Types of Share Capital
Share capital refers to the funds that a company raises in exchange for issuing shares to its shareholders. Depending on the rights associated with them and the manner of issuance, shares can be classified into various types. Here are some common types of share capital:
- Authorized Share Capital (or Nominal or Registered Capital):
- The maximum value of share capital that a company is authorized to issue to shareholders, as stated in the company’s memorandum of association. It signifies the upper limit, and the company cannot issue shares beyond this value without altering its memorandum.
- Issued Share Capital:
- The part of the authorized capital that a company offers for subscription to the shareholders. This is the value of the shares that have been actually issued to the public or private investors.
- Subscribed Share Capital:
- It refers to that part of the issued share capital for which investors have made a commitment and have agreed to buy.
- Called-up Share Capital:
- The amount of share capital for which shareholders are required to pay. Not all the subscribed capital might be called-up initially; companies can call the unpaid portion later as and when they need funds.
- Paid-up Share Capital:
- It’s the portion of the called-up capital that shareholders have paid. If some shareholders fail to pay the amount due, then the paid-up capital will be less than the called-up capital.
- Uncalled Share Capital:
- This refers to that portion of the subscribed share capital which the company has not yet called up. It remains as a reserve which a company can call at a later date when in need of funds.
- Reserve Share Capital:
- This is a portion of the uncalled share capital that the company has decided will only be called in the event of winding up. It acts as an assurance to the creditors about the company’s ability to pay back.
- Preference Share Capital:
- This represents the value of preference shares issued by the company. Preference shareholders have a preferential right over dividends and repayment of capital in case of winding up but usually don’t have voting rights.
- Equity Share Capital:
- This represents the value of equity shares issued by the company. Equity shareholders are the true owners of the company, bear the highest risk, and have voting rights.
The differentiation among these types of share capital helps in understanding the financial structure of a company and the nature of the shareholders’ investment.
Example of Types of Share Capital
Let’s use a hypothetical scenario with a company named “TechFlare Inc.” to illustrate the various types of share capital.
TechFlare Inc. Share Capital Breakdown:
- Authorized Share Capital:
- TechFlare Inc. is authorized to issue shares worth $1 million, as stated in its memorandum of association.
- Issued Share Capital:
- Out of the authorized capital, TechFlare decides to issue shares worth $800,000 to the public.
- Subscribed Share Capital:
- Investors show interest and subscribe to shares worth $750,000 out of the $800,000 issued share capital.
- Called-up Share Capital:
- TechFlare decides to call (ask for payment) for 80% of the subscribed share value right now. This means they are calling for $600,000 ($750,000 * 0.80).
- Paid-up Share Capital:
- Out of the called amount, let’s say some shareholders failed to pay for shares worth $50,000. Therefore, TechFlare successfully collects only $550,000. This amount is the paid-up capital.
- Uncalled Share Capital:
- As TechFlare didn’t call the full subscribed amount, there remains $150,000 ($750,000 – $600,000) as uncalled share capital.
- Reserve Share Capital:
- TechFlare decides that out of the uncalled capital, $100,000 will be set as reserve capital, to be called only in the event of winding up.
- Preference Share Capital:
- Out of the total subscribed share capital, $200,000 worth of shares are preference shares. This means preference shareholders have invested this amount with preferential rights to dividends and repayment in case of company liquidation.
- Equity Share Capital:
- The remaining $550,000 of the subscribed share capital ($750,000 – $200,000) is from equity shareholders. They are the primary risk bearers and have the right to vote on company matters.
Scenario Summary:
To put it in simple terms: TechFlare Inc. is allowed to raise a maximum of $1 million by issuing shares. They decided to offer shares worth $800,000 to investors. Investors showed interest and committed to buying shares worth $750,000. Out of this, TechFlare asked for 80% of the money right away but only managed to collect payment for shares worth $550,000. There’s still a portion of the money they haven’t asked for, and a part of that will only be requested if the company faces the risk of closing down. Out of all the money committed by investors, $200,000 is from those who want priority during dividends and in case the company shuts down, while the rest is from those who want voting rights and are okay with bearing higher risks.
This example helps illustrate the nuances between the various categories of share capital in a company’s financial structure.