A company’s share capital is the amount of money it raises through the issue of shares from both private and public sources. A company cannot generate money on its own, so it sells its shares to different investors, called shareholders. Shareholders receive shares in return for their investment.
The share capital of a company is the amount raised by selling certain units of fixed amount known as shares. Companies can issue new shares from time to time to change their share capital, which is not fixed.
Since shareholders invest money in the company, they are the owners. In the balance sheet of a company, share capital is shown under Head Liabilities.
The features of share capital
- A company’s share capital increase remains with it until it is liquidated.
- The company can rely on it to raise capital.
- In order to issue shares, a company must list itself on the stock market. As a result, investors become more trusting of the company.
- As shareholders, they have a right to participate in company management decisions since they own the company.
- Dividends are paid to shareholders in proportion to their investments as a share of the company’s profits.
Different types of share capital
- The authorised capital of a company is the maximum amount of shares that can be issued. In the Memorandum of Association, the amount of authorized capital is specified and can only be changed by following a specific procedure. Suppose the authorized capital of a company is $10,00,000 and the face value of a share is $10, then the company
- Issued Capital: The share capital issued to shareholders is called the issued capital. Authorized capital cannot be less than it, nor can it be greater than it. The authorized capital of a company might be $10,00,000, while the face value of a share might be $10. 60,000 shares will be issued to the general public by the company, as it only needs $6,00,000 in capital to begin with.
- Subscribed Capital: In subscribed capital, the public actually invests its capital. As an example, a company issued 10,000 shares at $10 per share to the public, of which only 6,000 were subscribed to by the company. 6,000 * $10 = 60,000, which is the subscribed capital.
- Called Up Capital: Capital up refers to the part of subscribed capital that is used to pay on the shares allocated to shareholders. It may not be necessary for the company to raise the entire amount at once, so it may ask shareholders to pay only the portion that is needed. A company, for example, asks its subscribers for $5 for 6,000 shares. As a result of the call-up, the called-up capital will be $30,000.
- Paid Up Capital: Shareholders’ paid-up capital is the amount of capital they have actually contributed. The shareholders of 5500 shares paid the called up amount of $5 out of the 6,000 subscribed shares. In this case, $5500 * $5 is $27,500, which is the paid-up capital.
- Uncalled Capital: A company’s uncalled capital is that portion of its total capital that it has not yet been asked to pay from its shareholders.
- Reserve Capital: A company’s reserve capital refers to the part of uncalled capital it reserves until liquidation. The creditors of the company receive this portion of capital during the company’s existence.
Also read: Procedure for Increase in Authorised Share Capital
Benefits
Raising share capital has the following advantages:
- Unlike bank loans, share capital does not require fixed monthly installments and interest payments like bank loans do. This is one of the biggest advantages of share capital. A dividend is the only way the company distributes profits, but that can also be halted if necessary.
- Capital flexibility: The Company has the freedom to decide how to use the money it raises through the issue of shares. Funds can be used without restrictions or requirements.
- Flexibility in raising capital: The company can decide how much and when to issue shares. When the company initially needs less capital, it can only ask shareholders for that portion.
- Lower Risk:
- Shares are a less risky way to raise capital than other forms of debt. A company’s shareholders cannot force it into bankruptcy, unlike creditors who can if repayment is not made.
Disadvantages
Raising share capital has the following disadvantages:
- Reduced ownership: It is one of the biggest disadvantages of raising capital through shares that the company loses control and ownership. Shareholders own the company, and each share is part of the company. Various business and management policies are voted on by shareholders. If shareholders have a majority, they can even remove the owner from leadership.
- Rate of return is higher: As shareholders have a higher risk than creditors, they will expect the company to return a higher rate of return.
- Raising capital is more expensive: A lengthy and expensive process is involved in raising capital through shares. The company must issue the prospectus informing of the IPO; there will be a reduction in advertisement costs, legal costs, etc.
- Taxation: A company pays dividends from its after-tax profits, while it deducts interest on bank loans.
Lastly,
An issue of shares to the public, referred to as shareholders of the company, raises share capital. Joint-stock companies use it as a major source of capital funding. The issue of shares has its own pros and cons, which a company must weigh before making a funding decision.
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