Definition of Share Capital
Share Capital is the sum total of money raised by a company from private and public sources through an issue of shares. Since a company is an artificial person and cannot generate money on its own, it sells its shares to different investors, called shareholders. These shareholders get shares of the company against the money invested.
A company’s capital is divided into certain units of fixed amount known as shares, and the money raised by the company by selling these shares is called Share capital. The share capital of a company is not fixed, and it can be changed by issuing new shares from time to time.
Shareholders are the owners of the company since their money is invested in the company. Share Capital is shown under the Head Liabilities in the Balance sheet of a company.
Features of Share Capital
- The share capital of the company remains with it till the time of its liquidation.
- It is the most reliable and dependable source of raising capital for the company.
- For issuing shares, a company has to list itself in the stock market. So, it increases the trust of the investors in the company.
- Since shareholders are the owners of the company, this gives them the right to participate in the company’s management decisions.
- The shareholders get a share of the profit of the company in the form of dividend against the amount invested by them.
Types of Share Capital
- Authorised Capital: Authorised capital is the maximum amount of share capital that a company can issue. The amount of authorized capital is specified in the Memorandum of Association and can be changed only by following a specific procedure underlined for the same. For example, if the authorized capital of a company is $10,00,000 and the face value of a share is decided as $10, then the company cannot issue more than 100,000 shares to the public.
- Issued Capital: Issued capital is the share capital issued to the shareholders. It can be less than authorized capital but not more than it. For example, a company’s authorized capital is $10,00,000, and the face value of a share is $10. The company’s owners decided that it only needs $6,00,000 of capital initially, so here the company will issue only 60,000 shares to the public.
- Subscribed Capital: Subscribed capital is the amount of capital that is actually invested by the public. For example, a company has issued 10,000 shares at face value of $10 per share to the public, out of which the company subscribed to only 6,000. Hence, subscribed capital will be 6,000 * $10, which is $60,000
- Called Up Capital: Called capital up is that part of subscribed capital which is called upon to pay on the shares allotted to the shareholders. The company may not require whole capital at once, so it may ask the shareholders to pay only the portion called up. For example, a company initially asks for $5 from its subscribers of 6,000 shares. The called-up capital will be 6,000 shares * $5, which is $30,000.
- Paid Up Capital: Paid-up capital is the total amount of capital actually paid by the shareholders. For example, out of the called up amount of $5 from its 6,000 subscribed shares, the shareholders of 5500 shares paid the called up amount. Paid-up capital, in this case, will be $5500 * $5, which is $27,500.
- Uncalled Capital: Uncalled capital is that portion of total capital that the company has not yet called upon to pay from its shareholders.
- Reserve Capital: Reserve capital is that part of uncalled capital which the company reserves till the time of its liquidation. This portion of capital is not called upon during the existence of the company, and it is kept aside for the creditors of the company.
Formula of Share Capital and Example
There are two ways to calculate the share capital of a company:
Share Capital = No. of Shares Outstanding * Issue Price per Share
Share Capital = (No. of Shares Outstanding * Par Value of Share) + Additional Paid Up Capital.
Par value here is the face value of a share. Additional paid-up capital is the capital raised in excess of the par value of a share.
D&C limited issued 10,000 shares with a par value of $10 and an issue price of $15.
Common Stock is calculated as
- Common Stock = 10000 * $10
- Common Stock = 1,00, 000
Additional Paid up Capital is calculated as
- Additional Paid up Capital = 10000 * $5
- Additional Paid up Capital = 50,000
Total Capital is calculated as
- Total Capital = 1,00,000 + 50,000
- Total Capital = 1,50,000
Here are few advantages of raising share capital:
- No fixed monthly payments: One of the biggest advantages of share capital is that the company need not worry about fixed monthly installments and interest payments that are there in the case of bank loans. The company only distribute its profits in the form of a dividend, but that too can be halted if necessary.
- Flexibility in terms of Capital usage: The Company can use the money it raises through the issue of shares in whatever way it decides. There are no restrictions or requirements attached to the usage of the funds.
- Flexibility in terms of raising capital: Company can decide how much and when to issue shares. If the company initially requires lesser funds, then it can call only that portion of the capital from the shareholders.
- Lower Risk: Raising capital through the issue of shares is less risky than other debt options. Shareholders of the company cannot force it into bankruptcy, unlike creditors, which can in case of failure of repayment.
Here are few disadvantages of raising share capital:
- Reduced ownership: One of the biggest disadvantages of raising capital through shares is the reduction in the control and ownership of the company. Each share is a part of the company, and its holder is an owner of the company. Shareholders have voting rights in terms of various business and management policies. Shareholders can even remove the owner from the leadership post if they have a majority.
- Higher rate of return: Since the risk of shareholders is high as compare to creditors, they will expect a higher rate of return from the company.
- Higher cost of raising capital: Raising capital through shares is a lengthy and expensive process. The company has to issue the prospects informing IPO; there will reduce advertisement cost, legal costs, etc.
- Taxation: Dividends are paid from the company’s after-tax profits, while the interest paid on bank loans is tax-deductible.
Share capital is money raised by the issue of shares to the public, which is called as shareholders of the company. It is one of the major sources of capital funding by the Joint-stock companies. Raising capital through the issue of shares has its own pros and cons, which a company has to weigh before making the funding decisions.
This is a guide to Share Capital. Here we also discuss the definition and types of share capital along with advantages and disadvantages. You may also have a look at the following articles to learn more –