CLASSIFICATION OF SHARE CAPITAL

Estimated Reading Time: 11 minutes

To start with the classification of share capital it is important to understand the meaning of certain terminology which plays an important role if we start digging deep inside the Company Law. As per the bookkeeping, the term ‘capital’ means the sum of money which acts as a resource into a business. The economic understanding of this term might be understood as the amount utilized to meet capital merchandise, that is, the apparatuses of creation; the cash accessible for speculation, or contributed, the limited worth of things to come pay to be gotten from a venture; the genuine or cash worth of complete resources; cash or property utilized for the creation and resources, utilized for the creation of benefits and riches[1].

While analyzing and discussing the classification of shares in the current article the author has divided the paper into two parts where one part of the paper gives the understanding of the terminology which is important to understand before understanding the classification tree of the share capital while the other part of the paper talks about the branches of the share capital which any company can adopt as per the norms of the Company law to expand its business and meet its day to day needs for surviving the present competition.

After getting an idea of capital let’s move forward to another important aspect which talks about Shares. The capital of a company is divided under certain heads of indivisible units which are fixed amounts, and these fixed amounts are termed as ‘shares’. As per Section 2(84) of the Companies Act, 2013 “a share is a share in the share capital of a company and includes stocks.”  In the case of CIT v Standard Vacuum Oil Co.[2] the Supreme Court authorities were of the view that “By a share in a company is meant not any some of the money but an interest measured by a sum of money and made up of diverse rights conferred of its holders by the articles of the company which constitute a contract between and the company.” Based on this understanding it can be considered that the share does not mean merely the interest of the shareholder it also carries along with certain rights and liabilities till the time the company is in existence or till the time the company is being wound up.

The nature of the share is not related to the sum of the money but it is related to the interest of investor or shareholder in the company which is measured by a sum of money for two reasons firstly, the purpose of liability and secondly, for the interest he holds in the affairs of the company. It also includes the series of mutual ‘covenant’ which is entered by all the shareholders of the company inter se.[3] 

Now the question which comes into the picture is regarding the meaning of share capital. It is to be taken note that capital and share capital both are synonyms. This means that a share capital or can also be called corporate share capital is that portion of corporate equity that is obtained by a company through issuing of shares to a shareholder, majorly through cash. It is important to keep this thing in mind that share capital cannot be confused with the membership fee of a company even if the process of both the things are similar as both require issuing of a share. As per the norms of the Company Act, a company must state the Capital in the Memorandum of Association (MOA) and Article of Association (AOA) of the company.

Share Capital is termed as the sum contributed by the proprietors of the organization for maintaining the business. Investors are considered as the proprietors of the Company. As there is more than one investor/proprietor in an organization, the total capital of the organization is isolated into little units called ‘Share’ for simplicity of circulation and identification.

TYPES OF SHARE CAPITAL

The Section 43 of the Company Act, 2013 talks about the kind of share capital. As per the Act it is of two kinds namely[4]:

1.                  Equity Share Capital

To start with the equity share capital let’s first know What is meant by Equity Shares?

Equity shares are the kind of shares that do not enjoy any preference right when it comes to the matter of payment of dividend or repayment of capital amount.A company tends to invite the public to buy its shares in order to obtain some of its ownership. Through this ownership, shareholders are entitled to receive income in the form of dividends.Usually, large private companies issue shares to be traded publicly on the stock exchange.

In case of wound up of a company, after satisfying the rights of the preference shareholder, the remaining profitable amount is distributed among the equity shareholders, along with this the rate of dividend which needs to be paid to the equity shareholder varies every year depending upon the amount of profit made by the company in that particular year.

It is the capital which is the concern of any organization restricted by shares implies all too kind of share capital which isn’t preference share capital. It alludes to the segment of the organization’s cash which is brought up in return for a portion of possession in the company. It is always seen that a company will in general welcome the overall population to procure its offers as a way to acquire partial responsibility for the same. Through such proprietorship, investors are qualified to procure returns as profits. Generally, a huge exclusive company issue offers to exchange freely in a stock trade. 

