In any corporation, share capital is represented as the funds raised by the company through the issuance of shares to investors. These shares form ownership in the company and are a very important part of its financial structure. The categories of share capital refer to all the different types and classifications of capital that a company can raise. These categories are important for investors, entrepreneurs, and students of finance to understand the financial structure of a company, its investment potential, and ownership sharing.
Share capital comprises the funds invested in a company by shareholders in return for shares of stock. This represents the financial base of a company and is a reflection of the ownership share the shareholder owns in the company. Companies often issue various categories and values of shares depending on their respective financial requirements, formation, and business strategies.
On formation, the amount of share capital that would be needed in a company is decided by the founders. It is then divided into shares that can be sold to raise capital. Share capital is an integral component of the equity of the company and not a debt because it confers ownership rights. It provides a right in the profits arising out of the business with a divergence into a share in the profits in the form of dividends and voting rights over the decisions in the company.
The classes of share capital are various types of shares that a company can issue. These can either be equity shares or preference shares in nature, the former offering different rights and privileges than the latter.
Equity share capital is the shareholding interest in the company. These are the most issued shares among share capital and are mostly given to investors. Shareholders possessing equity shares have voting rights and entitlement to dividends, although an entitlement on the quantum and periodicity of which cannot be ascertained. Equity shareholders incur the highest risk since they are paid last in a liquidation scenario. On the other hand, they also have a possibility of enjoying the fruits of the company in terms of capital gain and dividends.
Key Features of Equity Shares:
Preference shares, commonly referred to as the preferred shares, constitute another type of share capital. They rank preference shareholders over equity shareholders about dividend payments and their repayment in the event of liquidation. However, unless a company defaults on paying dividends, preference shareholders usually do not have voting rights.
Key Features of Preference Shares:
Preferred share capital is generally adopted by the company if it wishes to raise funds but does not want to dilute control by offering voting rights to common shareholders. It is therefore very appealing for the investor seeking a steady income stream through dividends without assuming the full risk associated with equity shares.
Share capital can be further divided into subcategories based on its status in the company’s capital structure. Each category contributes to determining the overall financial health and structure of the company.
Authorized share capital means the maximum amount of share capital that can be raised by a company through issues of shares. This is indicated in the memorandum of association of the company and would limit up to what extent the company may issue shares. The company can issue shares up to the authorized capital, but a step beyond that would not be allowed without increasing the authorized capital.
Unissued share capital is that portion of the authorized share capital, which the company has not yet issued to the public or investors. This is essentially the capital that the company has the potential to raise in the future. Thus, giving the company flexibility in managing the needs of capital. The unissued shares are usually kept in reserve by the company for some future requirements to raise funds.
Issued share capital would, therefore, be the portion of the authorized share capital that has been issued to investors or shareholders. This amount represents the actual shares issued and taken up by the shareholders. Once these shares are issued, they become part of the company’s equity base and contribute to its financial resources.
Subscribed capital means the portion of issued share capital that the shareholders have agreed to subscribe to. It is therefore the amount that the investors commit to putting up in the company. Put in other words, subscribed capital is that portion of issued capital accepted and paid for by investors.
Paid-up capital is that part of the subscribed capital that the shareholders have paid to the corporation actually. It refers to the amount of money received by the company in return for the issued shares. The amount of capital that the company receives can then be used for its operations.
Called-up capital is the share capital that a company asks for from the shareholder, according to the terms of the issue of shares. The companies can issue partly paid shares, where the shareholder need not pay the full amount of share capital at once, but the remaining amount is called up at a later date.
Reserve share capital is that kind of share capital that a company holds in reserve and thus does not immediately issue out. The company may use this reserve to issue shares later when necessary, thereby often raising further funds to expand or meet other needs.
Uncalled share capital means the unsubscribed capital of a company. In other words, it refers to the portion of subscribed capital that has not yet been called by the company. This is capital which the company has the right to call upon in the future when required. It remains in the hands of the shareholders until the company decides to call it up.
The treatment of share capital in a company’s balance sheet is an important aspect of financial reporting. Share capital is usually found in the “equity” section of the balance sheet, because share capital represents ownership in that company. The representation of share capital in the balance sheet can be used to understand how much financial health and stability a particular company has.
Share capital falls under the category of “Shareholders’ Equity” in the balance sheet, which also includes retained earnings, reserves, and other equity components. The share capital area will print a notice of the authorized amount, the issued amount, and the amount paid-up along with the number of shares issued and their nominal value.
Share capital can also be raised to assist the company to achieve its growth and expansion desires. Some of the key benefits of raising share capital include a fairly large amount of funds available for financing, good financial flexibility, and an increase in the credibility level of the company in the market.
While raising share capital offers many benefits, it also provides some negative consequences. This aspect of dilution of ownership causes founders or original shareholders to lose ownership in the company, while raising share capital requires lengthy and effortful procedures, involving compliance with legal and regulatory aspects.
Equity share capital represents ownership in the company, and shareholders have voting rights and the potential for higher returns. Preference share capital provides priority for dividends and repayment in case of liquidation, but preference shareholders generally do not have voting rights.
Authorized share capital refers to the maximum amount of share capital that a company is allowed to raise by issuing shares. It is stated in the company’s memorandum of association.
Paid-up capital represents the amount of money shareholders have actually paid to the company in exchange for shares. It indicates the financial resources available to the company for its operations and growth.
Called-up capital refers to the portion of share capital that a company requests from shareholders as per the terms of share issuance. Paid-up capital, on the other hand, is the amount shareholders have already paid.
Share capital is an important component of a company’s equity, reflecting its financial health. It indicates the funds raised through shares, providing insights into the company’s ownership structure and capital strength.
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