All about Share Capital Of a Company
Share capital is the capital that a company raises by way of issuing shares to its investors. It is the primary way a company raises funds. Shares can be issued for cash or non-cash considerations.
Suppose a company, ABC, wants to raise capital of Rs 1,00,000. Instead of borrowing the entire amount from a bank, the company decides to split this amount into small parts. Let’s assume the company splits the sum into parts of Rs 10 each. This means that there will be 10,000 parts to generate Rs 1,00,000. In exchange for the Rs 10, each of these parts would entitle the investor to a fraction of ownership in the company. These equal parts of the company are called shares.
In other words, the company ABC will issue 10,000 shares of Rs 10 each to generate its share capital of Rs 1,00,000. These shares can be issued to individuals or corporations.
Types of share capital
Broadly, share capital can be of two types: equity share capital and preference share capital. The main difference between the two is that preference shareholders have the right to receive dividends before the common stockholders. They are also entitled to be paid from company assets before common stockholders in case the company files for bankruptcy.
Share capital can be further classified as authorised, issued, subscribed, called up and paid-up share capital.
• Authorised Share Capital is the maximum amount of share capital that a company can raise by way of issuing shares. It is specified in the Memorandum of Association drafted during the company's incorporation. A company cannot raise capital that exceeds this amount. It is also known as Registered or Nominal capital. It should be kept in mind that the company need not issue the entire amount of authorised share capital for public subscription at once. It can be issued by the company depending on its requirement.
• Issued Capital is that portion of the authorised share capital that has been issued at any given time. It is the capital that the company actually offers for sale to investors. The authorised capital which is not offered for public subscription is called ‘Unissued Capital’.It is not necessary for the entire issued capital to be subscribed by the investors. Subscribed Capital is the portion of the issued capital that is subscribed by investors.
• Called-up Capital is the amount of subscribed capital that the company has requested that its shareholders pay up for. Investors may be asked to pay the entire face value of the shares or just a portion of it.
• Paid-up Capital is the portion of called-up capital paid by shareholders. It is the sum investors have paid to the company for its shares. The share capital that is shown on a company’s balance sheet is the paid-up capital.
Here’s an example explaining the types of share capital
ABC Ltd. has authorised capital of Rs 10,00,000, divided into 10,000 shares of Rs 100 each. They offered 5,000 shares to the general public for subscription. The company got applications for only 4,000 shares.
• Here, Rs 10,00,000 is the authorised capital
• Issued capital is equal to Rs 5,00,000 (5,000 shares x Rs 100)
• Unissued capital will be Rs 5,00,000 (Authorised capital – Issued capital)
• Subscribed capital will be equal to Rs 4,00,000 (4,000 shares x Rs 100)
• If the entire value of subscribed capital is paid by investors, paid-up capital will be equal to subscribed capital.
Share capital is the money that a company raises by way of issue of shares to investors. Depending on the type of shares, it can either be equity or preference share capital. Paid-up capital is the share capital that is shown on the company’s balance sheet. Disclosing the correct amount of share capital on the balance sheet is necessary as it helps maintain a reliable record of the total capital that shareholders have invested in the company.
A derivative is a financial instrument that derives its price and value from an underlying asset or a basket of assets.