Authorised capital meaning is the highest amount of share capital. The concept of the company was introduced in India with the Britisher’s rule. On the other hand, the Companies Act, 2013, only introduced the concept of share capital only.
Overview:
Authorised capital, also known as registered or nominal capital, represents the maximum amount of capital that a company is legally permitted to issue and sell to its shareholders. This figure is specified in the company’s constitutional documents, such as its memorandum of association. The authorized capital sets the upper limit for the company’s fundraising capacity and reflects the financial scale of its operations.
Authorised Capital
The authorised capital meaning is the amount of money that a company can spend without requiring any further approval. It is usually calculated by multiplying the share capital by the number of shares in the issue.
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Authorised Share Capital
As per Section 2(8) of The Companies Act, 2013, authorised capital is the maximum amount of capital that the company can issue to its subscribers for share capital. It is mentioned under the Capital Clause of the Memorandum of Association. (Authorised Capital Meaning)
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Issued Share Capital
It is the monetary value of the shares which was offered for subscription.
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Subscribed Share Capital
The amount received from subscribers against the issued share capital. There might be three situations:
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Over Subscription
In this situation, share applications received are more than the issued share capital. Therefore we have to issue shares on a partial allotment basis or Lottery system.
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Under Subscription
In this situation, the shares are not fully subscribed, but if subscribed more than a certain percentage limit, then we can issue shares. Otherwise, we have to refund the money received against the share applications. To cover this risk, companies appoint Underwriters before the Issuance of shares. They will buy the balancing shares to comply with the law.
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Full Subscription (Perfect Subscription)
This is a hypothetical situation. If it happens, we can issue shares against the application money received.
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Paid Up Capital
- It is the actual amount for which the shares have been issued and the application money received from the subscribers.
- Authorised Capital Meaning refers to the maximum amount of capital that a company can raise through the sale of its shares.
Example:
XYZ Private Limited has 2, 00,000 shares of ₹100 each as Authorised share capital. They invited applications for 1, 00,000 shares at ₹100 each as a fully paid-up share. Applications are received, and the following are the situations:
- Over Subscription – Applications for 1, 50,000 shares received with an amount of ₹1, 50, 00,000. Now in this situation, the company will issue 1, 00,000 shares, and they will refund ₹50, 00,000 on the basis of a lottery system or Partial subscription.
- Under Subscription – Applications for 92,000 shares received with an amount of ₹92, 00,000. Now, in this situation, the shares were under-subscribed, but as per the Companies Act, 2013 minimum of 90% of issued share capital should be subscribed. The company can issue these shares because 92% of the issued share capital has been received.
- Full Subscription (Perfect Subscription) – Applications for 1 00,000 shares with an amount of ₹1, 00, 00,000. In this situation, the company will issue shares against the application money received accordingly.
The amount of Authorised, Issued, Subscribed, and Paid-up capital in all the above three situations:
- Authorised Share Capital: ₹2,00,00,000 (2,00,000 shares of ₹100 each)
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- Issued Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
- Subscribed Share Capital: ₹1, 50, 00,000 (1, 50,000 shares of ₹100 each)
- Paid-up Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
- Authorised Share Capital: ₹2,00,00,000 (2,00,000 shares of ₹100 each)
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- Issued Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
- Subscribed Share Capital: ₹92, 00,000 (92,000 shares of ₹100 each)
- Paid-up Share Capital: ₹92, 00,000 (92,000 shares of ₹100 each)
- Authorised Share Capital: ₹2,00,00,000 (2,00,000 shares of ₹100 each)
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- Issued Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
- Subscribed Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
- Paid-up Share Capital: ₹1, 00, 00,000 (1, 00,000 shares of ₹100 each)
Purpose of the Authorised Share Capital
Authorised Capital limits the ability of directors to issue share capital due to which control over the company might affect. It is also used to prevent the conversion of profits into share capital. But the amount provided in authorised share capital is not fully issued. Some percentage of it is kept as a buffer to raise the additional amount of capital when required in adverse conditions. The Authorised Capital Meaning determines the upper limit of the company’s financial resources
Authorised Share Capital vs Paid Up Capital
| Authorised Share Capital | Paid Up Share Capital |
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Accounting and Disclosure Requirements For Authorised, Issued & Paid-up Share Capital
- Authorised Share Capital: It does not have any monetary impact and therefore is not recorded while book-keeping but disclosed in the Notes to Accounts only for reporting purposes. The Authorised share Capital Meaning is an important concept that helps to determine a company’s potential for growth and expansion.
- Issued & Paid-up Share Capital: This amount has a financial impact and is therefore accounted for in the company’s books. The amount of share capital is also shown on the Balance sheet.
Example
Let’s suppose you have a company ABC Ltd that has an authorised share capital of 4, 00,000 shares each valued at ₹100 each. Therefore the total amount of authorised share capital is ₹4, 00, 00,000.
However, they issued the subscribers fully subscribed 3, 00,000 shares of ₹100 each and these shares to the memorandum of association (MOA) of the company. Therefore Issued, Subscribed, and paid-up share capital of the company amounts to ₹3, 00, 00,000.
The balance of 1, 00,000 shares, whose value is ₹1,00,00,000 of ABC Ltd, is kept as a safety buffer for the situation of a financial crisis in the future. This would help the company to raise the financial amount and get out of the crisis.
Extract of Balance Sheet of ABC Ltd:
In the Book of ABC Ltd
Extract BALANCE SHEET
As of 31st March, 20XX
| Particulars | Note No. | Amount (₹) |
|
1 | 3,00,00,000 |
Notes to Accounts:
Note 1: Share Capital
| Particulars | Amount (₹) |
|
Authorised Share Capital 4,00,000 shares of ₹100 each Issued, Subscribed and fully paid up Share Capital 3,00,000 shares of ₹100 each Total Amount |
4,00,00,000 3,00,00,000 3,00,00,000 |
FAQs
What is authorized and issued capital?
Authorized capital refers to the maximum amount of capital that a company is legally permitted to issue to its shareholders. This limit is specified in the company's constitutional documents, such as its Memorandum of Association. The authorized capital represents the upper boundary for the total value of shares that can be issued by the company. It is a nominal or face value, and not necessarily the amount of capital the company currently possesses or plans to raise immediately.
What is the limit of authorized capital?
The limit of authorized capital is the maximum amount of capital that a company is legally allowed to issue in its corporate charter. This amount can be set by the company's founders and is often adjusted based on the company's needs and growth potential. There is no universal fixed limit, as it varies depending on jurisdiction and company regulations.
Who fixes the authorized capital of a company?
The authorized capital of a company is determined by its board of directors during the company's incorporation process. It is the maximum amount of capital that the company is allowed to raise through the issuance of shares. The authorized capital can be subsequently altered through shareholder approval, following the legal procedures outlined in the company's articles of association and relevant corporate laws.
What is the formula for Authorised share capital?
Authorized Share Capital is a predetermined maximum amount of share capital that a company is legally allowed to issue. The formula for Authorized Share Capital is not a mathematical calculation, but rather a decision made by the company at the time of incorporation or through amendments to its charter documents. It represents the upper limit of shares that a company can issue to shareholders.
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