What Is Share Capital?
In the financial world, capital refers to investors’ money that has been invested in companies or other entities to generate returns. A “Share capital” or “company share capital” is the total amount of money raised from investors from the time it was first established, through subsequent capital increases and/or share purchases. The term “share capital” does not refer to the common stocks/shares of a company held by its shareholders.
The increase in a company share capital over time can be tracked through the issuance of both additional equity shares and preference shares. Additional shares issued by a company will dilute the value of existing equity shares and reduce their return on investment, while additional preference shares will not affect an investor’s return and will not dilute his current holdings.
A company share capital can change significantly over time as a result of a series of public offerings, both primary initial public offerings (IPOs) when the company is established and secondary offerings when it needs more capital to continue operations or pay off existing debts. In addition, stock options can be issued to employees and others to increase a company share capital without having to sell new shares.
The share capital is the total value of a firm. Most of the time in the corporate world, the terms share capital and capital are used interchangeably. And such share capital needs to be disclosed in the Memorandum of Association and Articles of Association.
Categories of Share Capital
Here are the different categories of share capital for a firm:
Preferred Share Capital
The money generated by issuing shares with privileged rights is known as preferred share capital. Fixed dividends are a form of preference rights. Additionally, stockholders who own preferred shares are entitled to receive funds before ordinary shareholders. Preferred dividends must be paid by a corporation regardless of cash flows or debt arrangements. The business has the option to pay preferred equity holders dividends in the future or at maturity.
Common or Equity Share Capital
The term “common equity” describes the equity acquired through the issuance of common shares. The shareholders receive voting rights and a portion of the earnings from equity share capital. However, the business is not required to pay dividends. The business may also grant rights to its common stockholders in addition to bonus shares.
Types Of Share Capital
1. Authorized share capital
Authorized share capital is the addition of entire money that a company can raise from its investors/employees/public by issuing shares to them. As per section 2(8) of the companies Act,2013 the authorized capital has to be mentioned in the MOA and AOA.
Registered capital/nominal capital/authorized capital is known as the one to be decided at the incorporation of a company. The limit of Authorized Capital is decided by the Board on behalf of all shareholders, who have agreed to set it when they registered the firm. The firm’s shareholders can expand this limit by taking appropriate action to issue more shares, but they are not allowed to issue shares at a value higher than the authorized capital in any case.
Authorized capital is the sum of issued capital + unissued capital.
2. Issued share capital
Issued share capital is known as the part of authorized capital that has been issued to the public for subscriptions. It involves certain stages like application, allotment, calls as preferred by each and every company. Once the public has got the allotment of shares, the subscriber turns into a shareholder. As a result, issued share capital is included in paid-up capital as well as free reserves.
3. Unissued share capital
Companies, as previously noted, issue shares regularly. As a result, they will have different approved and issued share capital. The company’s unissued share capital will be the difference between the two sums. The quantity of shares that a company has available to raise capital is referred to as unissued capital.
4. Subscribed capital
Subscribed share capital is known as the capital that has been subscribed by the public when issued to them. Subscribed share capital is often part of an initial public offer or a subsequent public offer. It can be only subscribed by the public while shares are issued to them.
5. Called up capital
Called-up the shareholder’s payment is made up of capital, which is a percentage of the Subscribed Capital. The entire amount is not received at once by the company. When a portion of the subscribed money is required in installments, it is used. The rest of the Subscribed Capital is referred to as Uncalled Capital.
6. Paid-up capital
The percentage of Called-up Capital that is provided by the investor is known as Paid-up Capital. The corporation does not need the shareholder to pay the specified amount. The corporation may receive half of the called-up Capital, known as Reserved Capital, from the shareholder.
7. Uncalled share capital
A firm expects its shareholders to pay for their shares when it issues them. However, they have the option of not doing so. The term “uncalled share capital” denotes shares that have been granted but have yet to be claimed. The liabilities of the shareholders are also included in this capital. After subtracting the called-up capital from the total number of shares allotted, this is the residual sum.
8. Reserve share capital
The number of shares that a company can’t even sell unless it declares bankruptcy is known as reserve capital. These shares are normally issued after a special resolution with more than three-quarters of the vote is passed. Companies, too, are unable to modify their articles of incorporation to reverse this decision. The goal of reserve share capital is to make liquidation easier.
9. Circulating and fixed share capital
Circulating share capital is included in a company’s subscribed capital. This capital is provided by operational assets such as bank reserves, book debts, bills receivable, and so on. These are money that is utilized for a company’s basic operations. Fixed capital, which consists of a company’s fixed assets, is also linked.
Read More: Contributed Capital
Conclusion
The share capital of a company is the total nominal value of its shares. The company’s capital must be specified in the memorandum and articles of association. The share capital must not exceed the authorized capital. The price per share is usually fixed, but can be determined by the board of directors (with shareholders voting to approve or disapprove).
There are majorly 8 types of share capital known as authorized share capital, paid-up share capital, called share capital, uncalled share capital, reserve share capital, subscribed capital, unissued share capital, issued share capital, and circulating and fixed share capital.
The firm’s share capital can be increased in several ways. A firm can offer the shares of the company directly to potential investors, either publicly or privately. It can also use the services of investment bankers to find buyers for the shares.
FAQ’s
The total nominal value of a company’s shares is its share capital. Share capital is the sum of money that businesses raise via selling their common shares to both public and private sources. It appears on the liability side of the organization’s balance sheet under owner equity.
Different types of share capital are:
- Authorized capital
- Issued capital
- Subscribed capital
- Called-up capital
- Uncalled capital
- Unissued capital
- Circulating and fixed capital
- Reserve share capital
- Paid-up capital
The share capital is found under the head EQUITY AND LIABILITIES under the subheading SHAREHOLDER’S FUND.
A corporation issues share capital via an initial public offering (IPO).
