Authorized Share Capital
Reviewed by Aug 27, 2020| Updated on
Authorized share capital is the number of stock units (shares) that a company may issue, as set out in its association memorandum or incorporation papers. Management also does not make full use of authorized share capital to leave space for potential issuance of additional stock if the company needs to collect capital quickly. Another reason to hold company treasury shares is to maintain a controlling interest in the company.
Authorized share capital is often referred to as "authorized stock," "authorized stock" or "authorized capital stock" depending on the jurisdiction. To be fully understood, authorized share capital must be interpreted in a way where it relates to paid-up capital, subscribed capital and issued capital. Although these words are all interrelated, they are not synonyms.
"Authorized share capital" is the widest term used to describe the capital of an enterprise. It contains every single portion of every category that the organization might issue if it required or wanted to.
For example: if XYZ Pvt Ltd has an authorized capital Rs. 20 lakhs and shares issued to shareholders up to an amount of Rs.15 Lakhs, it means that XYZ Pvt Ltd has issued shares that are not above the maximum limit, i.e. The Company's authorized capital and also has the right to issue more shares amounting to Rs.5 lakhs in future without increasing the authorized share capital
However, if XYZ Pvt Ltd has issued shares in the amount of Rs.25 Lakhs to shareholders with the same Rs 20 Lakhs allowed money, this means that the company has issued shares in excess of the permissible limit and is therefore not permitted by law. To do so, first, the process of increasing authorized share capital has to carry out, and then the issue of shares to shareholders can be done.