Meaning and Types of Share Capital

Availability of capital can be one of the major constraints in setting up or expanding a business because of limited pool of resources of the promoters of a company. To overcome this constraint, a promoter can raise money from public by issuing shares of the company. The funds raised in lieu of the shares is called share capital. There are two types of shares in the share capital viz. preference shares and equity or ordinary shares.

Though many promoters and investors contribute varying sums to the Company’s capital yet, there is no separate Capital account for each investor or promoter. Hence, there is a single consolidated Capital Account which is called the Share Capital Account.

Types of Share Capital

There are various terms used in connection with the share capital of the company. They are as follows:

Authorized / Registered / Nominal Capital

This is the Maximum Capital which the company can raise in its life time. This is mentioned in the Memorandum of the Association of the Company. This is also called as Registered Capital or Nominal Capital.

Issued Capital

This is the part of the Authorised Capital which is issued to the public for Subscription. The act of creating new issued shares is called issuance, allocation or allotment. After allotment, a subscriber becomes a shareholder. The number of issued shares is a subset of the total authorized shares and

Shares authorized = Shares issued + Shares unissued

Subscribed Capital

The issued Capital may not be fully subscribed by the public. Subscribed Capital is that part of issued Capital which has been taken off by the public i.e. the capital for which applications are received from the public. So, it is a part of the Issued Capital as follows:

Issued Capital = Subscribed Capital + Unsubscribed Capital

This can be understood by an example. If we say that 15000 shares of Rs. 100 each are offered to the public and public applies only for 12000 shares, then the Issued Capital would be Rs. 15 Lakh and Subscribed Capital would be Rs. 12 Lakh.

Please note that once the shares have been issued and purchased by investors and are held by them, they are called Shares Outstanding.  These outstanding shares have rights and represent ownership in the corporation by the person that holds the shares. The unsubscribed capital is also known as Treasury shares, which are shares held by the corporation itself and have no exercisable rights. Shares outstanding plus treasury shares together amount to the number of issued shares.

Called – up Capital

The Company may not need to receive the entire amount of capital of capital at once. It may call up only part of the subscribed capital as and when needed in instalments. Thus, the called – up Capital is the part of „subscribed capital which the company has actually called upon the shareholders to pay. Called – up Capital includes the amount paid by the shareholder from time to time on application, on allotment, on various calls such as First Call, Second Call, Final Call etc. The remaining part of subscribe capital not yet called up is known as Uncalled Capital. The Uncalled Capital may be converted, by passing a special resolution, into Reserve Capital; Reserve Capital can be called up only in case of winding up of the company, to meet the liabilities arising then.

Paid-up Capital

The Called-up Capital may not be fully paid. Some Shareholders may pay only part of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-up capital which is actually paid by the shareholders. The remaining part indicates the default in payment of calls by some shareholders, known as Calls in Arrears. Thus,

Paid-up Capital = Called-up Capital – Calls in Arrears.

Reserve Capital: As mentioned above, the company by special resolution may determine that a portion of the uncalled capital shall not be called up, except in the event of the winding up of the company. This part is called Reserved Capital. It is kept reserved for the Creditors in case of the winding up of the company.

Capital Reserves versus Reserve Capital

Here please note that Capital Reserve and Reserve Capital are two different animals. Capital Reserves are those reserves which are created out of the Capital Profits. Capital Profits are those profits which are not earned in the normal course of the business. Some examples are as follows:

• Profit on sale of fixed assets
• Profit on revaluation of fixed assets
• Premium on issue of shares and debentures
• Profit on redemption of debentures
• Profit earned by the company prior to its incorporation

Please note that Capital Reserves can not be utilized for the distribution of dividends as dividends are something which can be given from a profit that is earned by normal business of a company.