A Brief Introduction to Outstanding Share Capital
There are several types of share capital in a company and each of them has its own significance. If you ever wish to analyse the performance of a company for any reason, understanding its capital structure should be your first step. In this article, we have discussed in detail what outstanding share capital is and its significance .
What is Outstanding Share Capital?
Outstanding share capital is the aggregate monetary value of all shares that a company has issued so far excluding shares that it bought back. It also includes shares which have been issued privately to promoters, mutual funds, or even the government.
Example of Outstanding Share Capital
Here is an example to better understand outstanding share capital. Let’s say a company issued 1000 shares of ₹100 each, out of which 200 shares were issued to its promoters and 800 shares were issued to the public. Now outstanding shares of the company will be 1000 shares. Outstanding share capital will be 1000 shares X ₹100 = ₹1,00,000.
Significance of Outstanding Share Capital for Investors
A portion of outstanding share capital represents shares that are being traded in the market. Therefore, as an investor, it is smart to know the financial position of a company before putting your money in it. Outstanding shares of a company can help you figure out its market capitalisation, earnings per share as well as cash flow of the company.
All three metrics play a key role in reflecting the financial standing of a company. They also help an investor make their investment decisions and figure out an expected return on their investments.
Outstanding Shares vs. Floating Shares
Floating share capital of a company refers to those shares of the company which are being publicly traded at present. It does not include any restricted share that is being held by insiders or promoters of the company. Outstanding share capital, on the other hand, is a sum of both floating share capital and restricted share capital.
Continuing with the example discussed above, the 800 shares issued to the public constitute floating share capital of the company, whereas 200 shares issued to the promoters are restricted shares. These are called restricted shares because they are not traded publicly.
How Does a Stock Split Affect Outstanding Shares?
Stock split is a corporate action where a listed company divides its outstanding number of shares into new multiple shares of smaller value. This does not affect the market valuation of that company in any way but makes those shares more accessible to the public because of the reduced share price. This action is usually done to increase the liquidity of the shares and the shareholder count.
A stock split increases the number of shares thus increasing the total outstanding shares of the company. However, it does not affect outstanding share capital in any way because the aggregate value of those shares remains the same.
Taking the above example, let’s say the company decided to split its shares in the ratio of 2:1. Now, for every share held, the shareholders would get one more share. So, the number of total shares is now 2000 shares with a value of Rs. 50 each. The outstanding share capital is still ₹1,00,000. But, the number of outstanding share capital has shot up to 2000 shares.
Relationship Between Outstanding Shares and Buyback
When a company pays money to its existing shareholders to pull back some of its issued shares from the market, it is called buyback. There can be various reasons for a company to buy back its own shares. Some major reasons are to reward its existing shareholders with profits that it has earned. When a company buys back shares, it increases the value of the remaining shares in the market.
As a result of buyback, the number of shares in the market reduces, thus also reducing the outstanding shares of the company. But during buyback, because the company pays money to get those shares back, it also reduces the outstanding share capital of the company.
Continuing with the same example from top again, let’s say the company decided to buy back 100 of its floating stock. This would bring down the number of shares in the market to 700. So the floating share capital would also come down to 70,000. Therefore, the outstanding share capital would now be ₹70,000 + ₹20,000 = ₹90,000, which was ₹1,00,000 before.
Outstanding share capital of a company is an indicator of several key metrics of a company. As an investor, it is always wise to gain some knowledge about the issuer of the financial instrument first before investing your money in it. Not just for investors, even entities like asset management companies, mutual funds etc., should take note of such parameters for their operational decisions.
Frequently Asked Questions
How does an issue of bonus shares impact outstanding shares?
Bonus shares are issued to existing shareholders of a company. While the shareholders are not required to pay any money for these bonus shares, it still increases the number of fully paid-up shares of the company in the market. With an increase in the number of shares, the outstanding share capital of the company also increases.
Can outstanding share capital exceed authorised share capital?
Authorised share capital is the maximum value of shares that a company can issue to anyone. It includes all types of shares. Since a company cannot go past its authorised limits, the outstanding shares can never be higher than the authorised share capital.
Is it still outstanding share capital if it is not being traded?
Outstanding share capital includes all shares that a company issues excluding the shares it bought back if any. So even if a share has been issued to insiders or promoters (which are not traded), it still is a part of the outstanding share capital.
Why would a company want to increase its outstanding share capital?
Outstanding share capital includes both privately placed shares and publicly traded shares. So one of the primary reasons a company would want to increase its outstanding share capital could be to raise money for further expansion or development. Some of the few ways to do it could be by issuing new shares to the public or issuing new shares to financial institutions in order to secure a loan.