What is Share Capital? Meaning, Categories Merit and Demerit
Understand the different categories of Share Capital, authorized, issued, subscribed, and more and how they impact a company's funding and ownership structure.
Muskan Verma28 Oct, 2024
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In the world of finance and corporate management, share capital plays a crucial role in funding businesses. Share capital is the money raised by a company through the issuance of shares to investors. It forms a significant part of a company’s equity, and the shareholders, in return for their investment, receive ownership in the company. Understanding the different categories of share capital is essential for both investors and companies, as it directly impacts how businesses are structured and financed.
In this blog, we will explore the meaning of share capital, the various categories, and their importance in corporate financing.What is Share Capital?
Share capital is the amount of money that a company raises by issuing shares to shareholders. When a company is formed, it divides its ownership into small units called shares, which are sold to raise funds. Shareholders who purchase these shares become partial owners of the company, and the capital they provide is used for business operations, expansion, or investments. The company's share capital is recorded in its balance sheet and is considered a long-term source of funding. It also represents the ownership interest of the shareholders in the company. The share capital is divided into different categories based on the types of shares issued and the rights associated with them.Categories of Share Capital
Share capital can be classified into various categories based on different factors like issuance status, type of shares, and nature of capital. Let’s delve into the major categories of share capital:Authorized Capital (Nominal or Registered Capital)
Authorized capital refers to the maximum amount of capital that a company is allowed to raise by issuing shares. It is the limit set in the company’s memorandum of association, which defines the company’s structure. However, authorised capital does not represent the actual capital raised; it only sets the limit within which the company can issue shares. Key Points- The company cannot issue shares beyond this amount without amending its memorandum of association.
- Authorized capital gives the company flexibility for future share issuances.
Issued Capital
Issued capital is the part of authorized capital that a company has actually offered to investors by issuing shares. It refers to the value of shares that have been subscribed and purchased by shareholders. Key Points- Issued capital is always less than or equal to the authorised capital.
- The company can issue more shares from the authorised capital if needed in the future.
Subscribed Capital
Subscribed capital refers to the portion of issued capital that investors have agreed to purchase. When a company issues shares, investors subscribe to these shares by committing to buy them. Key Points- The company receives subscriptions for its shares, but sometimes the entire issued capital may not be subscribed.
- If some shares remain unsubscribed, the subscribed capital will be lower than the issued capital.
Called-Up Capital
Called-up capital is the part of the subscribed capital that the company has asked shareholders to pay. When shares are issued, shareholders may not be required to pay the full value of the shares immediately. Instead, the company may "call" for payments in installments as needed. Key Points- It represents the amount that shareholders are required to pay at any given time.
- Called-up capital allows companies to raise funds gradually as they need it.
Paid-Up Capital
Paid-up capital is the actual amount that shareholders have paid to the company for the shares they hold. It is the portion of called-up capital that shareholders have already paid. Key Points- Paid-up capital is the money the company has received from its shareholders.
- It is a key source of long-term funding for the company.
Uncalled Capital
Uncalled capital is the portion of the subscribed capital that has not yet been called up by the company. This represents the remaining amount that shareholders still owe to the company but have not been asked to pay yet. Key Points- The company can call for this capital at a later stage when needed.
- It gives the company a financial cushion for future needs.
Reserve Capital
Reserve capital refers to a portion of the company's uncalled capital that the company has decided not to call except in the case of liquidation. This capital is set aside and can only be used when the company is winding up. Key Points- It acts as a safeguard for creditors in case of liquidation.
- Reserve capital cannot be used during the company’s normal course of business.
Importance of Share Capital
Share capital is vital for companies as it provides the essential funds needed for operations, expansion, and investments. It also determines the ownership structure and control of the company. Companies can use share capital to attract investors, improve their balance sheets, and leverage financial growth opportunities. For investors, share capital represents ownership in the company and the opportunity to participate in the company’s success through dividends and capital gains. However, it also comes with risks, as shareholders are entitled to a company's profits only after all other liabilities have been settled.Merits and Demerits of Share Capital
As we already know the meaning of Share Capital and the Categories of Share Capital, lets understand the merits and demerits of Share Capital:Merits
Long-Term Funding : Share capital provides a permanent source of funding, unlike debt which has to be repaid. No Interest Payments : Unlike loans, companies do not have to pay interest on share capital, which reduces financial strain. Attracts Investors : Issuing shares helps companies raise capital from a large pool of investors. No Repayment Obligation : Companies are not obligated to repay share capital, which helps in maintaining cash flow.Demerits
Dilution of Ownership : Issuing new shares dilutes the ownership percentage of existing shareholders. Dividend Payments : While share capital does not require interest payments, companies may have to pay dividends, which can reduce profits. Loss of Control : The more shares a company issues, the more control it may lose if a large percentage is held by external investors. Fluctuating Share Prices : The value of share capital can fluctuate based on market conditions, affecting the company’s valuation. Share capital is a cornerstone of corporate finance, offering companies the ability to raise funds and shareholders the opportunity to invest and own a part of the company. Understanding the different categories of share capital—such as authorized, issued, subscribed, called-up, paid-up, and reserve capital—helps both companies and investors make informed financial decisions. While share capital provides a stable source of funding, it also comes with pros and cons that must be carefully considered. Unlock your potential in commerce with PW Commerce Courses! Enroll today to gain in-depth knowledge and skills that will help you excel in your exams and future career. Don’t miss out!| Read Related Topics | |
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What is Share Capital FAQs
What is share capital?
Share capital refers to the funds a company raises by issuing shares to investors, representing the ownership interest of shareholders in the company.
What is the difference between authorized and issued capital?
Authorised capital is the maximum capital a company is allowed to raise, while issued capital is the portion of authorised capital actually offered to investors.
What is paid-up capital?
Paid-up capital is the amount of money that shareholders have paid for the shares they hold. It is the portion of called-up capital that has been fully paid.
What is the importance of share capital for a company?
Share capital provides essential long-term funding for a company’s operations and growth, helping it to expand without the need for debt.
What are the pros and cons of raising share capital?
Pros include long-term funding and no interest payments, while cons include dilution of ownership and potential loss of control if many shares are issued.
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