Authorized share capital is the maximum amount of share capital a company is legally permitted to issue to shareholders. It’s determined by the company’s constitutional documents and can be increased with shareholder approval, setting the upper limit for potential equity financing.
Authorized Share Capital Meaning
Authorized share capital represents the maximum value of shares a company can issue, as stated in its legal documents. It’s the equity limit a company can raise from shareholders, and altering this limit requires shareholder consent, reflecting its potential for equity-based funding.
Authorized share capital is a company’s maximum allowable share issuance value, defined in its founding documents. This figure represents the total worth of shares it can legally distribute to investors. It sets the upper limit on how much capital a company can generate through equity.
Changing authorized share capital requires changing the company’s constitution, usually with shareholder approval. This limit is key for investors, signaling the firm’s equity fundraising capacity and affecting shareholder ownership dilution.
For example, if a company’s authorized share capital is Rs.1 million, it can issue shares up to that value. If it decides to raise more capital, it must increase this limit, usually through a shareholder vote, before issuing additional shares beyond the Rs.1 million mark.
Authorized Share Capital example
For example, XYZ Pvt Ltd has an authorized share capital of Rs. 20 lakhs and has issued shares worth Rs. 15 lakhs. This means the company is within its legal limit for share issuance. The Rs. 20 lakhs mark represents the maximum share capital (Authorized share capital) XYZ Pvt Ltd can issue.
Authorized Share Capital formula
Authorized Share Capital = Number of Authorized Shares × Par Value per Share
The formula to calculate authorized share capital is to multiply the number of authorized shares by the par value per share. This calculation gives you the nominal capital, combining the quantity of shares a company can issue and their individual value.
For Example – Authorized Share Capital (1000) = Number of Authorized Shares (100) × Par Value per Share (10)
Difference Between Authorized Capital And Paid Up Capital
The main difference between authorized capital and paid up capital is that Authorized capital is the maximum amount a company can legally raise through share sales, while paid up capital is the actual amount received from selling these shares.
| Aspect | Authorized Capital | Paid Up Capital |
| Definition | The maximum capital a company is legally allowed to raise by issuing shares. | The actual amount received by a company from selling its shares. |
| Limit | Represents the upper limit of share capital the company can issue. | Indicates the actual capital raised, which can be less than or equal to the authorized capital. |
| Purpose | Set as a part of the company’s charter to limit the amount of shares that can be issued. | Reflects the capital that has been invested by shareholders and is available for business operations. |
| Change | Can be altered with shareholders’ approval, typically requiring a change in the company’s charter. | Changes when more shares are issued and paid for by shareholders, up to the limit of authorized capital. |
| Legal Requirement | Must be stated in the company’s founding documents and disclosed to regulatory authorities. | Calculated based on the actual shares issued and paid for, and reported in financial statements. |
Authorized Share Capital Meaning – Quick Summary
- Authorized share capital is the highest amount of stock that a company can legally issue, as stated in its corporate charter. This includes all shares that the company is permitted to offer or issue.
- The formula for calculating authorized share capital is: multiply the number of authorized shares by their par value. This gives the nominal capital, indicating the total potential value of shares a company can issue.
- The main difference between authorized and paid up capital is that authorized capital is the legal maximum a company can raise through share sales, while paid up capital is the actual amount received from these sales.
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Authorized Share Capital – FAQs
Authorized share capital is the maximum stock a company can issue legally, as defined in its corporate charter. It covers all the shares the company can offer or issue.
To calculate authorized share capital, multiply the number of authorized shares by their par value per share. This gives the nominal capital, combining the share quantity a company can issue with their value.
Authorized Share Capital = Number of Authorized Shares × Par Value per Share
Nominal share capital refers to the face value of a company’s shares, while authorized share capital is the maximum value of shares a company can legally issue, as stated in its charter.
For instance, XYZ Pvt Ltd has an authorized capital of Rs. 20 lakhs. If it issues shares totaling Rs. 15 lakhs, it means the company remains within its authorized capital limit.
The main difference between authorized and issued shares is that authorized shares are the maximum number a company can issue as per its charter, while issued shares are those actually distributed to shareholders.
Companies can authorize any number of shares without restrictions. They use these shares during public offerings, like in an Initial Public Offering (IPO), to sell the company’s equity.
The minimum authorized capital should be at least 1 lakh, with no maximum limit. Any changes after incorporation and share issuance are decided by shareholders in a general meeting.
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