Share capital refers to the funds raised by a company through the issuance of shares to investors. It is a key component of a company’s financial structure and provides the necessary capital for the business's operations and growth. Understanding the features, types, and classifications of share capital is crucial for both investors and company management. This tutorial explains these concepts with real-world examples.
Share capital is a significant source of funding for a company and has several key features:
Share capital can be categorized into different types based on the classification of shares issued by the company. The main types of share capital include:
Authorized share capital refers to the maximum amount of capital a company is allowed to raise by issuing shares. It is specified in the company's memorandum of association and cannot be exceeded without approval from the shareholders. For example, a company might be authorized to issue up to $1,000,000 worth of shares.
Issued share capital represents the portion of authorized share capital that has actually been issued to shareholders. It is the amount the company has raised by selling shares to investors. For instance, if a company is authorized to issue $1,000,000 worth of shares but only sells $500,000 worth, the issued share capital is $500,000.
Subscribed share capital is the amount of capital that shareholders have agreed to take up by purchasing shares. It can be less than or equal to the issued capital. If a company issues $500,000 worth of shares, but only $450,000 worth is subscribed by investors, the subscribed capital is $450,000.
Paid-up share capital is the amount of money the company has actually received from shareholders in exchange for shares. It is the total amount paid by shareholders for the shares they have subscribed to. For example, if a shareholder buys 100 shares at $10 each, the paid-up capital from that shareholder is $1,000.
Called-up share capital refers to the portion of the issued share capital that the company has called upon shareholders to pay. This is typically requested in installments over time. For instance, a company might call up 50% of the issued capital when shares are issued and the remaining 50% at a later date.
Uncalled share capital refers to the portion of the authorized share capital that the company has not yet called from its shareholders. This is the remaining amount that shareholders are obliged to pay in case the company decides to call for additional capital.
Share capital can also be classified based on the nature of the shares issued. The two primary classifications of share capital are:
Equity share capital consists of ordinary shares that give shareholders the right to vote at general meetings, receive dividends, and share in the company's profits. Equity shareholders are the last to be paid in case the company is liquidated, but they enjoy the benefits of the company's success. For example, if a company issues 1,000,000 equity shares at $10 each, the equity share capital would be $10,000,000.
Preference share capital consists of preference shares, which provide shareholders with preferential treatment regarding dividends and the return of capital in case of liquidation. Preference shareholders receive a fixed dividend, and their claims are paid before equity shareholders in case the company is liquidated. For example, if a company issues 500,000 preference shares at $10 each, the preference share capital would be $5,000,000.
Let’s consider a company, ABC Ltd., with the following share capital structure:
In this example, ABC Ltd. is authorized to raise $1,000,000 in share capital but has issued only $600,000 worth of shares, with $500,000 subscribed by shareholders. The company has collected $400,000 from shareholders, and its equity share capital is $350,000, with the remaining portion in preference shares.
Share capital is a fundamental element in the financial structure of a company, representing the funds raised from shareholders in exchange for shares. Understanding the features, types, and classifications of share capital is important for both businesses and investors. Whether raising capital through equity or preference shares, the classification and management of share capital help determine the financial position of the company and the rights of its shareholders.