As you process through the multiple disciplines of business, you will become familiar with how companies raise capital and what is the true meaning of share capital. Raising capital might be the most challenging task for businesses, it is essential to set up the business.
Share Capital refers to the funds raised by a company by issuing shares to the public, in other words, the money invested in a company by the shareholders is known as share capital. It is a long-term source of finance through which the shareholders gain a share of ownership in the business.
In this article you will understand about the Types & Classification of Share Capital in detail, so check it out!
Classification of Share Capital
As share capital is not a condition precedent for incorporation of a company because The Companies Act allows registration of companies without raising capital, it is rather essential for trading companies.
The term capital can be classified into 4 major categories, which are:
- Equity Capital
Equity capital is raised by issuing ordinary shares to the public and allows them to have voting rights. It also entitles the shareholders to receive a share from the company’s net profits making them eligible to avail the bonus shares and dividends.
- Preferred Share Capital
As the capital amount is raised by issuing shares carrying preferential rights in terms of receiving dividends at a fixed rate, preferred share capital entitles the shareholders to receive paid-up capital before the common shareholders.
- Debenture Capital
Debenture capital consists of debentures and denoted money raised by issuing the debentures. Debenture is considered to be a debt to the company and comes under the category of borrowed capital.
- Public Deposits
Public deposits refer to the unsecured deposits invited by the business from the public to mainly finance the working capital needs of the business. Any public member is eligible to fill up the prescribed form in order to deposit money into the company.
Different Types of Share Capital
Capital raised by the business by issuing shares of the company refers to share capital. The Companies Act uses the term capital in several senses, let’s understand the different types of share capital below.
Authorized Share Capital refers to the total capital accepted by companies through their investors by issuing shares mentioned in the official document of the company, Memorandum of Association. It is also known as Nominal Capital or Registered Capital.
The company is allowed to raise funds by issuing of shares only up to the amount of authorized capital. However, this amount can be increased by altering the MOU.
Authorized Capital = Issued Shares + Unissued Shares
Issued Share Capital
Part of the Authorized Share Capital, Issued Share Capital refers to the shares issued to the public for subscription. The Act of issuing shares is called Issuance, Allocation or Allotment. In simple words, you can say that Issued Share Capital is a subset of authorized share capital.
As the capital is issued in installments, the issued capital is less than the nominal capital. Once the allotment of shares is done successfully, a subscriber becomes a shareholder.
Issued Share Capital = Subscribed + Unsubscribed Capital
Being a part of Issued Share Capital, Subscribed Capital has been taken up by the public as it is not mandatory to fully subscribe the issued capital to the public. In such a case, the subscribed capital should be less than the issued capital.
If the public subscribes all the shares, subscribed capital will become equal to the issued capital. For instance, if a business offers 16000 shares of 100 Rs each and the public applies for 10000 shares, then the issued capital would be 16 lacs while the subscribed capital will be 10 lacs. Issued shares is equal to the sum total of outstanding shares and treasury shares.
Note: Once shares are issued and purchased by an investor, those shares will be called Shares Outstanding and the issuing of shares will allow the shareholders ownership in the business. The Unsubscribed Share Capital can be called Treasury Shares.
Called Up Capital
Called up capital is a part of the subscribed capital including the amount paid by the shareholder. As the company does not receive the entire amount of capital at once, it will call upon the part of the subscribed capital in installments whenever needed. The remaining part of the subscribed capital is known as Uncalled Capital.
For instance, if the face value of one share is 10 dollar and 5 dollar each for the 10,000 shares, then the Called-Up Capital shall be 50,000 dollars.
Paid Up Capital
A part of the subscribed capital which has actually been paid up by the shareholders is known as Paid Up Capital. The amount which is not paid by the shareholders on the calls made is known as calls-in-arrears. The expression Paid-up capital also includes the amount credited as paid up on the shares.
The Companies Act amends that there is no minimum requirement of paid-up capital in the company, which signifies that presently, the formation of the company can be done even at 100 dollars as the company’s paid-up capital.
Paid Up Capital = Called Up Capital – Calls in Arrear
Part of the capital that the business has decided not to call upon except during the dissolution of the firm is called Reserve Capital. At times, a business might face capital shortage for proper functioning of daily operations. In such a case, the company might decide to not call upon a certain part of the subscribed capital except during winding up of the business.
The company law also sanctions the creation of a reserve capital otherwise known as Reserve Liability. The purpose of Reserve Capital is to protect the interest of investors and creditors if the business decides to dissolve.
Learning about share capital can be boring and difficult. Hope this article helped you understand the various Types of Share Capital and how to calculate it.