Issued share capital is the total number of shares that a company has authorized. The more shares you have, the more money you can make if your company is successful. Let us understand this concept in details.
Understanding Share Capital
Share capital refers to the equity a company raises by issuing shares in the stock market. The amount of share equity is subject to change, as per public offerings. Authorized share capital is the maximum amount approved by the company for the public. A company may decide to float more shares in the stock market if it decides to increase its capital. Share Capital is one of the major sources of equity financing generated by offering a small ownership stake in the company against the monetary investment.
What is Issued Share Capital?
Issued shares are the shares owned by the investors of the company. These investors can be individuals, retail investors or large institutions. Issued share capital is the monetary value of the shares of a company that are actually offered for sale to investors. The number of issued shares must correspond to the amount of subscribed share capital. The amount of subscribed share capital and issued share capital must not exceed the authorized share capital.
Issued share capital comprises the shares that are sold to the shareholders against cash. For example, if a company sold 10,000 shares at face value of Rs10 per share, then the issued share capital of the company is Rs 100,000.
Characteristics of Issued Share Capital
- Issued share capital is the capital issued to the shareholders and is currently outstanding. The shares that have been redeemed or repurchased by the company to add to the treasury are not considered as the part of the issued share capital. Earlier, issued share capital administered common equity shares and also the preferred shares. But as per current accounting rules, only irredeemable preferred shares are shown as part of issued share capital.
- The share capital of a company is subject to change. Many companies issue new shares to the existing investors/shareholders or new shareholders. This additional issuing of shares increases the value of issued share capital.
- The issued share capital is unaffected by the market price of shares. The value of issued share capital presented in the financial statement is the number of issued shares multiplied by the face value per share. For instance, if the company has issued 10,000 equity shares of face value Rs. 10 per share and the market value of share is Rs 20, the issued share capital of the company will be Rs 100,000.
Difference Between Issued Share Capital and Paid-up Capital
Issued share capital is referred to as the amount of the shares that a company has issued to the investors, either privately or through the stock market. The number of total shares multiplied by the face value gives us the subscribed share capital. It must never be more than the authorized share capital.
Paid-up share capital is the value of shares that the investors pay up. Usually, issued share capital and paid-up share capital are frequently interchangeable and are almost synonymous. The difference between issued share capital and paid-up share capital is basically if the payment was made against the shares by the investors or not.
Paid up share capital is the amount for which the company issues shares to the shareholders and receives funds in return. Paid up capital, at all times, must be less than or equal to the authorized share capital. No shares can be issued beyond the authorized share capital of the company. According to the Companies Act 2015, there is no minimum paid up capital requirement, which allows companies to function with paid up capital as low as Rs. 1000.
A company may decide to issue only a portion of the total share capital and plan on issuing more shares at a later date. These shares may or may not sell right away, and the par value of the issued capital should not exceed the authorized capital.
The total par value of the shares sold by the company is addressed as the paid share capital. Issued share capital is the monetary value of the shares of the total stock a company offers for sale to its investors. Paid-up capital is important because it is the unborrowed capital. A fully paid up company that has sold all available shares cannot generate more capital unless it borrows money through debt.
Paid-up capital is listed on the balance sheet under the stockholders equity. Paid up capital is further categorized into the common stock and additional paid-up capital sub-accounts. The price of a share comprises of two parts: the par value and the additional premium that is paid above the par value. The total par value of all shares sold is listed under the common stock, while the remaining is assigned to the additional paid-up capital account.
Paid-up capital is also used in fundamental analysis. Companies that avail large amounts through equity funding may carry lower debt. A company with a lower debt to equity ratio is a good investment indicator of the company. It boosts confidence in investors that the company is not into abrupt financial practices and has a relatively reduced debt burden.
How Does an Increase in Issued Share Capital Benefit a Company?
An increase in issued share capital will lead to an increase in the total number of shares, which may result in more investors and therefore an increased valuation.
Issuing shares is one of the most common ways for a company to raise money. A company can issue more shares and sell them to investors in order to raise capital, and the increased number of shares means that investors will own a smaller percentage of the company.
How Does Issued Share Capital Affect the Company’s Management?
Issued share capital is the total number of shares that a company has authorized, issued and fully paid. It also includes any shares that are held by the company as treasury shares. The number of shares affects the management of a company in different ways. It also determines how much each shareholder gets paid when dividends are distributed. It affects voting rights. The share capital helps determine the management of the company.
Alco, check the difference between capital and revenue.