Authorised capital

Authorised capital is a permission, not a possession.

When a company is incorporated, its Memorandum of Association states the largest amount of equity capital it will ever have without going back to its shareholders to change that document. Everything the company subsequently issues — to promoters, to the public, to specified investors, as bonus shares, on conversion of debentures — has to fit underneath that number.

So a company with Rs 20 crore of authorised capital and Rs 4 crore issued is not a company with Rs 16 crore in the bank. It is a company with Rs 16 crore of headroom.

Three figures sit inside one another, and the workbook states the order explicitly:

Paid-up capital  ≤  Issued capital  ≤  Authorised capital

Authorised is the maximum that can be issued or paid up. Issued is the portion actually offered to investors — at face value, at a premium, or in special cases at a discount. Paid-up is the portion of the issued capital the shareholders have actually handed over.

For a registrar this is not bookkeeping trivia. Every corporate action that creates shares — a bonus issue, a rights issue, conversion of an FCD, an ESOP allotment — consumes headroom, and an allotment that would breach the authorised capital simply cannot be made. The Memorandum has to be altered first.

It is also the number the depositories reconcile against. The distinctive number (DN) database maintained by the depositories holds the issued capital, the DN ranges, and the split between physical and dematerialised holdings, precisely so that total issued capital, listed capital and demat capital can be tied out.

A company decides the maximum equity capital it will need is Rs 20 crore, and in the first stage needs Rs 10 crore. It issues shares of Rs 10 face value at par, calling Rs 5 with application and Rs 5 after six months.

Outstanding shares: Rs 10 crore ÷ Rs 10 = 1 crore shares.

Now test the headroom. The board wants a bonus issue:

1:2 bonus → 50 lakh new shares  → issued capital rises to Rs 15 crore  ✔ fits
1:1 bonus → 1 crore new shares  → issued capital rises to Rs 20 crore  ✔ exactly at the ceiling
3:2 bonus → 1.5 crore new shares → would need Rs 25 crore              ✘ impossible

The third one is not a funding problem — a bonus issue needs no money from anybody. It is a documentation problem, and it stops the corporate action dead until the Memorandum is altered.

Chapter 2.4 (Equity Terminology) defines authorised, issued, paid-up and outstanding shares together and works the example above; the workbook then states the three inequalities as a thing to remember. Expect a computation that gives you a fact pattern and asks for one of the three figures, or a direct "which is always the largest" question. Chapter 12.6.1 (Distinctive Number database) is where issued capital returns as a reconciliation item.

• Authorised capital is not money raised, and not cash. It never appears as an amount the company received.
• It is not market capitalisation either. Authorised capital is measured at face value; market cap is shares × market price.
• A bonus issue consumes authorised capital. It costs the shareholders nothing but it creates shares, and shares need headroom.
• The inequality only runs one way: paid-up ≤ issued ≤ authorised. Any question implying issued capital exceeds authorised capital is testing whether you noticed.
• Shares may be issued at face value, at a premium, or in special cases at a discount — but the premium never enters authorised or issued capital, which are counted at face value.