Authorized Capital

Authorized Capital is important because it sets a limit on the amount of equity that the company can issue. This limit helps to prevent over-issuance of stock, which can dilute the value of existing shares and potentially harm the company's financial health.

What is Authorized Capital

Authorized capital refers to the maximum amount of stock that a company is legally allowed to issue, as stated in its articles of incorporation or charter.

This represents the upper limit of the company's potential equity and is used as a measure of a company's growth potential.

The authorized capital may not necessarily correspond to the actual amount of stock issued, as a company may choose to issue only a portion of its authorized capital.

Understand Authorized Capital more deeply

Authorized capital is a key concept in corporate finance and is often used as an indicator of a company's growth potential. It is the maximum amount of capital stock that a company is authorized to issue, as set forth in its articles of incorporation or charter.

This amount is determined by the company's founders or board of directors and is usually stated in terms of the number of shares and their respective par values.

It's important to note that just because a company has authorized capital doesn't mean that it has to issue all of the stock. A company may choose to issue only a portion of its authorized capital, depending on its financing needs and market conditions.

The remaining authorized capital can be used for future equity offerings or to provide additional liquidity to the company.

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Issued Capital

Paid Up Capital

For example:

Suppose the capacity of a bathtub is 100 litres, which means that you cannot add water more than 100 litres in it.

Authorised capital is like the capacity of a bathtub. It is the amount invested in the company using shares and a company cannot issue shares beyond the authorised capital.

So, if your authorised capital is Rs. 10 lakhs, then you cannot issue shares more than Rs. 10 lakhs.

If the face value of 1 share is Rs. 10 and your total authorised capital is Rs. 10 lakhs, then you can issue 1 lakh shares (Rs. 10 lakhs divided by Rs. 10) of the company.

Thus, the company can issue 1 lakh shares for Rs. 10 each and can generated the authorised capital of Rs. 10 lakhs.

In summary, authorized capital is a crucial element of a company's capital structure and represents the maximum amount of equity that the company can issue to raise capital or finance growth.

Use of Authorized Capital

The use of authorized capital refers to the way a company utilizes the maximum amount of stock it is legally allowed to issue, as stated in its articles of incorporation or charter.

Here are some of the common uses of authorized capital:

1. Issuing stock: Companies can use authorized capital by issuing stock to raise capital. This can be done through an initial public offering (IPO) or through follow-on offerings to the public or private markets.
2. Employee stock options: Authorized capital can also be used to provide employee stock options, which can be a valuable tool for attracting and retaining talented employees.
3. Mergers and Acquisitions: Authorized capital can be used to finance mergers and acquisitions by issuing additional stock. This can help the company expand its operations and grow its business.
4. Stock dividends: Companies can also use authorized capital to distribute stock dividends to shareholders, which can increase the value of existing shares and attract new investors.
5. Reserve for future use: Authorized capital can be kept as a reserve for future use, such as issuing additional stock to raise capital or to provide additional liquidity to the company.

Conclusion

In conclusion, authorized capital plays a crucial role in a company's financing strategy and can be used in various ways to support the growth and development of the business.

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