Also Read  Utilization of Securities Premium Account

Notwithstanding, capital age is the essential motivation behind why both small and large companies issue shares to the overall population who are interested in the company in any case. The value of the equity share capital hence is raised through issuing the equity share, which is later utilized for fostering the undertaking of the company. Furthermore, a huge capital base amount which is earned by the company through the process of issuing the equity share to the public assists them with upgrading their financial soundness on the lookout. At the point when an organization issues shares for financial backers to gain, they additionally stretch out a chance to procure a portion of its benefits and to stake in its value. All shares remain in the company. It didn’t come back until the company closed. Shareholders of these shares have the right to vote and elect the management of the company. The equity dividend rate depends on the availability of excess capital. However, there is no fixed dividend rate on equity.

2.                  Preference Shares Capital:

Preference Shares, as the name proposes are the kind of shares where investors get the benefit of the company in the type of profits before Equity investors at a fixed profit rate. Cash raised by the company through the issuing of preference shares is called preference share capital. The preference share investors don’t have the position to control the undertakings of the company. Preference share investors may have likewise the option to partake in any surplus capital of the company which may stay after the whole capital has been reimbursed.[5]

This kind of share capital is one of the unique sorts of share capital domain having a fixed pace of profit and they convey special rights over equity shareholders in sharing of benefits and furthermore asserts over resources of the company. People who invested in a company through the process of buying the preference share get needed in the profit statement and at the hour of wrapping up of the company, they are the primary individuals to get cash. They reserve the privilege to cast a ballot just when the matter straightforwardly or by implication influences them.

CLASSIFICATION OF SHARE CAPITAL

●                   Authorised Share Capital:

Each company needs to indicate the measure of capital it wishes to enlist inside its Memorandum of Association. The sum of the amount in this way expressed is named as registered, authorized, or nominal capital. In a general sense, it is the measure of cash and is permitted to raise through open membership. Its size can be expanded or diminished according to necessity by meeting the recommended strategy.

On the off chance, if the company is needed to raise more capital, it can expand the approved capital by modifying its MOA with the endorsement of its individuals. A company registration charge payable to the Registrar of Companies and the stamp obligation is reliant upon the Authorized Capital of the company. Each time the company plan expands its Authorized Capital the gradual/extra enlistment expense and Stamp obligation are payable to the workplace of Registrar of Companies.[6]

●                   Issued Capital:

It makes up that piece of the authorized capital that is offered for public membership as shares. It should be noticed that a company may abstain from giving the whole enrolled capital at a solitary go. Because of their necessity, an organization may raise this capital now and then. The organization may not issue the whole issued capital on the double. It continues raising the capital as and when the requirement for the extra assets is felt. In short, it can be said that it is the sum offered by the organization now and then proposed by the investors of the company. It is given by the company at first during consolidation and periodically via the designation of offers for membership. The issued share capital must be consistently inside the measure of approved capital as referenced in the update.

Shares can be given at face esteem (standard worth) or a premium rate. Additionally, the company needs to give Share Certificates to the investors within 60 days of the offer issue. Under some random circumstance, given capital should not surpass the issued capital. For the most part, it incorporates every one of the offers which have been dispensed to merchants, people in general, signatories of the notice of affiliation, and so on.

●                   Unissued Capital:

Commonly, it comprises that part of authorized capital which is yet to be given. In less complex words, unissued capital can be depicted as the contrast between an organization’s ostensible capital and given capital.

●                   Subscribed Capital:

Subscribed capital is a piece of issued capital that has been acknowledged by the general population. The said capital is designated to every endorser as per the goal delivered by the director of the company. The subscribed capital is allotted to the respective subscribers as per resolution passed by the directors of the company. In a circumstance, where the shares assigned by an organization are bought in by general society, the issued capital and the subscribed capital will be something very similar. In any case, it should be noticed that subscribed capital can’t surpass an organization’s issued capital.

Also Read  Power of Board to Refuse Registration

It is that domain of share which the financial backers have vowed to purchase in the future. These shares are typically bought in as a feature of the initial public offering (IPO). Guarantors are also known as underwriters frequently guarantee to convey a specific number of bought in shares before the IPO. The endorsers are normally enormous institutional financial backers and banks. Bought in share capital alludes to the money-related worth of the multitude of shares for which financial backers have communicated an interest.

