares	Payment in cash or property	Within 1 year after registration
5. State registration	Submission to registering authority	JSC obtains legal status
6. Full formation	Authorized capital fully formed within one year	Noncompliance may lead to liquidation
7. Accounting reflection	Entries in accounting records	In accordance with accounting rules

 

Changes in Authorized Capital

1. General Characteristics

Authorized capital is not fixed permanently — it may be increased or decreased. All changes must be registered with the state.

2. Increase of Authorized Capital

• Methods: Additional shares, capitalization of retained earnings, debt-to-equity conversion, attracting new investors.
• Decision: By general meeting or supervisory board (if authorized).
• Conditions: Within declared share limits; preferred shares ≤ 25%; preemptive rights preserved; registration required.

3. Reduction of Authorized Capital

• Methods: Lowering nominal value, reducing number of shares (buyback and cancellation).
• Decision: By general meeting with justification.
• Restrictions: Not below statutory minimum; if net assets < capital → must reduce or liquidate; creditors may claim early payment within 30 days.

4. Procedure

1. Decision by competent body.
2. Amendment of charter.
3. State registration.
4. Notice to creditors (if reduction).
5. Implementation (share placement or cancellation).
6. Accounting entries.

5. Legal and Economic Significance

Increase strengthens financial stability and investor trust; reduction may signal financial distress but helps align assets and capital.

Comparison of Increase vs. Reduction

Criterion	Increase	Reduction
Purpose	Attract investment, expand operations	Align capital with assets, return funds, financial recovery
Methods	Additional shares, profit capitalization, new investors, debt conversion	Lower nominal value, reduce shares
Decision-making body	General meeting or supervisory board	Only general meeting
Procedure	Within declared shares; preemptive rights	Reasons must be stated; not below legal minimum
Registration	Amendments and state registration	Amendments and state registration
Shareholder rights	Preemptive rights; increase ownership	Possible refund; decreased share value
Creditor rights	Indirectly stronger guarantees	Right to early repayment within 30 days
Consequences	Growth, financial expansion	Reduced guarantees, possible trust loss

 

Rights of Shareholders and Creditors during Capital Changes

Change	Shareholders’ Rights	Creditors’ Rights
Increase	Preemptive right to buy new shares; increased participation; higher dividend potential	Indirectly benefit via stronger guarantees
Reduction	Participate in decisions; may receive partial refund; reduced share value	May demand early repayment and compensation within 30 days; increased monitoring

In summary:

Shareholders benefit from capital increases through expanded rights and income potential, but face risks when capital decreases.

Creditors are primarily interested in maintaining or increasing capital levels, and the law protects them with the right to demand early repayment in case of reduction.