Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
Companies can obtain the funds to run and grow their businesses in two ways. The first is by availing of a business loan from a bank or a non-banking financial company (NBFC). The other method is by raising capital. This is done by issuing shares — which represent ownership in the company — to the general public via an initial public offering (IPO). The shareholders can benefit from the long-term growth in the company’s share prices and cash in on this capital appreciation.
There are many advantages of issuing shares — both for the company as well as its shareholders. However, just like there’s a limit on the maximum amount of loan a business can avail of, there’s also a limit on the number of shares it can legally issue.
This is where the concept of the authorised stock becomes relevant.
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What is Authorised Stock?
Authorised stock, also known as authorised share capital, represents the maximum number of shares that a company is allowed to issue. If a company issues multiple classes of shares like equity and preference shares, each class will have its own authorised stock limit.
A company, may at any point in time, choose to increase the maximum limit of shares it can issue. However, the authorised stock limit can only be increased via a resolution passed in a general meeting (shareholders’ meeting) with at least two-thirds of the total shareholders approving the said resolution.
Now that you know the definition of authorised stock, here’s a quick overview of how you can calculate it using a simple mathematical formula.
| Authorised stock = Total number of issued shares + Total number of shares yet to be issued |
Thankfully, you don’t have to use the above-mentioned formula to calculate the authorised share capital of a company. According to Indian laws, every registered company should list the details of its authorised stock in its Articles of Association (AoA) and the Share Capital section of its Balance Sheet.
Authorised Stocks: An Example
Here’s a hypothetical example to help you understand the meaning of authorised stock.
Assume there’s a company called ABC Limited. The authorised equity share capital set at the time of incorporation is 20 lakh equity shares. The company has already issued about 12 lakh equity shares. Now, the company wants to expand its business and seeks to raise funds to the tune of ₹10 crores from the public.
To do that, it would have to issue around 10 lakh additional equity shares. However, due to the authorised stock limit, the company can only issue about 8 lakh equity shares before it reaches its limit.
To bypass this limitation, the company calls for a general meeting and seeks approval from its shareholders to increase its total authorised share capital from 20 lakh equity shares to 40 lakh equity shares. The shareholders approve the increase and the company goes on to issue 12 lakh additional equity shares and raise ₹10 crores from the public.
As an investor, it is crucial to know the difference between authorised stock, issued stock and outstanding stock. Here’s a table outlining the key differences between these three types of share capital.
| Parameters | Authorised Shares | Issued Shares | Outstanding Shares |
| Definition | Refers to the total number of shares a company is legally allowed to issue | Refers to the total number of shares a company has already issued | Refers to the total number of shares that have been subscribed |
| Quantity | Consists of issued shares and unissued shares | Is a subset of authorised shares | Is a subset of issued shares |
| Treasury stocks | Features treasury stocks, i.e., stocks that have been bought back by the company | Also features subscribed shares that have been bought back by the company | Doesn’t feature stocks that have been bought back by the company |
| Articles of Association | Mentioned in the Articles of Association | Not mentioned in the Articles | Not mentioned in the Articles |
Why Do Companies Not Issue All of Their Authorised Stock?
At the time of incorporation, most companies set a high authorised share capital limit even if they only plan on issuing a fraction of it. This gives the company the freedom to raise funds by issuing more shares in the future without the need to convene a general meeting to obtain shareholders’ approval. This helps it save a lot of time, money and mitigate the risk of shareholders not giving their consent to increase the limit.
Conclusion
While the authorised capital is defined in the Memorandum of Association (MoA) of a company, it can be increased if necessary. This is only possible if the company’s Articles of Association (AoA) permit an increase in authorised capital.
If the AoA allows for this, the company will need to obtain the approval of its shareholders via an ordinary resolution in an extraordinary general meeting (EGM). If the proposal is approved, the company can increase its authorised stock as required.
