Authorised Capital: Definition, Purpose and Difference

What is Authorised Capital?

Authorised capital refers to the maximum amount of shares that a company is legally allowed to issue to its shareholders. Also known as nominal capital, authorised stock, or authorised capital stock, it represents the total value of shares as mentioned in key documents of the company called Memorandum of Association, or articles of incorporation. It sets the upper limit on how much capital a company can raise through shares and also ensures that companies do not issue an excessive number of shares without approval. 

What is the Purpose of Authorised Capital?

• It provides a limit on the amount of capital that a company can raise by selling shares. This protects the company and ensures the investors that a company cannot issue unlimited amounts of shares that could lead to diluting of their ownership.
• It allows a company to issue new shares and raise additional funds as needed, with a condition that it complies with legal regulations and obtains shareholder approval.
• A higher authorised capital enables a company to plan for future expansion and funding needs without frequent changes to its capital structure. This flexibility helps the company adapt to market conditions and seize growth opportunities.
• It prevents any shift in the profit distribution balance. 
• It is often not utilized in entirety by the company as a small percentage is key for safety as an emergency measure to raise capital immediately, or to continue upholding control over the company. 

How to Calculate Authorised Capital?

To calculate Authorised capital, use the following formula:

Here,

Total number of shares= Determine the total number of shares a company is allowed to issue as per its Memorandum of Association or incorporation documents. This includes all types of shares (ordinary, preference, etc.).

Par Value Per Share= The price at which the share is issued, as stated in the company’s incorporation documents. This value is usually a fixed amount.

Differences between Authorised Capital and Paid Up Capital

Authorised Capital:

• It is the maximum amount of capital a company can raise by issuing shares.
• It provides flexibility for future capital raising without needing constant changes in the company’s capital structure.
• It is generally greater than or equal to paid-up capital, as it includes the maximum capital a company can issue.
• It can be altered by following legal procedures, which involves shareholder’s approval and payment of an additional fee to the Registrar of Companies (ROC).

Paid-Up Capital:

It is the actual amount of money that shareholders have paid for the shares issued to them.

It indicates how much of the authorised capital has been utilized and paid for.

It is always less than or equal to the authorised capital, as it only includes the shares that have been issued and paid for.

It changes based on the issuance of new shares or the redemption of existing shares. Adjustments usually do not require regulatory filings unless they affect the company’s overall capital structure.