Authorised Share Capital

Authorised share capital sets the maximum value of shares that a company is permitted to issue. This limit is recorded in the company’s Memorandum of Association.

• A company does not have to issue its entire authorised capital.
• The issued capital cannot exceed the authorised capital.
• Unissued capital gives the company room to issue shares in the future.
• Authorised capital is calculated using the number of authorised shares and their face value.
• For example, 15,00,000 shares with a face value of ₹20 each create an authorised capital of ₹3 crore.
• The company must follow the required legal process if it wants to increase or decrease this limit.
   

Authorised share capital is the maximum amount of share capital that a company can legally issue. This limit is mentioned in the company’s Memorandum of Association.
A company does not always issue shares equal to its full authorised capital. It may keep part of the capital unissued so that it can raise funds in the future.
For example, suppose a company has an authorised share capital of ₹1 crore. It may initially issue shares worth only ₹10 lakh and keep the remaining amount available for future share issues.
 

Here are some important terms that can help you understand authorised share capital.

Reserve capital    A part of the uncalled share capital that can be called only when the company is being wound up.

Subscribed capital

Subscribed capital is the part of issued capital that investors have agreed to buy. It represents the value of the shares for which shareholders have applied or subscribed.

For example, a company may issue shares worth ₹20 lakh. If investors agree to purchase shares worth ₹18 lakh, the subscribed capital is ₹18 lakh.

Paid-up capital

Paid-up capital is the amount that shareholders have paid to the company against the shares they subscribed to. It may be equal to or lower than subscribed capital if some payment is still due.

For example, investors may subscribe to shares worth ₹18 lakh but pay only ₹15 lakh at that stage. The company’s paid-up capital would then be ₹15 lakh.

Issued capital

Issued capital is the part of authorised capital that a company has issued or offered to investors. It is equal to or lower than the authorised capital.

For example, a company with authorised capital of ₹1 crore may issue shares worth ₹25 lakh. In this case, ₹25 lakh is its issued capital.

Special considerations

The number of outstanding shares may change when a company issues new shares, buys back shares, consolidates shares or carries out a stock split.

A stock split changes the number and face value of shares proportionately. However, it does not by itself increase the company’s total authorised capital.

If a company wants to increase its authorised share capital, it must follow the required legal process and alter its Memorandum of Association.

Additional read: What is stock split

Authorised capital is important in corporate finance and business operations for several reasons.

• Legal framework: It sets the maximum amount of share capital that a company can legally issue under its charter documents.
• Investor confidence: Available authorised capital shows that the company has room to issue additional shares if it needs funds for expansion, acquisitions or other requirements.
• Flexibility: A company may increase or decrease its authorised capital through the prescribed process. This allows it to adjust its capital structure according to its financial needs.
• Credibility and reputation: A suitable authorised capital structure may show that the company has planned for its future funding requirements. However, authorised capital alone does not indicate the company’s financial strength or performance.
• Regulatory compliance: The company must issue shares within the authorised limit and follow the applicable legal requirements when changing that limit.

• Protecting shareholder interests: The authorised limit prevents the company from issuing shares beyond the approved amount without completing the required process. New share issues may still dilute the ownership percentage of existing shareholders.

  
  
  

The authorised share capital is generally decided when a company is incorporated. It is recorded in the company’s Memorandum of Association along with details such as the number of shares and their face value.

Issued and paid-up capital do not determine the authorised capital. Instead, they are portions of the authorised capital.

For example, consider a company with the following capital structure:

• Authorised capital: ₹1 crore
• Issued capital: ₹40 lakh
• Subscribed capital: ₹35 lakh

• Paid-up capital: ₹30 lakh

  
  

The company may issue additional shares within the remaining authorised limit, subject to applicable requirements.

If the company wants to issue shares beyond its authorised capital, it must first increase the authorised limit. This involves altering its capital clause and completing the required approval and filing process.

Issuing additional shares may reduce the ownership percentage of existing shareholders if they do not purchase a proportionate number of the new shares.

The following are the main components used to determine authorised share capital.

Authorised shares

Authorised shares are the maximum number of shares that a company is permitted to issue. This number is stated in its Memorandum of Association.

For example, a company may be authorised to issue 10 lakh equity shares. It may issue all these shares at once or issue only a portion initially.

Par value per share

Par value is the nominal or face value assigned to each share in the company’s charter documents.

The face value is not necessarily the same as the market price. For example, a share with a face value of ₹10 may trade in the market at a higher or lower price.

Authorised share capital is calculated by multiplying the total number of authorised shares by the face value of each share.
Authorised capital = Number of authorised shares × Face value per share
For example, suppose ABC Limited is authorised to issue 15,00,000 shares. The face value of each share is ₹20.
Authorised capital = 15,00,000 × ₹20
Authorised capital = ₹3,00,00,000 or ₹3 crore
This is the maximum share capital that ABC Limited can issue unless it formally increases its authorised capital.

Also read: Bonus shares
 

Suppose an Indian company has an authorised share capital of ₹1 crore, divided into 10 lakh equity shares with a face value of ₹10 each.

The company initially issues only 1 lakh shares. Therefore, shares with a face value of ₹10 lakh have been issued, while 9 lakh shares remain unissued.

The company can issue more shares later, provided the total issued capital remains within the authorised limit, and the company follows the applicable requirements.

Keeping part of the authorised capital unissued gives the company room to raise funds in future financing rounds. However, issuing additional shares may dilute the ownership percentage of existing shareholders.

Authorised share capital sets the maximum amount of share capital a company can issue under its Memorandum of Association. A company may issue only a part of this amount and keep the rest available for future fundraising. Understanding authorised, issued, subscribed, and paid-up capital helps investors read a company’s capital structure more clearly. However, a high authorised capital does not by itself show strong financial performance, profitability, or business quality, so it should be considered along with other financial information.