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One of the many variables that affect the stock market is a company’s authorised stock issuance, which is a significant indicator of the size of that company’s prospective equity impact.
A company determines the maximum number of shares it may issue at the time of formation. The term authorised stock describes these shares. The authorised stocks might be all or a portion of the shares offered to the public for trading on open markets.
Today, we will look into authorised shares and their differences from issued and outstanding shares.
What are authorised shares?
The total number of shares an organisation can legally issue following its corporate regulations (articles of incorporation) are authorised stock or authorised shares. The face value per share and the number of authorised shares determine the authorised share capital.
The authorised stock usually stays unissued for a while. Authorised shares serve as an assurance of the management’s authority to issue more shares. If the new shares are offered at a price below their market value, this share issuance might alter the distribution of profits.
Example of authorised stock
Assume the role of ABC Corporation’s founders is to build a new manufacturing facility to expand the company. After assessing the circumstances, the founder determines that building a new facility—which will cost ₹20 crore—is the appropriate course of action.
After analysing the capital structure, they discovered that only 100,000 of the 200,000 authorised shares—each priced at ₹5,000—have been issued. To get the extra ₹20 crore, they decided to issue an additional 40,000 shares from a pool of unissued shares.
Out of the 100,000 unissued shares, they have decided to sell 40,000 with the board’s approval. As a result, the issued shares increase to 140,000 while the total authorised shares remain at 200,000, generating the ₹20 crore required for this planned development.
Features of authorised shares of stock
- Limitation on issued shares:
The total number of stock units that might be issued is the entire number of authorised shares. The authorised shares are always more than or equal to the issued shares to control the business’s ownership structure.
- Potential funding capability:
Companies purposefully hold authorised shares that have not yet been distributed so they may raise funds later. They may issue additional shares as required, promoting financial stability and development.
- Protection against acquisitions:
Authorised shares that have not been issued safeguard against aggressive takeover efforts. Holding up on issuing all authorised shares helps corporations retain control and avoid ownership dilution.
- Shares set aside for strategic planning:
Authorised shares that are not yet issued are identified as reserved shares for several reasons. These reserves provide flexibility for employee incentives and may be added to future stock option schemes.
- Strategically issuing warrants:
Stock warrants are used to strategically issue authorised shares. It gives businesses a strategic way to interact with third parties and makes regulated stock distribution easier.
Difference between authorised shares and issued shares and outstanding shares
| Aspect | Authorised shares | Issued shares | Outstanding shares |
| Meaning | The most number of shares that a business may lawfully issue following the terms of its corporate document. | The number of shares the company has chosen to collect funds. The number can be lower than the number of authorised shares. | Shares from the authorised shares that have been held by the shareholders at present after excluding the shares bought back. |
| Purpose | Allows for future capital requirements and possible growth. | To gather funds to establish or expand the business. | Shows shares that are available for trade and represent the true ownership of the business. |
| Usage | Reserved for use in secondary offerings and employee stock options, among other future issuances of shares. | Used to get initial capital for the business. | Used for determining a company’s market value and EPS. |
Conclusion
One way to think of authorised stocks is as a limit on the maximum units of stock that a company may issue. Not only does this control benefit long-term planning, but it also prevents those who may not be interested in the company’s best interests from acquiring it.
Companies display their awareness of current needs and future growth potential by carefully regulating the ratio of allowed to given-out shares.
FAQs
Authorised capital, also known as authorised stock, is the maximum amount of share capital that a company is legally allowed to issue as stated in its Memorandum of Association. It represents the potential for future funding and sets the limit on the number of shares a company can offer to investors. Capital stock, on the other hand, includes both authorised and issued capital and represents the total value of shares that the company can issue to shareholders.
Authorised stock is not treasury stock. Authorised stock refers to the total number of shares a company can issue as per its corporate documents, while treasury stock consists of shares that have been repurchased by the company or were never issued to the public. Treasury stock is held by the company itself and does not confer voting rights or dividends.
Authorised shares are the total number of shares a company is permitted to issue according to its corporate charter. Unissued shares are part of the authorised shares that have not yet been offered to investors. These unissued shares provide a reserve that the company can utilise in the future for raising capital or other corporate purposes. In summary, authorised shares set an upper limit, whereas unissued shares remain available for future use.
Authorised capital is the maximum amount of capital that a company can raise through the issuance of shares, as specified in its Memorandum of Association. It sets the limit for how much a company can raise from its shareholders. Issued capital, on the other hand, is the portion of authorised capital that has actually been offered and subscribed to by shareholders. It represents the actual capital raised by the company from its shareholders.
Authorised but unissued share capital refers to the portion of a company’s authorised capital that has not been issued to shareholders. These shares are part of the total authorised capital but have not been actively distributed. These shares serve as a reserve for future use and are available for the company to issue at a later date, providing flexibility for future capital-raising activities without the need to alter the authorised capital amount.
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