Share capital is responsible for keeping the business operation and functioning smooth and running. Its indispensable role in the structure of a limited company and the enhancement of market reputation makes it vital for owners.
Consequently, individuals must understand the different types of share capital and their context to assess a company effectively.
It can be described as the amount of money a company raises by issuing preferred stocks or equity stocks to the public. Regardless, it must be noted that the relevant meaning of share capital depends entirely on the context.
For instance, for an accountant, share capital would simply translate to an amount of money raised through the sale of company shares. It must be remembered that the size of the share capital of a company tends to change with more public offerings.
Notably, only a company that is limited by shares tends to have share capital. On the other hand, unlimited companies or companies limited by guarantee do not have such a capital.
For instance, a company that issues shares in return of capital is categorised as a joint-stock company. Now, such a company can be a separate legal entity for those involved with the company or a corporation. Alternatively, a company which limits the risk of its investors by limiting the investment amount is categorised as a limited liability company (LLC).
In the general sense, a company with a limited number of shares has two kinds of share capital, namely –
| Name | Preferred share capital | Common or equity share capital |
| Definition | The capital amount is raised by issuing shares which carry preferential rights in terms of receiving dividends at a fixed rate.
Also, such share entitles shareholders to receive paid-up capital before common shareholders. |
This capital is raised by issuing ordinary shares to the public, which extends voting rights to them. It further entitles shareholders to receive a share from the company’s net profits and also makes them eligible to avail bonus shares and dividend. |
Notably, a company’s share capital can be divided into several types based on authorisation and subscription.
The different types of share capital are as follows –
Every company has to specify the amount of capital it wishes to register within its Memorandum of Association. The amount thus stated is termed registered, authorised or nominal capital.
Fundamentally, it is the amount of money a company is allowed to raise through public subscription. Its size can be increased or decreased as per requirement by meeting the prescribed method.
It makes up that part of the nominal capital which is offered for public subscription in the form of shares. It must be noted that a company may refrain from issuing the entire registered capital in a single go. Based on their requirement, a company may raise this capital from time to time.
Under any given situation, issued capital must not exceed the authorised capital. Generally, it includes all the shares which have been allotted to vendors, the public, signatories of the memorandum of association, etc.
Typically, it is made up of that portion of nominal capital which is yet to be issued. In simpler words, unissued capital can be described as the difference between a company’s nominal capital and issued capital.
Subscribed capital is a part of issued capital which has been accepted by the public. The said capital is allotted to each subscriber according to the resolution released by company directors.
In a situation where the shares allotted by a company are subscribed by the public, the issued capital and subscribed capital will be the same. However, it must be noted that subscribed capital cannot exceed a company’s issued capital.
It forms a part of subscribed capital, which can be called up or repurchased by the company. Notably, a company does not call the entire value of each share that had been allotted to shareholders. In fact, only a portion of the amount required by the company is raised at different intervals.
Suppose, a company’s 20,000 shares each of Rs.100 had been subscribed. Now, the company calls shareholders to pay –
Subsequently, the called-up value would amount to Rs. 1,200,000 (20000×60) and the remaining Rs. 800,000 (20000×40) would be considered as the company’s uncalled capital.
This capital makes up the uncalled part of allotted capital. In a general sense, it represents a contingent liability of a company’s shareholders on their shares.
It is essentially a part of called-up capital. It signifies the amount of money paid by shareholders in response to the call made by a company. Usually, the paid-up capital of a company can be ascertained by subtracting the outstanding calls from called up capital.
The said capital comprises fixed assets used in the company. The most prominent examples of fixed capital include – equipment, land, furniture, buildings, etc.
This particular capital cannot be called by the company unless it is winding up or being liquidated. A reserve capital can be created by passing a special resolution with a 3/4th majority vote in its favour.
Once created, the Articles of Association cannot be altered to make the reserve liability available at any given time. It must be noted that such capital cannot be pledged as security to secure loans by the company directors. Also, it cannot be converted into ordinary capital without receiving the court’s order and is only available for creditors when a company is winding-up.
Fundamentally, this capital is a part of the subscribed capital. It is mostly available in the form of operational goods and assets like bills receivable, bank balance, book debts, etc.
By looking at this list of types of share capital, it can be said that the primary point of distinction and classification is based on issuance and subscription of company shares.
Typically, share capital appears in a company’s balance sheet under the header of ‘shareholder’s fund’. Paid-up capital is considered to be the real capital as it represents the amount paid by the shareholders. Also, it is added to the liabilities side of the balance sheet to complete the column.
According to Schedule VI of Companies Act, 1965, a company’s share capital should appear in its balance sheet as shown in this excerpt below –
Balance sheet of ABCD Ltd. as on 31st March
| Liabilities | Current Year (Rs.) | Present Year (Rs.) |
Shareholder’s Fund:
|
Xxxxxxx
Xxxxxxx xxxxxxx |
Xxxxxxxxx
Xxxxxxxxx xxxxxxxxx |
According to the revised schedule VI, notes pertaining to share capital’s disclosure.
Notes:
| (Rs.) | (Rs.) | |
| Share Capital
Xy Equity shares of Rs. (x) each Xy Preference shares of Rs. (x) each
Xy Equity shares of Rs. (x) each Xy Preference shares of Rs. (x) each
Xy Equity shares of Rs. (x) each Xy Preference shares of Rs. (x) each (These shares are allotted as full paid-up without payment being received in cash.)
Xy Equity shares of Rs. (x) each Xy Preference shares of Rs. (x) each
Xy Equity shares of Rs. (x) each Xy Preference shares of Rs. (x) each Less: Calls in arrears {xy shares x Rs(x)} Add Forfeited shares: |
Xxxxxxx XXXXXX |
Xxxxxxxxxx XXXXXXXX |
Taking a look at the share capital and its types, it can be said that share capital is the par value of a company’s equity securities. It includes preferred stocks and common stocks that have been sold of shareholders.
Depending on the limit on the issuance of shares and composition share, capital can be categorized into several types. Each of those types is distinct from another and is crucial for a company’s financial standing.