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.
- 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.
- Subscribed capital represents a portion of the authorized capital that potential shareholders have agreed to purchase from the company’s treasury, often as part of the company’s initial public offering (IPO).
- 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.
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.
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 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.
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.
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 split stocks or some other dilutive measure. Authorized share capital is set by the shareholders and can only be increased with their approval.