Share Capital

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In today’s world, large-scale operations of a company demands large amount of share capital. The total amount of capital is divided into smaller units. These units are called shares.

Each share is assigned a value. This value is called the par value of the share. The total capital is thus divided into a large number of shares. This pool is, therefore, called share capital. This scheme of raising capital through shares:

(i) Helps the company to raise a large amount, and

(ii) Helps a larger section of the investment population to benefit from the operations of large scale business concerns.

Types of Share Capital

A company has to fulfill certain legal requirements if, in later years, it decides to either increase or decrease its share capital. And it has to state its maximum capital in the memorandum of association. To minimize the chances of undergoing legal formalities in later years, therefore, it is customary to state a reasonable amount as the maximum capital. Types of share capital used are explained in the following paragraphs.

1. Authorized Share Capital

Authorized share capital is the amount of capital with which the company is registered. This capital is mentioned in the memorandum of association. A mention is also made of the number of shares into which this total capital is divided, and of the par value of shares. In later years, if the company wants to either increase or decrease this capital, certain legal requirements must be met. Authorized share capital is also known as nominal capital or registered capital.

2. Issued Share Capital

Shares offered to the general public for contribution are known as shares issued. The total par value of such shares is called issued share capital. To begin with, a company seldom offers all of its shares for subscription. Therefore, the amount of issued capital is generally less than the authorized capital. If a company has an authorized capital of Rs. 1,000,000 divided into 10,000 shares of Rs. 100 each, it may decide to offer 5,000 shares to the general public. In this case the issued capital is said to be Rs. 500,000 divided into 5,000 shares of Rs. 100 each. The remainder, that is, the difference between the authorized and issued capital is known as unissued capital.

3. Subscribed Share Capital

Out of the total number of shares offered (issued) by the company, that number of shares which is taken up by the public is known as shares subscribed. The total par value of such shares is called subscribed share capital. For example, out of the 5,000 shares issued by the company, if the public takes up 4,500 shares, the subscribed share capital is Rs. 450,000 (4,500 shares X Rs. 100 par value of each share).

4. Called-Up Share Capital

A company may require payment of the par value either in installments or in lump sum. This amount is known as the called-up capital. For example, for each of the 4,500 shares taken up by the public the company may require a payment of Rs. 70 per share (the remainder Rs. 30 per share to be paid when asked for by the company. In this case the called-up capital of the company is Rs. 315,000 (4,500 X Rs. 70 per share called-up). The difference between the subscribed capital and the called-up capital is known as un-called capital. In this case the un-called capital is Rs. 135,000 (Rs. 4,50,000 subscribed capital minus Rs. 3,15,000 called-up capital or 4,500 shares subscribed x Rs. 30 per share un-called capital.

5. Paid-Up Share Capital

The total amount received by the company out of the total called-up amount is known as the paid-up capital. Assuming that of Rs. 315,000 called-up capital the company received Rs. 300,000; the paid-up capital is in the amount of Rs. 300,000. The remainder of Rs. 15,000 is known as calls unpaid or calls in arrears. Now-a-days the total par value is collected at the time of application and as such practically there are no calls in arrears. Presently, therefore, the subscribed, called-up and paid-up capitals are in the same amount.

6. Reserve Capital

It is the portion of the subscribed capital which the company, through a special resolution, reserves to call in the event of winding up. Assume that 4,500 shares Rs. 100 are subscribed, the company decided to call Rs. 70 per share and passed a special resolution to the effect that Rs. 30 per share will be called up in the event of winding up. The company is said to have reserve capital of Rs. 135,000 (4,500 X Rs. 30 per share). Reserve capital cannot be turned into ordinary capital without leave of the court, and it cannot be dealt with or charged by creditors.