What is Authorized Share Capital?
Authorized capital or authorized share is the maximum number of shares which the company can issue and sell to investors, it based on the article of incorporation. During initial registration, the company files a formal document (an article of incorporation) with the government to form the corporation. This document contains the maximum number of share which the corporate can issue to the shareholders.
The company does not need to issue all the authorized shares, management will keep some shares to issue in the future. It is not necessary to issue all authorized shares if the company does not need the money to invest. If we have the remaining authorized share (treasury share) on hand, it will be room to raise more capital in the future. We do not know what will happen in the future, the company may need more funds to support its operation. So it is good to have a backup plan.
The number of authorized shares can be increased by the shareholders in the annual shareholder meeting. Then, the company needs to revise the article of incorporation which is registered with the government. Increasing authorized shares means that the current shareholders will lose their value. It simply means current shareholders will share the company with new shareholders while the company’s value remains the same.
Authorized Share Example
Company ABC has authorized capital of 500,000 common shares at $1 par value. The company has registered a number of shares with the ministry of commerce (government). However, company only issues 200,000 common shares to the public to raise the capital for investment. The remaining share of 300,000 remains as the treasury share which will be used to raise more capital in the future if necessary.
Authorized Share of Listed Companies
Stock exchange requires the listed companies to have a minimum number of authorized shares in order to list on their market. They want to ensure that the company will have additional shares to issue in case of emergency. The minimum number of authorized share will depend on each stock exchange regulation.