Authorised capital refers to the maximum number of shares a company can issue as per its Memorandum of Association (MOA) bylaws. These shares can be used to raise funds by selling them to the public.
Why is authorised capital important?
Authorised capital helps limit the directors' power to issue new shares that could affect the company's governance. It also ensures fair profit distribution and serves as a safety net for additional funding needs.
Key Differences Between Authorised and Paid-Up Capital
Is the maximum share capital a company can issue.
Is stated in the company's MOA.
Can be increased with shareholder approval and regulatory authority consent.
Sets the company's maximum borrowing capacity.
Directors cannot issue shares beyond this limit without shareholder consent.
Paid up capital:
Is the share capital issued and fully paid by shareholders.
Is mentioned in the company's Articles of Association (AOA).
Cannot exceed the company's authorised capital.
Indicates the actual capital raised by the company.
Affects the company's financial ratios and valuation.
Benefits of Authorised Capital
It allows the company to focus on expansion through the revenue from share sales, without relying on loans or traditional funding sources. It also enables the business to pay its stakeholders more.
Authorised Capital in Public Companies
To be listed on stock exchanges like the London Stock Exchange (LSE), companies are required to have a certain amount of authorised capital. The authorised capital may exceed the number of trading shares, with the excess referred to as "outstanding shares."