Authorised Share Capital – Meaning and Purpose

Authorised Share Capital is the number of shares that a company can issue as stated in its memorandum of association or its articles of association. The Authorised capital is part of its MOA under the capital clause. At the time of Incorporation, the company submits a formal document to the Registrar of companies to form the company. 

The amount of share capital may change with time if the shares are issued to the public. There is a specific limit on the amount of share capital that cannot be exceeded while raising money from the public. The amount above which a company cannot issue shares is known as Authorised capital.

What is Authorised share capital?

Every company has applied a limit while raising share capital for a public offer which is known as Authorised capital. In simple terms, when the company is allowed to raise a certain amount of capital through a public offer is known as Authorised capital. 

Though the company may issue a new offer to raise the new amount of share capital to increase the amount on the balance sheet.

The company must take permission to execute the public offer before increasing the share capital. The company shall define the total amount of share capital that it wants to raise, the face value of shares is known as par value. 

Purpose of Authorised Share Capital

The authorised capital is a kind of limit that is imposed on the company. The company can issue shares up to the authorised capital amount mentioned in the memorandum of association and not as per its will. 

The main two benefits of authorised capital are:

1. A company never utilizes the full amount of its authorised capital because in the future it may start a new project instead of taking money from banks and raising funds from the market.

2. To dilute the power of existing shareholders. 

For example, a company has 1000 shareholders. These 1000 shareholders control the company and take major decisions for the company. The company issues new shares and there are a total of 1500 shares. The power of decision-making and control is distributed among 1500 shareholders.

Features of Authorised Share Capital

• The authorised capital is determined at the time of the company’s incorporation
• The ROC fees will increase according to the amount of the authorised capital
• The authorised capital needs to be mentioned in the MOA and AOA of a company
• The authorised capital is the maximum amount of capital that a company can have and is issued to determine the nominal value of each share.
• It can be altered anytime after the incorporation of a company
• The net worth of the company cannot be calculated by using authorised capital
• A company does not have to issue shares up to its authorised capital. 

How Authorised capital is decided?

The first subscribers or members of the memorandum decide the amount of authorised capital at the time of incorporation. You can search authorised share capital meaning in Hindi on google. There is no minimum amount of capital requirement as per the rules of company law. There is also no maximum limit prescribed under the Companies Act, 2013. The alteration in authorised capital i.e., any change or modification is decided by the shareholders in the general meeting of the company. 

Hence, the subscribers of the memorandum and shareholders decide the amount of authorised capital. There are several methods of increasing the authorised capital by the company. First, the investors will be issued new shares. Second, the new shares are being issued to the existing shareholders, or third way, issuing new shares to the company directly.

What are the differences between Authorised share capital and Paid-up Capital?

The key difference between Authorised capital and Paid-up share Capital are as follows:

• The maximum number of shares any company can issue is called as 

   Authorised Capital. In simple words, it limits the total number of shares that a company can issue to the public. Whereas, the amount of shares the company issues to the shareholders is known as Paid-up Capital.

• There are required legal compliances in case to increase the authorized capital. Whereas, the Paid-up Capital of private company can easily increase up to the amount of authorized capital.
• The authorized capital cannot be zero. However, the Paid-up share capital can be zero.

What are the differences between Authorised share capital and Issued share capital?

The key differences in authorized capital and issued capital are as follows:

• Authorized capital is the maximum limit that a company can raise from the public. Whereas, the issued capital is offered to the general public for subscription.
• It is declared before the company incorporation and the issued capital is declared at the time when the company brings the Initial public offer (IPO)
• When the share capital authorized is changed by the company, the memorandum of association needs to be altered. On the other hand, there is no need to alter MOA for changes in the issued capital.

Here’s an Authorised share capital example:

In case, ABC Pvt Ltd has an authorized capital of Rs. 30 lakhs and issued shares up to an amount of Rs. 20 lakhs to its shareholders. It means ABC Pvt Ltd. has not issued the shares in excess of the maximum limit i.e., Authorised Capital of the company, and also has an option in the future to issue more shares amounting to Rs. 5 lakhs without increasing the Authorised Capital.

However, if ABC Pvt Ltd has issued shares of an amount of Rs. 35 lakhs to existing shareholders with the same capital of Rs. 30 lakhs. It implies that the company has issued in excess of the maximum limit of Authorised Capital. The first step is to initiate the process of increasing capital authorized shares and then issuing shares to the shareholders.

What are the Reasons for the Increase of Authorised Capital?

There can be various reasons to increase authorised capital such as:

• Financing the company’s new project
• The merger of two enterprises 
• Debt is converted to equity capital
• Issue of additional share capital.
• Need for enormous funds
• To fulfill the legal requirements.

Can Authorized Capital be Increased?

Yes, the Authorised share capital increase if it’s authorized by the articles of association. If the articles don’t permit the company, then it has to alter its articles for increasing authorized capital. For alteration of share capital, the company should take final approval from the shareholders in the general meeting. After getting the shareholder’s approval company is required to file mentioned forms with the registrar of the company along with the prescribed fees. 

Conclusion

Authorised share capital is an important aspect for the company as it decides how much amount of share can be issued to the shareholders. The authorised capital is a part of the capital clause of MOA. It is advised to increase the authorised capital when it’s needed because it helps in compensating liquidity crunch triggered by the financial crisis. The amount of capital required by the company depends on the nature of the business activity and the requirement of operations. We have discussed the purpose, features, and who decides the authorised capital. The difference between authorised capital and issued capital and paid-up capital with an example.