The term share capital denotes the amount of capital raised or to be raised by the issue of shares by a company and is used in many expressions. The usual different expressions of share capital found in the capital structure of a company are popularly known as “kinds of share capital.”
Kinds of share capital
These kinds are:
1. Authorized capital :
It is the maximum amount of share capital stated in a company’s memorandum which the company is, for the time being, authorized to raise. As the memorandum is registered with the Registrar it is also called the ‘Registered’ capital. Again, as the actual issued capital of the company is usually different (i.e. less) from the authorized capital, it is also known as ‘Nominal’ capital.
2. Issued capital :
It means the nominal value of that part of the authorized capital which is allotted for cash or for consideration other than cash and includes the shares subscribed by the signatories to the memorandum.
It may be noted that the term ‘Issued Capital’ is often defined in textbooks as “the nominal value of that part of the authorized capital which is offered for subscription to the public.” The phrase ‘offered for subscription to the public’ has been dropped and other necessary modifications have been made in the customary definition to meet the following objections:
(i) that, the customary definition which connotes only the nominal value of shares offered for subscription to the public does not provide any useful information to an analyser of a company’s Balance Sheet. What is important to him is the nominal value of shares actually allotted by the company because it is this amount which can be taken as the ultimate fund out of which the creditors are to be paid, even though the actual paid up capital for the time being may be less than this amount. Moreover, the term Issued Capital literally means that part of share capital which has been actually issued or allotted by the company:
(ii) that, if shares offered for subscription to the public are taken as ‘Issued Capital’, a private company which cannot make offer to the public can never have ‘Issued Capital’;
(iii) that, the following types of allotments of shares cannot be treated as shares offered for subscription to the public: –
- shares issued to the: (1) subscribers to the memorandum, (2) friends and relatives of the directors, and (3) vendors for consideration other than cash.
- shares reserved and allotted to the: (i) employees of the company, and, (ii) specialized institutions like Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India.
- the ‘Rights Issue’ and the ‘Bonus Issue.’
These allotments, therefore, cannot be included under ‘Issued Capital’ as traditionally defined.
3. Subscribed capital :
It means the paid up value of that part of the authorized capital which is allotted for cash or for consideration other than cash and includes the shares subscribed by the signatories to the memorandum. Thus, in a company where shares are fully paid up, the ‘Subscribed Capital’ would be equal to the ‘Issued Capital.’ The ‘Subscribed Capital’ sub-heading is of significance only if the shares are partly paid up or certain ‘calls’ on shares are unpaid or some shares have been forfeited for non-payment of the ‘call money’. In any of these situations the ‘Issued Capital’ denotes the nominal value of shares actually allotted and the ‘Subscribed Capital denotes the paid up capital of the company.
It is under the above heads that the Companies Act requires the share capital of a company to be exhibited in its Balance Sheet. However, some other terms relating to share capital are in prevalence, as such it will be proper to deal with them in brief here.
Called up capital is that part of the allotted share capital which has been called up by the company.
Uncalled capital is that part of the allotted share capital which has not been called up by the company.
Paid up capital is equal to called up capital minus calls in arrears.
Reserve capital is that part of uncalled capital which has been reserved by the company to be called in the event of its winding up.
Reserve capital :
The legal provisions about reserve capital may now be seen. Reserve capital can only be created under Section 99 which states that a limited company may, by special resolution, determine that any portion of its uncalled share capital shall not be capable of being called up except in the event of winding up. Such a step is usually taken by a company with the object of affording additional security to the creditors.
Once the company has created reserve capital in this way, it cannot charge it as security for loans unlike the uncalled capital. Moreover, reserve capital cannot be turned into ordinary capital without leave of the court nor can it be cancelled in reduction of capital (Natal Land Company vs Paul in Colliery Syndicate). This type of share capital is also known as the “reserve liability” of the shareholders because it is that portion of the value of each share which cannot be called up except in the case of winding up of the company.