What is the Authorized Share Capital?
The units of shares defined in the memorandum of association or its article of incorporation (AOI) are known as share capital that is authorized. Some part of the share capital (authorized) is left unused for future requirements or fulfill the needs of additional stock in case the company needs to raise additional capital urgently. Another reason to keep the shares in the company treasury is to retain a controlling interest in the company.
Breaking Down ‘Authorized Share Capital’
The authorized share capital is known by different names in a different jurisdiction. The other words are also authorized capital, authorized shares or authorized stock. In simple words, the category of shares under authorized capital can be related to the capital that is paid, subscribed & issued. Although all these terms are interrelated, they are not synonymous.
Breakdown of a Company’s Capital
The authorized share capital is a broad term used to define the company’s capital. The authorized share capital consists of every single share of each category that the company could issue if it needed. Further, subscribed capital is a part of the capital that has been authorized by the potential shareholders who have agreed to buy from the firm’s treasury. The paid-up capital is considered as the part of the subscribed capital that is gained by the company based on the payment received from the shareholders. The shares that are issued by the company the shareholders are known as the issued capital.
For example, if the company has an authorized capital of hundred thousand common shares at $1 each, then the total of shares that the company can accumulate will be around $100k shares. The actual number of shares that can be issued will be only 100,000 shares, and rest of 900,000 will remain in the treasure of the company future requirements.
For Start-up Companies, the authorized share value may be higher than the actually issued capital for generating financing from the eventual investors.
Authorized Share Capital of Public Companies
In order to be listed on the exchange, companies are required to have a minimum number of authorized stock. For e.g., the stock exchange in London asks for the public limited companies to have a minimum of fifty thousand pounds of the authorized capital of shares for getting listed in the exchange. The category of authorized capital shares can be greater than the shares available for trading. In such case, the shares that have been given to the public and employees are defined as outstanding shares.
The simple example of the authorized shared can be better explained by the famous company – Coca-Cola which has an authorized capital of 11.2 billion shares at the rate of 25 cents per share. The total value of the outstanding shares is 4.33 billion.
The share capital includes the funds that have been raised by the company in return for the shares of either common or preferred shares of stock. The price defined for the share capital and/or the equity of the company can be modified in the future. If any company wants to generate additional equity then it can get the authorization for issuing and selling additional shares by increasing its share capital.
Breaking Down ‘Share Capital’
The amount of share capital defined in the company’s balance sheet reports, only the amount that is received by the shareholders at the initial period. If the shareholders trade their shares in the secondary market at a higher price, then the difference between the actual and saleable price does not impact the company’s share capital.
Depending on the usage and context, the meaning and definition of the term share-capital also change. As part of the capital raising discussion, the company can legally raise by selling the stock from several categories of share capital. Accountants have a much narrow definition of the share capital.
The paid-up capital is generated by the company through the shares purchased by the shareholders. The paid-up capital can be generated by selling the shares in the direct primary market by the company. If the shares are purchased or sold on the secondary market then the additional capital generated in the process of mutual transactions is not considered to the company’s paid-up capital.
Breaking Down ‘Paid-Up Capital’
The other terms for paid-up capital are paid-in and contributed capital. The major two funding platforms through which the paid-up capital is generated are the par value of the stock and the additional paid-in capital. The base price on which the shares are issued is known as the par. Typically, the value of the at par price of the stock can be very less like around $1. If the amount by the investors is higher than the par value defined for the stock then that par value is known as the additional paid-in capital. The company balance sheet will show the par value of the shares issues in the list of common stock or the preferred stock under the section of shareholder’s equity, as per the stocks issued by the company.
Any shares that are issued in the market are known as the authorized shares which are sold to the shareholders of the company. The shares can be purchased by the internal shareholders, institutions as well as the external shareholders like the general public, as defined in the company’s annual report. The issued shares are sold to the shareholders in exchange for the amount for generating the company’s capital while the insider is given the shares based on their compensation packages. As each share is held as part of the treasury, retired shares are not considered in the figure.
Breaking Down ‘Issued Shares’
Once the company has issued the shares, the investor is free to sell the shares to another investor. If the company wants to purchase its own shares then the status of such shares will remain issued as it can be further sold by the company to other investors. In small company setup, the shares can be held by the original owners of the company.
Recording Issued Shares
The stock issued by any company is listed as the capital stock in the balance sheet records. Companies file the outstanding shares quarterly with the Securities and Exchange Commission (SEC). The annual report of the company has the complete details of the outstanding shares in the capital section.