Understanding Share Capital Meaning and Its Various Types
Understanding Share Capital Meaning and Importance
Share Capital refers to the portion of a company’s capital that is raised by issuing shares to the public or private investors. It represents the ownership of shareholders in the company and is the primary source of long-term funds for a company.
According to Section 2(71) of the Companies Act, 2013, “Share Capital means the capital of a company which is divided into shares of a fixed amount each.”
Key Points of Share Capital
- Shareholders are the owners of the company.
- Share capital can be increased or reduced as per legal provisions.
- It is recorded in the Balance Sheet under Shareholders’ Equity.
Different Types of Share Capital Explained
Share Capital is classified based on various criteria:
Classification Based on Payment Status
- Authorized Share Capital / Registered Capital
- Maximum capital a company is authorized to raise as per the Memorandum of Association (MOA).
- Example: “The company may raise capital up to ₹50 lakh.”
- Issued Share Capital
- Part of the authorized capital that the company actually issues to shareholders.
- Example: Out of ₹50 lakh authorized, the company issues shares worth ₹30 lakh.
- Subscribed Share Capital
- Part of the issued capital that investors agree to subscribe to.
- Example: Out of ₹30 lakh issued, investors apply for ₹25 lakh.
- Called-up Share Capital
- Portion of the subscribed capital called by the company for payment.
- Example: The company may call ₹20 lakh out of ₹25 lakh subscribed.
- Paid-up Share Capital
- Portion of the called-up capital that is actually paid by shareholders.
- Example: Out of ₹20 lakh called, shareholders pay ₹18 lakh.
Classification Based on Rights and Privileges
- Equity Share Capital (Ordinary Shares)
- Shareholders have voting rights.
- The dividend is not fixed and depends on profit.
- Example: A company issues 10,000 shares of ₹10 each.
- Preference Share Capital
- Preference shareholders have priority in dividend and repayment at the time of winding up.
- The dividend may be fixed.
- Types of preference shares:
- Cumulative: Unpaid dividends accumulate.
- Non-cumulative: Unpaid dividends are lost.
- Participating: May participate in extra profits.
- Non-participating: Fixed dividend only.
- Redeemable: Can be repaid after a fixed period.
- Irredeemable / Perpetual: Not repayable during the company’s life.
Classification Based on Mode of Issue
- Capital Raised by Public Issue: Shares offered to the general public.
- Capital Raised by Private Placement: Shares offered to select investors.
- Bonus Shares: Shares issued free of cost from company reserves.
- Rights Shares: Shares offered to existing shareholders in proportion to their holding.
Equity vs. Preference Share Capital Comparison
| Basis | Equity Share | Preference Share |
|---|---|---|
| Voting Rights | Yes | Usually No |
| Dividend | Variable | Fixed / Priority |
| Priority on Repayment | Last | First |
| Risk | High | Low |
| Bonus Shares | Eligible | Eligible as per terms |
Final Thoughts on Corporate Share Capital
Share Capital represents the ownership capital of a company and is essential for raising long-term funds. Proper classification into authorized, issued, subscribed, called-up, and paid-up capital, as well as equity and preference shares, helps in maintaining transparency and compliance with the Companies Act, 2013.