The maximum capital mentioned in the management letter of a company is called authorized capital. Even better understood, the amount of capital registered at the time when any company is registered is called authorized capital. It is also called registered capital or nominal capital.
Authorized capital is the limit to increasing the share of any company. No more shares can be issued than the authorized capital registered at the time of company registration. Therefore, the company registers a lot of authorized capital at the time of registration of authorized capital, which is much higher than the current financial condition of the company because the company can raise additional capital if there is any need.
A firm has an authorized capital of Rs. 80,00,000, that firm can only issue shares up to Rs. 80,00,000, not more than that. However, if the firm issues shares worth Rs 40,00,000, the remaining authorized capital will remain as unused capital and can be used by the company at any time in the future.
For a company to increase its authorized capital, it needs the approval of its shareholders. That is, with the approval of the shareholders, the company can increase its authorized capital at any time. To increase the limit of authorized capital, an additional fee has to be paid to the registrar’s office along with the approval of the shareholders.