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Authorized Share Capital

Contents

  1. Understanding Authorized Share Capital
  2. Key Takeaways:
  3. Exploring Different Types of Share Capital
  4. Subscribed Capital:
  5. Paid-Up Capital:
  6. Issued Capital:
  7. Special Considerations
  8. Example Illustration
  9. Authorized Share Capital of Public Companies

Deciphering Authorized Share Capital: Understanding Its Significance in Corporate Finance

Understanding Authorized Share Capital

Authorized share capital, also known as authorized stock or capital stock, represents the maximum number of shares a company is legally allowed to issue based on its corporate charter. This article explores the intricacies of authorized share capital and its relevance in corporate finance.

Key Takeaways:

  • Authorized share capital sets the limit on the number of shares a company can issue.
  • Subscribed capital represents the portion of authorized capital that potential shareholders agree to purchase.
  • Issued capital refers to shares that have been actually issued by the company to shareholders.

Exploring Different Types of Share Capital

Subscribed Capital:

Subscribed capital comprises the portion of authorized capital that potential shareholders commit to purchasing from the company's treasury. These shares are often part of an initial public offering (IPO) and are purchased by large institutional investors and banks.

Paid-Up Capital:

Paid-up capital is the portion of subscribed capital for which the company has received payment from subscribers. It is created when shares are sold directly to investors in the primary market.

Issued Capital:

Issued capital refers to shares that have been issued by the company to shareholders. These shares can include those held by the general public, institutional investors, and insiders who receive stock as part of their compensation.

Special Considerations

A company's authorized share capital can only be increased with shareholder approval, typically through a stock split or other dilutive measures. This ensures that shareholders have control over the company's capital structure.

Example Illustration

Consider a company with an authorized share capital of one million shares, of which only 100,000 shares have been issued. This leaves 900,000 shares in the company's treasury for future issuance. Such a strategy allows the company to maintain flexibility for future financing needs.

Authorized Share Capital of Public Companies

Stock exchanges often require companies to have a minimum amount of authorized share capital for listing. For instance, the London Stock Exchange (LSE) mandates a minimum of £700,000 for public limited companies (PLCs) to be listed.