The post-pandemic era witnessed a surge in retail investments relating to the financial markets. The income from equity instruments outdoes any other investment avenue. Within equity instruments, various alternatives are available to investors. The most popular source of equity investment is share capital.
The company shareholders invest in the company. The maximum liability of the shareholders is the capital investment. In exchange, shareholders acquire voting rights in company matters. The shareholders also appoint the board of directors. Moreover, shareholders receive returns through capital appreciation and dividends. There are different types of share capital based on the obligations and rights offered to the investors.
Overview of Share Capital
The Share capital definition pertains to the funds amassed by an entity to issue shares to the general public. In plain terms, share capital comprises the money donated to a firm by its shareholders. It includes a longstanding capital source, supporting profitability, smooth operations, and financial growth.
Mainly, capital signifies the assets used to conduct a business. Alternatively, it may comprise the resources needed to launch a venture. The terms “share capital” and “capital” are interchangeable. According to the Indian Companies Act, share capital refers to a company’s percentage of ownership or capital.
The Company’s Memorandum of Association states the maximum amount of share capital. The company may raise the maximum share capital through an amendment to its Memorandum of Association. Furthermore, a company restricted by its share capital issues shares, whereas a company restricted by guarantee does not possess any capital.
From a financial reporting perspective, share capital is classified as a liability in a balance sheet. In the event of liquidation, the shareholders get the residual assets following payment of all other liabilities.
In company law, share capital refers to the total value of the funds raised by a company through the sale of shares. Share capital is sometimes called shareholders’ capital, contributed capital, equity capital, or paid-in capital.
Apart from this, share capital forms a crucial component of the capital structure of a firm and greatly influences its investment capacity and financial standing. The capital raised from shareholders’ capital can be used by the firm to finance its operations, purchase assets, invest in new ventures, or retire debt.
Types of Share Capital
Share capital can also be categorized into various types based on its nature or stage of issuance. Let’s examine the different kinds of share capital as per this method of classification.
1. Issued Share Capital
Issued share capital is the part of a company’s authorized capital that has been granted to shareholders. This effectively reflects the amount of capital a company has attempted to raise. The issued share capital comprises various classes of shares, such as preference shares and equity shares. The total worth of the issued share capital is forever equal to or less than the authorized capital.
It is a prime component of a shareholder’s finances, listed under the liabilities section of a balance sheet. Also, analysts utilize issued capital to assess the value of common equity stock. For instance, XYZ Ltd issues a thousand shares having a face value of Rs. 15. The company issues the shares for Rs. 20 per share. So, XYZ Ltd. raises Rs. 15,000 from the initial sales of shares. Rs 5,000 is surplus and forms the company’s reserves.
2. Called-Up Share Capital
When investors sign up for the shares issued by a company, they may need to pay the price of each share in whole or in part. The amount of money that the company requires shareholders to pay at any stage is termed the called-up share capital. This capital cannot exceed the amount of capital that investors have committed to. If the called-up share capital matches the subscribed share capital, it implies all shares have been called up in full.
For example, a company has 30,000 shares each of Rs. 100 had been signed up. Now, the company calls shareholders to pay –
Subsequently, the called-up value would amount to Rs. 1,800,000 (30,000 x 60), and the remaining Rs. 1,200,000 (30,000 x 40) would be regarded as the company’s uncalled capital.
3. Authorized Share Capital
Authorized share capital denotes the maximum number of shares a company may issue. The Memorandum of Association restricts the authorized capital to a specified amount. Authorized share capital exceeds the total outstanding shares.
A company may raise its authorized capital for various reasons, such as acquiring another company or issuing employee stock options. Any alteration in the authorized capital requires shareholder acceptance, as an increase in the authorized capital may shift the balance of power between shareholders and other stakeholders.
4. Unissued Share Capital
Unissued shares are still required to be issued to the employees or the general public. Unissued stock constitutes a portion of the company’s treasury and does not affect the shareholders. The Board of Directors manages unissued shares. Unissued shares are not exchangeable in the secondary market.
Most firms hold a significant percentage of their unissued shares. The value of unissued share capital is reduced. The aim is to sell or assign unissued shares at a premium in the future. The company may utilize unissued stock to pay off debt or to collect money for fresh investments. Directors may even assign unissued shares to a minority shareholder if required.
5. Paid-Up Capital
Paid-up capital signifies investment obtained by a company from a share issue. Typically, a company issues new capital to raise funds. Fresh share capital forms the company’s paid-up capital. According to the Companies Act 2013, the minimum paid-up capital required is Rs. 1 lakh.
Paid-up Capital is crucial for fundamental analysis. A company having a reduced paid-up capital may need to depend on debt to fund its operations. Conversely, an elevated paid-up capital indicates a reduced dependency on borrowed funds.
6. Reserve Share Capital
Reserve capital pertains to share capital that a company cannot reach save in the event of bankruptcy. The company can issue reserve share capital only with a special resolution. Furthermore, a company cannot alter its articles of association to issue reserve share capital. Reserve share capital aims to simplify liquidation.. Reserve capital denotes the company’s emergency funds and is subject to various restrictions.
7. Called-Up Capital
Called-up Capital comprises the subscribed capital segment that includes the shareholders’ payment. The balance sheet separately collects called-up capital under the shareholders’ equity. Called-up capital is helpful for companies with unexpected or emergency fund requirements.
Upon publication of shares, the company requires its shareholders to pay a portion of the capital. Thus, called-up capital provides greater flexibility in the payment and investment terms.
8. Subscribed Capital
A company’s endorsed share capital matches its registered capital. A portion of the issued capital constitutes the subscribed capital. Shareholders commit to subscribe to or buy a company’s shares. The payment of subscribed share capital might be in installments.
Subscribed capital signifies the part of a company’s issued capital acknowledged by the public. The public displays interest in a company by virtue of a subscription. A company only publishes a portion of the share capital in one instance.
Wrapping Up
Share capital denotes the par value of a company’s shares. The sale of shares to the general public creates funds for the business, which is a leading source of capital finance. Nonetheless, the issue of shares carries its upsides and downsides. As a result, companies must carefully weigh all options available when decisions around financing are made.
It is important for both firms and investors to understand share capital and its implications. When investors understand the structure, advantages, and effects of shareholders’ capital, they have the ability to make informed decisions. At the same time, companies can successfully manage their capital structure to uphold their financial objectives and drive growth. Kanakkupillai can cater to all your share capital-related needs and aid in the advancement of your company.
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