Introduction
Authorised 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 authorised 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.
Understanding Authorised Share Capital
Authorised share capital is often referred to as "authorised stock" or "authorised capital stock" depending on the jurisdiction. To be fully understood, authorised 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.
"Authorised share capital" is the widest term used to describe the capital of an enterprise. It contains every single portion of every category that the organisation might issue if it required or wanted to.
Example
If XYZ Pvt Ltd has an authorised 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 of the company's authorised capital. It also has the right to issue more shares amounting to Rs.5 lakhs in future without increasing the authorised 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 of allowed money, this means that the company has issued shares in excess of the permissible limit and is therefore not permitted by law. In order to do so, the process of increasing authorised share capital must have been carried out in the first place, and then the issue of shares to shareholders can be done.
