The money raised by a business to issue shares to the general public is referred to by the definition of share capital. Share capital is, to put it simply, the cash that shareholders invest in a company. It is a reliable source of long-term capital that supports efficient operations, financial growth, and profitability.
Capital primarily refers to the resources utilized to operate a firm. Alternately, it might be the funding needed to start a business. Share capital and capital are both interchangeable terms. The percentage of capital or interest held by a corporation is referred to as its share capital in the Indian Companies Act.
The maximum share capital is stated in the Company’s Memorandum of Association. By amending its Memorandum of Association, the firm may raise the maximum share capital. A business limited by stock additionally issues shares of capital, whereas a company limited by guarantee has no capital.
In a balance sheet, share capital is classified as a liability from the perspective of financial reporting. In the event of liquidation, the shareholders are given the remaining assets once all debts have been settled.
Classes of Share Capital
Generally, a firm can choose between two share capital classes:
A. Preferred Share Capital
The money raised through the issuance of shares with privileged rights is known as preferred share capital. Fixed dividends are included under preferential rights. Additionally, stockholders who own preferred shares are entitled to receive funds before common shareholders. Preferred dividends must be paid by a corporation regardless of cash flows or debt instruments. The business has the option to pay preferred equity holders dividends in the future or at maturity.
B. Common or Equity Share Capital
The share capital acquired through the issue of common shares is referred to as common equity. The shareholders receive a portion of the profits and voting rights through equity share capital. The business is not required to pay dividends, though. The business may additionally issue right issues or bonus shares to its common shareholders.
Types of Share Capital
1. Authorized Share Capital
Authorized share capital refers to the maximum number of shares a company may issue. The Memorandum of Association limits the authorized capital to a fixed amount. Authorized share capital is more than the total outstanding shares.
A company may increase its authorized capital for several reasons, such as acquiring another company or employee stock options. Any change in the authorized capital requires shareholder approval since an increase in the authorized capital may shift the balance of power between the shareholders and other stakeholders.
2. Unissued Share Capital
Shares that have not yet been issued must be given to customers or staff members. Unissued stock is held in reserve by the corporation and has no effect on shareholders. Unissued shares are in control of the Board of Directors. The secondary market does not allow trading of unissued shares.
The majority of businesses hold a sizeable portion of their unissued shares. Unissued share capital has little value. The goal is to eventually sell or distribute unissued shares at a profit. Unissued shares may be used by the business to reduce debt or raise funds for fresh initiatives. If required, directors may even assign unissued shares to a minority shareholder.
3. Issued Share Capital
The number of shares a corporation issues to its shareholders is known as the issued share capital. Common equity shares and preferred stock make up the issued share capital.
It makes up a significant portion of the shareholder’s money listed under liabilities on a balance sheet. Analysts also assess the value of common equity stock using issued capital. As an illustration, ABC Ltd. issues a million shares with a face value of Rs. The price per share set by the corporation is Rs. 15. Therefore, from the initial share sales, ABC Ltd. receives Rs. 10,000. The company’s reserves are made up of the surplus amount of Rs. 5000.
4. Subscribed Capital
The authorized share capital of a corporation is the same as the registered capital. The subscribed capital makes up a portion of the issued capital. Investors commit to acquiring or subscribing to a company’s shares. The subscribed share capital payment may be made in installments.
The part of a company’s issued capital that has been accepted by the public is known as subscribed capital. The public expresses interest in a business by subscribing to its publication. Only a portion of the share capital may be issued by a firm at a time.
It might eventually issue more shares. Additionally, the firm may only demand partial payment of the share’s full face value.
5. Paid-Up Capital
A company’s paid-up capital is the investment it receives from issuing shares. A business typically issues new capital to raise money. The company’s paid-up capital consists of new share capital. The minimum paid-up capital required is Rs. 1 lakh, as per the Companies Act of 2013.
Paid-up To do a fundamental analysis, capital is required. A business that has little paid-up capital could need to borrow money to fund its operations. High paid-up capital, on the other hand, denotes less reliance on borrowed money.
6. Called-Up Capital
The corporation asks its shareholders to contribute a portion of the capital following the issue of shares. As a result, called-up capital provides greater investment and payment terms flexibility.
7. Reserve Share Capital
Share capital that a corporation can only access in the event of bankruptcy is referred to as reserve capital. Only after passing a specific resolution is the corporation able to issue reserve share capital. A business cannot change its articles of organization to issue reserve share capital, as well. Reserve share capital is used to simplify liquidation. Reserve capital, which is subject to numerous limitations, serves as the business’s emergency funds.
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