Authorised Capital

What is Authorised Capital?

Authorised capital is the maximum amount of money a company can raise by offering its shareholders new shares. This limit is set in the company’s official documents, like the Memorandum of Association (MoA). It acts as a cap on the total share capital a company is allowed to issue.

Why Authorised Capital Matters?

Limits Share Issuance: The authorised capital refers to the maximum number of shares that a company can issue, thus acting as a safeguard for the existing shareholders from the over-issuance of shares that makes their ownership less valuable.

Flexibility for Future Growth: Corporations with some of the authorized capital not issued yet can easily release additional shares later to attract the capital they need without extra regulatory complexity.

Investor Confidence: Ahead of that, it tells the investor that the organization will not make them irrelevant to the company by continually creating new shares for the other ones, who can adjust their ownership and dividends according to the volume of shares issued.

Example Calculation of Authorised Capital

You can calculate authorised capital using this formula:

Authorised Capital = Total Number of Shares × Par Value Per Share

For example, if a company is authorised to issue 100,000 shares, and each share has a par value of $1, the authorised capital would be: 100,000 × $1 = $100,000

In short, authorised capital is essential in corporate finance. It sets a limit on the shares a company can issue, ensures flexibility for future fundraising, and protects shareholder interests.