Business, Legal & Accounting Glossary
Authorized share capital—also known as “authorized stock,” “authorized shares,” or “authorized capital stock”—refers to the maximum number of shares a company is legally allowed to issue or offer based on its corporate charter.
The maximum number of shares of stock that a corporation is authorized to sell, as stipulated in its articles of incorporation.
The authorised share capital of a company is the maximum number of stock units (shares) that can be issued pursuant to the terms of its memorandum of association or articles of incorporation. Management frequently does not use all authorised share capital in order to leave room for future issuance of additional stock in the event the company needs to raise capital quickly. Another reason to keep company stock in the treasury is to maintain control of the business.
Authorized share capital is also referred to as “authorised stock,” “authorised shares,” or “authorised capital stock” depending on the jurisdiction. Authorized share capital must be viewed in relation to paid-up capital, subscribed capital, and issued capital in order to be fully understood.
While all of these terms are synonymous, they are not synonymous. The broadest term for a company’s capital is authorised share capital. It includes each and every share of each category that the company could issue if necessary or desired.
Subscribed capital is a percentage of authorised capital that prospective shareholders have agreed to purchase from the company’s treasury. These shares are frequently sold in conjunction with a company’s initial public offering (IPO). Frequently, large institutional investors and banks are the subscribers who purchase shares during the initial public offering.
Paid-up capital refers to the portion of subscribed capital for which the company has been paid by subscribers. Paid-up capital is generated when a business sells its shares directly to investors in the primary market. These investors may hold the shares or sell them on the secondary market to other investors. Selling the shares to other investors does not result in the creation of additional paid-up capital. Thus, investors will receive the proceeds from the sale of their shares, not the issuing company.
Finally, issued capital refers to the shares that the company has actually issued to its shareholders. The general public, institutional investors, and insiders who receive stock as part of their compensation packages are all examples of shareholders. The term “issued shares” is also used to refer to outstanding shares.
Considerations
While a company’s shares outstanding will fluctuate as it repurchases or issues additional shares, its authorised share capital will remain constant absent of a stock split or other dilutive measure. The shareholders determine the authorised share capital, which can only be increased with their approval.
Consider a company with a $1 million authorised share capital consisting of one million common shares with a par value of $1 each. However, the company’s issued capital is only 100,000 shares, leaving 900,000 shares available for future issuance in the company’s treasury. This appears to be shortsighted, as the company is foregoing $900,000 in capital, but it makes sense when the business phases are considered.
Assume our business is a startup. In this case, it is maintaining a high authorised share capital while maintaining a low issued share capital in order to facilitate additional financing rounds from investors. If the startup attempts to split the stock, it may face opposition from shareholders. If it holds a significant amount of stock, it does not need shareholder approval to raise additional capital in the future.
Surprisingly, mature companies frequently see their shares outstanding decline in comparison to their authorised capital. When a business is established and no longer growing aggressively, the best use of excess capital is to frequently repurchase outstanding shares.
Stock exchanges may require companies to have a certain amount of authorised share capital in order to be listed. For instance, the London Stock Exchange (LSE) requires that a public limited company (PLC) have a minimum authorised share capital of £700,000 before it can be listed. 1 Authorized share capital may exceed available for trading shares. The shares that have been issued to the public and to the company’s employees are referred to as “outstanding shares” in this case.
authorised share capital
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This glossary post was last updated: 25th January, 2022 | 0 Views.