Definition: The Authorized Capital is the maximum amount of capital that a company can raise through the issue of shares to the shareholders. In other words, the capital amount with which a company is registered with the registrar of the company (as stated in the article of incorporation) is called the authorized capital.
Thus, authorized capital is the limit to which the companies can raise shares to the shareholders and not beyond it. Therefore, the companies get registered with capital, which is quite above their current needs of financing, so that the capital can be further raised when the need arises.
Often, the authorized capital is not fully used by the management; a safety buffer is maintained that can be used to raise the additional capital whenever the need arises. Also with the issue of shares the ownership in the company gets diluted, and therefore, the full amount of capital is not raised with the intent to have limited control over the affairs of the company.
For Example: Suppose a firm has an authorized capital of Rs 50,00,000, then it can issue shares worth up to Rs 50,00,000 to its shareholders and cannot issue anything beyond it. But however, if the company issued shares worth up to Rs 25,00,000 only, then the remaining capital amount will be held as an unused capital and can be used anytime by the firm in the future.
The authorized capital can be increased anytime a firm wants, provided the shareholders approve it. Thus, in order to increase the limit, along with the shareholder’s approval, an additional fee has to be paid to the registrar of the companies.