The share capital of a company is the total amount of money collected by the company through the issuance of shares to its shareholders. Share capital is the foundation of a company’s finances, indicating ownership, control, and liability of shareholders. Companies are permitted by the Companies Act, 2013, to issue various forms of share capital based on their business needs, legal obligations and the preferences of their investors. Directors, promoters, and investors must understand the types of share capital and how to issue them.
Meaning of Share Capital
Share capital refers to the capital contributed by shareholders, who have donated their money in exchange for the right to own the company. It is the stock capital of the company, which is used to finance business operations, growth, and other corporate functions. Shareholders, on the other hand, may receive dividends, voting rights, and capital appreciation.
There are various types of share capital that companies can issue, each with its own distinct legal and procedural requirements. The issuance, allotment, and compliance are all regulated under the Companies Act, 2013, as well as the Companies (Share Capital and Debentures) Rules, 2014.
Types of Share Capital
1. Authorized Share Capital
Nominal capital or authorized share capital. The highest amount of capital which the company may raise through the issue of shares as stipulated in its Memorandum of Association (MOA).
This is the ceiling limit that is set in the MOA of the company. Firms may raise authorized capital by use of a special resolution during a general meeting and submission of form SH-7 to the Registrar of Companies (ROC). Shareholders do not pay up the authorised capital, which merely provides a limit on future issuance of shares.
2. Issued Share Capital
Issued share capital can be defined as the part of authorized capital which the company actually issues to the shareholders. It indicates the quantity of shares that the company will be offering to investors in order to acquire funds.
The issuance of shares is resolved by the Board of Directors, and the shareholders are allotted shares in accordance with the approved terms. The issued capital may be the same as the authorized capital, or less than it.
3. Subscribed Share Capital
Subscribed capital is that part of issued capital to which investors subscribe. That is, it is the capital which shareholders have pledged to pay.
In case a company has 1,00,000 shares and investors are willing to subscribe to 80,000 shares, then 80,000 shares constitute the subscribed capital. Subscribed capital is a form of issued capital and is an indication of investor confidence in the company.
4. Paid-Up Share Capital
The amount of money that the company had actually received against the shares issued is called paid-up capital.
To take an example, when a shareholder subscribes 1,000 shares of share at 10 rupees each yet has to pay only 7 rupees per share at first, the paid-up capital will be 7,000. Companies are allowed to make future calls on shares to obtain the balance. The paid-up capital is a component of the company’s equity in the balance sheet.
5. Called-Up Share Capital
The called-up capital is that part of the subscribed capital which the company request shareholders to pay. It can or cannot be fully paid yet.
As an example, when the company has already issued 1,00,000 shares at a value of Rs. 10 each, the amount called for is Rs. 6, thus the amount called-up capital is Rs. 6,00,000. The unpaid balance will be in the form of unpaid capital, which can be called later on.
6. Reserve Share Capital
Reserve share capital is a portion of authorised capital that is not to be called except on liquidation. It provides security to the creditors, since some amount of capital is left to be used in the event the company is liquidated.
The reserve share capital needs to be disclosed by the company in its MOA and must adhere to Section 52 of the Companies Act, 2013.
7. Equity Share Capital
The equity share capital represents the ownership of the company and confers voting rights. Dividend is also not guaranteed and equity shareholders are entitled to receive dividends based on profits.
The equity shares are usually riskier compared to preference shares, but they have the possibility of capital appreciation and ownership.
8. Preference Share Capital
Preference shares offer a fixed rate of dividends before any other stockholder of the equity receives a dividend. They are not ordinarily vested with votes, except in some special cases.
Preference shares may also be cumulative, non-cumulative, redeemable or irredeemable. Preference share issues are a common practice among companies that seek to raise funds without relinquishing ownership control to equity shareholders.
Procedure for Issuing Share Capital
Share capital is issued in a guided procedure and legal framework in the Companies Act, 2013.
Step 1: Board Approval
A resolution by the Board of Directors authorising the issuance of shares is issued, providing details of the type, number, face value, and terms of the shares.
Step 2: Offer to Shareholders
Shareholders are issued by companies with shares according to the authorized capital, among existing or new shareholders. Depending on the way of subscription, offers can be either in a private placement or in a public issue.
Step 3: Filing with ROC
Some of the filings to ROC are obligatory:
- Form PAS-3 to allotment of shares.
- Form SH-7 to increase capital authorized (where necessary)
Step 4: Payment and Allotment
Shareholders pay as stipulated. Share certificates are issued by the company in two months of allotment.
Step 5: Compliance and Reporting
The company revises its register of members, MOA/AOA records and submits annual returns in respect of the revised share capital.
Conclusion
Share capital is not only a source of finance to the company, but it also demonstrates ownership, control and financial stability. Knowledge of the types of share capital, including authorised, issued, subscribed, paid-up, called-up, equity, and preference shares, will enable promoters and investors to make informed decisions.
The issue of shares is subject to the Companies Act, approval by the board, ROC, and documentation, as well as legal compliance and corporate governance. In either case of raising funds by using equity or preference shares, proper procedures will protect the company, protect the shareholders, and ensure corporate actions remain transparent.
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