What is Authorized Share Capital
Authorized share capital is the number of stock units (shares) that a company can issue as stated in its memorandum of association or its articles of incorporation. Authorized share capital is often not fully used by management in order to leave room for future issuance of additional stock in case the company needs to raise capital quickly. Another reason to keep shares in the company treasury is to retain a controlling interest in the business.
Types Of Shares: Authorized, Outstanding, Float And Restricted Shares
BREAKING DOWN Authorized Share Capital
Depending on the jurisdiction, authorized share capital is sometimes also called "authorized stock," "authorized shares" or "authorized capital stock." In order to be fully understood, authorized share capital must be viewed in a context where it relates to paid-up capital, subscribed capital and issued capital. Althoug all these terms are interrelated, they are not synonyms.
Breakdown of a Company's Capital
"Authorized share capital" is the broadest term used to describe a company's capital. It comprises every single share of every category that the company could issue if it needed or wanted to. Next, subscribed capital represents a portion of the authorized capital that potential shareholders have agreed to purchase from the company's treasury. Paid-up capital is the portion of the subscribed capital for which the company has received payment from the subscribers. Finally, issued capital is the shares that have actually been issued by the company to the shareholders.
For example, a company could have an authorized capital of 1 million common shares at a par value of $1 each, for a total of $1 million. However, the actual issued capital may be only 100,000 shares, leaving 900,000 in the company's treasury available for future issuance.
In the case of a startup, authorized share capital may be very high while actual issued capital is low to allow financing from eventual investors.
Authorized Share Capital of Public Companies
Stock exchanges may require companies to have a minimum amount of authorized share capital as a requirement of being listed on the exchange. For example, the London Stock Exchange requires that a public limited company have at least £50,000 of authorized share capital to be listed. Authorized share capital may be greater than the shares available for trading. In this case, the shares that have actually been issued to the public and to the company's employees are known as "outstanding shares."
For example, the Coca-Cola Co. has an authorized share capital of 11.2 billion shares with a par value of 25 cents per share. However, it has only 4.33 billion outstanding shares.