Learn About Share Capital and Its Types With Examples
Share capital is the total amount of money raised by a company through the issuance of shares to investors. It serves as a crucial source of funds for businesses to expand operations, acquire assets, and enhance profitability. Understanding types of share capital is vital for commerce students, professionals, and investors, as it highlights how companies manage their finances and ownership structures. This guide explains the meaning, types, advantages, and disadvantages of share capital in a concise yet comprehensive manner.
Students can visit and download other Study Material of Commerce for a better understanding of the Chapter beneficial for last-minute exam preparation.
What is Share Capital?
Share capital is the money collected by a company from shareholders in exchange for ownership rights in the company. Shareholders are co-owners of the company and have voting rights, dividends, and a claim on the company's assets.
When a company is registered, its Articles of Association (AoA) and Memorandum of Association (MoA) specify the maximum amount of share capital it can raise. Share capital plays a critical role in funding long-term business growth without the obligation of repayment.
Types of Share Capital
Authorised Capital (Nominal Capital)
Maximum amount of share capital a company can issue, as specified in the MoA.
Example: A company registered with an authorised capital of ₹10 crore can issue shares worth up to ₹10 crore.
Issued Capital
The portion of authorised capital that has been offered to investors.
Example: If a company with ₹10 crore authorised capital issues ₹5 crore worth of shares, that is its issued capital.
Subscribed Capital
The part of issued capital that investors have committed to purchasing.
Example: Out of ₹5 crore issued shares, if investors agree to buy ₹4 crore worth, it is subscribed capital.
Called-up Capital
The portion of subscribed capital that shareholders are asked to pay.
Companies may demand payments in installments (e.g., 50% upfront and the rest later).
Paid-up Capital
The amount paid by shareholders after a call.
It is the actual capital available to the company for operations.
Uncalled Capital
The unpaid portion of subscribed capital that the company can call for later.
Acts as a reserve for future funding needs.
Reserve Capital
Part of uncalled capital reserved for specific situations like liquidation.
Cannot be used for daily operations or pledged as collateral.
Classification of Share Capital Based on Shares Issued
Equity Share Capital
Represents ownership in the company.
Shareholders enjoy voting rights, dividends, and capital gains.
Risks and rewards are higher as profits/losses directly affect equity holders.
Preference Share Capital
Shareholders receive fixed dividends and preferential treatment in asset distribution during liquidation.
No voting rights but reduced risks compared to equity shares.
Advantages of Raising Share Capital
Unlike loans, companies are not required to repay share capital, ensuring financial stability.
Companies can raise additional funds by issuing new shares when needed.
Unlike debt financing, raising share capital does not involve paying interest, reducing financial strain.
A strong equity base enhances the company’s credibility among creditors and investors.
Shareholders bear the risks of the company, reducing the management burden.
Disadvantages of Raising Share Capital
Issuing additional shares reduces existing shareholders' ownership percentages, potentially impacting decision-making.
Shareholders may demand regular dividends, affecting the company's cash flow.
Majority shareholders can influence decisions, which might conflict with the company's objectives.
Issuing shares involves legal, regulatory, and administrative expenses.
Conclusion
Share capital is a fundamental aspect of corporate finance, providing a company with the means to grow and sustain operations without debt obligations. Understanding its types, classifications, and implications is essential for students, professionals, and investors to make informed financial decisions.
FAQs on What are the Types of Share Capital?
1. What are the two primary types of share capital in a company?
The two primary types of share capital are Equity Share Capital and Preference Share Capital. Equity shares, also known as ordinary shares, grant shareholders voting rights and a claim on the company's profits and assets. Preference shares, on the other hand, offer preferential rights regarding dividend payments and capital repayment during liquidation but typically do not come with voting rights.
2. How is share capital classified based on its issuance and subscription stages?
Share capital is classified into several categories based on its stage of issuance, as per the Companies Act, 2013. The main classifications are:
- Authorised Capital: The maximum amount of capital a company is legally permitted to issue, as defined in its Memorandum of Association.
- Issued Capital: The portion of the authorised capital that the company has offered to the public for subscription.
- Subscribed Capital: The portion of the issued capital that has been subscribed to or accepted by investors.
- Called-up Capital: The amount of subscribed capital that the company has requested shareholders to pay.
- Paid-up Capital: The actual amount of money that shareholders have paid to the company on the called-up capital.
3. What is the difference between Authorised Capital and Issued Capital?
The key difference lies in their scope and function. Authorised Capital represents the ceiling or maximum limit of capital a company can raise throughout its lifetime without altering its legal documents. In contrast, Issued Capital is the actual amount of that capital the company decides to offer to investors at a specific point in time. A company's issued capital can be less than or equal to its authorised capital, but it can never exceed it.
4. How is share capital presented in a company's Balance Sheet as per Schedule III of the Companies Act, 2013?
In a company's Balance Sheet, share capital is disclosed under the 'Equity and Liabilities' part, within the main heading 'Shareholders' Funds'. While the final figure on the face of the Balance Sheet is the 'Subscribed and Paid-up Capital', the Notes to Accounts provide a detailed breakdown of Authorised Capital, Issued Capital, and Subscribed Capital for regulatory compliance and transparency.
5. What is the significance of distinguishing between different types of share capital for a student of Commerce?
Understanding these distinctions is crucial for analysing a company's financial health and strategy. It helps in assessing its fundraising capacity (Authorised Capital), market reputation (Subscribed Capital vs. Issued Capital), and liquidity (Paid-up Capital). This knowledge is fundamental for topics like financial statement analysis, ratio analysis, and understanding corporate governance as per the CBSE syllabus for the 2025-26 session.
6. Why is share capital considered a liability on the Balance Sheet when it represents owners' funds?
This is due to the 'Business Entity Concept' in accounting, which states that a business is an entity separate and distinct from its owners (the shareholders). From the business's perspective, the capital contributed by shareholders is an amount that the business owes to them. Therefore, it is treated as an internal liability under 'Shareholders' Funds' to reflect the company's accountability to its owners.
7. What is the practical difference between 'Called-up Capital' and 'Paid-up Capital'?
Called-up Capital is the total amount of money the company has formally requested its shareholders to pay on the shares they have subscribed to. Paid-up Capital is the amount that shareholders have actually paid out of that called-up amount. The difference between the two, if any, is known as 'Calls-in-Arrears' and represents the amount that shareholders have failed to pay despite the company's demand.
8. How does 'Reserve Capital' differ from 'Capital Reserve'?
These two terms are often confused but are fundamentally different. Reserve Capital is a part of the uncalled capital that a company decides, by special resolution, not to call up except in the event of liquidation. It is not disclosed in the Balance Sheet. In contrast, a Capital Reserve is created from capital profits (like profit on the sale of fixed assets) and is a realized reserve. It is shown on the liability side of the Balance Sheet under 'Reserves and Surplus' and has specific usage restrictions.
