Understanding the intricacies of share capital is essential for making well-informed decisions in the corporate world. Share capital represents a fundamental aspect of a company’s structure, symbolising the capital generated by issuing shares to its shareholders. In the following sections, we will delve into the various types of share capital, unravelling their distinct characteristics and roles within a company’s financial framework. By the end of this article, you will have gained a comprehensive understanding of each type of share capital and how they collectively influence a company’s financial well-being. So, without further ado, let’s embark on this journey of exploration into the world of share capital.
What is Share Capital?
Share capital is a cornerstone of a company’s financial structure, constituting the entire value of capital generated by selling shares to shareholders. These shares are typically divided into units, granting ownership stakes to those who hold them.
A company’s balance sheet records its share capital, which includes the capital obtained through private company registration. It can be increased by issuing shares or reduced by repurchasing existing ones. Share capital serves as a means for companies to secure funding without taking on debt while also enabling investors to partake in the company’s achievements.
Governing Law in India
In India, the legal framework governing types of share capital, is primarily established by the Companies Act, 2013. This comprehensive legislation covers the issuance, management, and alteration of share capital, specifying procedures, rights, and disclosure requirements for companies operating in India. It also empowers regulatory bodies like the Securities and Exchange Board of India (SEBI) to oversee share-related activities, ensuring transparency and compliance in India’s corporate sector.
Key Aspects of Share Capital Law in India
The legal framework in India governing types of share capital is primarily defined by the Companies Act, 2013. This legislation covers key aspects such as:
Types of Share Capital: Defining authorized, issued, subscribed, and paid-up share capital.
Issuance of Shares: Procedures for creating and issuing shares, including shareholder approvals.
Alteration of Share Capital: Legal processes for changing share capital, with requirements for approvals.
Rights and Obligations: Differentiating rights and obligations based on share types of share capital(e.g., equity vs. preference shares).
Reporting and Disclosure: Mandating transparent financial reporting and record-keeping.
Corporate Governance: Establishing governance guidelines and roles of regulatory bodies like SEBI.
What are the Types of Share Capital?
Let’s take a look at the types of share capital
Authorised Share Capital
It is the maximum amount of share capital that a company is authorised to issue as per its Memorandum of Association. The company can increase the authorised share capital with shareholder approval. It represents the upper limit of the company’s ability to raise capital by issuing shares.
Issued Share Capital
It refers to the portion of share capital that a company has already allocated to its shareholders. These shares symbolise ownership in the company. Are possessed by the shareholders. The issued share capital cannot exceed the authorised share capital.
Unissued Share Capital
It is the portion of authorised share capital that has not been issued to the shareholders yet. The company can issue these shares in the future if required. Unissued share capital represents the potential future capital-raising capacity of the company.
Subscribed Capital
The subscribed capital refers to the portion of the share capital that shareholders have committed or agreed to invest in the company. It signifies the amount of capital that shareholders have decided to put into the business. This measure is significant as it indicates how interested investors are in supporting the company.
Called-Up Capital
It is the portion of subscribed share capital that the company has called upon its shareholders to pay. It is the amount that shareholders are required to pay to the company to fully subscribe to their shares. Called-up capital is the amount that the company can legally demand from the shareholders.
Paid-Up Capital
It is the portion of called-up share capital that has been paid by the shareholders. Paid up capital refers to the amount of capital that the company has received from its shareholders. It represents the funds for the company to utilise in its day to day operations.
Uncalled Share Capital
It is the portion of subscribed share capital, including various types of share capital, that the company has not yet called up for payment from its shareholders. Uncalled share capital represents the potential future liability of shareholders to pay for their shares. The company can call up this capital in the future if required.
Reserve Share Capital
One of the many types of share capital is reserve share capital. It is a share capital that a company creates by setting aside a portion of its profits to be used for specific purposes, such as issuing bonus shares or writing off accumulated losses. Reserve share capital represents the company’s retained earnings that are not distributed as dividends.
Fixed and Circulating Share Capital
Fixed share capital refers to the portion of share capital that is fixed and cannot be changed, such as preference shares. Circulating share capital refers to the portion of share capital that can be changed, such as equity shares. Fixed and circulating share capital represent different types of shares that a company can issue to raise capital.
Alteration Of Share Capital
Share capital alteration, including alterations related to the types of share capital, involves making changes to a company’s capital structure, including the number, value, or rights associated with its shares. This process is typically driven by strategic, financial, or ownership considerations. It involves several key steps:
Reasons for Alteration: Companies may consider altering share capital for various reasons, including capital restructuring, changes in ownership, or debt conversion.
Procedures and Legal Obligations: Usually making changes to the process involves obtaining consent from the company’s board of directors shareholders ( through a resolution) and ensuring compliance with regulatory bodies. In situations court approval might be needed to safeguard the interests of creditors.
Shareholders’ Role: Shareholders have a crucial role in approving share capital alterations. Transparency and communication are essential to ensure their understanding and support.
Impact on Corporate Governance and Finance: Share capital alterations can reshape corporate governance structures and influence financial decision-making. Companies must carefully assess the consequences and benefits of such changes.
Conclusion
The various types of share capital are crucial in comprehending a company’s financial structure. By grasping the nuances of authorised, issued, unissued, subscribed, called-up, paid-up, uncalled, reserve, and fixed and circulating share capital, investors can make informed decisions about investing in a company. Share capital is essential for evaluating a company’s health and making decisions in the business world and to realise its importance is necessary. Whether you’re an aspiring entrepreneur or an investor it’s important to be familiar with the intricacies of share capital as it forms the bedrock of a company’s structure.
