Authorized Share Capital and Example

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.

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.

Subscribed Capital

Subscribed capital represents a portion of the authorized capital that potential shareholders have agreed to purchase from the company's treasury. These shares are often a part of a company's initial public offering (IPO). Large institutional investors and banks are frequently the subscribers who will purchase shares during the IPO.

Paid-Up Capital

Paid-up capital is the portion of the subscribed capital for which the company has received payment from the subscribers. A company creates paid-up capital by selling its shares directly to investors in the primary market. These investors may hold the shares or they may sell them to other investors on the secondary market. The subsequent selling of the shares to other investors does not create additional paid-up capital. Thus, investors who sell their shares will receive the proceeds and not the issuing company.

Issued Capital

Finally, issued capital refers to the shares that have actually been issued by the company to the shareholders. These shareholders can include the general public, institutional investors, and insiders who receive stock as part of their compensation packages. Issued shares are also referred to as outstanding shares.

Special Considerations

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.

Example of Authorized Share Capital

Imagine a company with an authorized share capital of one 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 shortsighted, 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 the 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 is frequently buying back shares outstanding.

A share buyback usually increases the value of the remaining shares on the market by lowering the true supply.

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 (LSE) requires that a public limited company (PLC) have at least £700,000 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."