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
Understanding 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. Although all these terms are interrelated, they are not synonyms.
"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.
A company's shares outstanding will fluctuate as it buys back or issues more shares, but its authorized share capital will not increase without a stock split or some other dilutive measure. Authorized share capital is set by the shareholders and can only be increased with their approval.
- Authorized share capital refers to all the shares issued for a company.
- Companies often hold back a portion of their authorized share capital for future financing needs.
- A company's authorized share capital will not increase without shareholder approval.
Example of Authorized Share Capital
Imagine a company with 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 of the company is only 100,000 shares, leaving 900,000 in the company's treasury available for future issuance. This sounds short-sighted, as the company is forgoing $900,000 in capital, but it makes sense when you look at the business phases. Imagine our company is a startup. In this case, it is keeping authorized share capital high while actual issued capital is low to allow for additional financing rounds from investors. If the startup tries to split stock, it may not get shareholder approval. If it has a large amount of stock held back, then it doesn't need to get shareholder approval to raise more capital in the future.
Interestingly enough, mature companies often see their shares outstanding shrink in comparison to authorized share capital. When a company is established and no longer growing aggressively, then the best return for extra capital may be buying back shares outstanding. This usually increases the value of the remaining shares on the market by lowering the true supply. For example, the Coca-Cola Co. had an authorized share capital of 11.2 billion shares in 2018 with a par value of 25 cents per share. However, it has only 4.33 billion outstanding shares in the same period.
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."