What are the Types of Share Capital?

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.

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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

1. 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.

2. 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.

3. 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.

4. 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).

5. Paid-up Capital

• The amount paid by shareholders after a call.

• It is the actual capital available to the company for operations.

6. Uncalled Capital

• The unpaid portion of subscribed capital that the company can call for later.

• Acts as a reserve for future funding needs.

7. 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

1. 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.

2. 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

1. Unlike loans, companies are not required to repay share capital, ensuring financial stability.

2. Companies can raise additional funds by issuing new shares when needed.

3. Unlike debt financing, raising share capital does not involve paying interest, reducing financial strain.

4. A strong equity base enhances the company’s credibility among creditors and investors.

5. Shareholders bear the risks of the company, reducing the management burden.

Disadvantages of Raising Share Capital

1. Issuing additional shares reduces existing shareholders' ownership percentages, potentially impacting decision-making.

2. Shareholders may demand regular dividends, affecting the company's cash flow.

3. Majority shareholders can influence decisions, which might conflict with the company's objectives.

4. 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.