●                   Called – Up Capital:

It frames a piece of subscribed capital, which can be called up or repurchased by the organization. Outstandingly, a company doesn’t call the whole worth of each share that had been dispensed to investors. Indeed, just a segment of the sum needed by the organization is raised at various spans.

Contingent upon the jurisdiction of running the business and the business being referred to, some of the companies may give shares to financial backers with the understanding they will be paid sometime in the future. This takes into account more adaptable venture terms and may allure financial backers to offer more share capital than if they needed to give reserves forthright. The measure of shares capital investors owe, however, have not paid, is alluded to as called-up capital in simple words.

●                   Paid – Up Capital:

It is basically a piece of called-up capital. It implies the measure of cash paid by investors because of the call made by a company. Normally, the paid-up capital of an organization can be found out by taking away the extraordinary calls from called-up capital.

This domain of share capital addresses cash that isn’t acquired. An organization that is completely settled up has sold every single accessible share and, in this manner, the company can’t expand its capital except if it acquires cash by assuming obligation. A company could, nonetheless, get approval to sell more shares to the public. In such a situation, the paid-up capital figure in this way addresses the degree to which it relies upon value financing to support its tasks. This figure can measure up to the organization’s degree of obligation to evaluate in the event that it has a good overall arrangement of financing, given its activities, plan of action, and winning industry standards.

Many instances occur when people get confused between called – up and paid – up capital to solve this issue it is important to distinguish between both. While relying upon the business and appropriate guidelines, organizations may give stock to financial backers with the understanding that the financial backers will pay sometime in the future. Any assets due for shares given however not completely paid for are called-up share capital. Any assets transmitted for shares are considered as paid-up capital.[7] 

Whereas on the other hand, such kind of debt financing, or mezzanine financing, is not viewed as share capital. Debt capital incorporates financing sources like credit extensions, business advances, and charge card adjustments. While mezzanine financing, similar to share capital, is incorporated under the value part of the accounting report, it isn’t viewed as share capital.

●                   Calls in Arrear:

In the event that an investor can’t pay the call sum due on designation or on any calls as indicated by the terms, the sum that becomes due is Calls-In-Arrears. We may move or not exchange the arrear sum by virtue of apportioning or calls to Calls-financially past due Account.

CONCLUSION

While concluding the article the author wants to say that the article summarizes the essential need to give shares and ways of raising capital and its significance in a company. Each business association needs assets for its business exercises. It can raise reserves either inside or through outside sources. The fundamental capacity of the approved/authorized capital of an organization is to secure the current investors against a conceivable weakening of their value advantages by the giving of shares in the past. The position to take decisions hence is given to organizations to buy their shares which have given organizations the adaptability to settle on issues straightforwardly identifying with the share capital of the organization. It can additionally be reasoned that responsible share and raising capital is a fundamental piece of any business/organization. It not just aids in getting speculation from financial backers/investors yet additionally helps the organization in re-putting resources into itself. It may very well be seen that when an organization is in a strong position it can deal with its representatives, chiefs, and investors and rouse them to improve.


[1] Kirti Dubey, “Share Capital: Exploring the backbone of Company Law” (2018).

[2] CIT v Standard Vacuum Oil Co., (1996) Comp. LJ 187

[3] Borland’s Trustees v Steel Bros. & Co. Ltd., (1901) 1 Ch. 279 (Ch.D.)

[4] Companies Act, 2013, http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17422.

[5] 8137_et_et.pdf, http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/05._share_capital,_its_nature,_kinds,_rights_and_liabilities_of_shareholders/et/8137_et_et.pdf.

[6] Share Capital: Meaning, Types and Classes | Company, Essays, Research Papers and Articles on Business Management (2017), https://www.businessmanagementideas.com/company-management/share-capital-meaning-types-and-classes-company/8980.

[7] Full Bio Follow Linkedin Follow Twitter Christina Majaski writes et al., The Difference in Called-Up Share Capital vs. Paid-Up Share Capital, Investopedia , https://www.investopedia.com/ask/answers/073015/what-difference-between-calledup-share-capital-and-paidup-share-capital.asp .

Hey there!

come here often?

Login To Come In