The capital of a company is divided into a number of equal parts known as shares.
“The interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all shareholders.” — Farewel, J.
Section 2(46) of Companies Act. 1956, defines it as “a share in the share capital of a company, and includes stock except, where a distinction between stock and shares is expressed or implied.”
Kinds of Shares
Companies issue different types of shares to mop up funds from various investors. Before Companies Act 1956, public companies used to issue three types of shares, i.e., Preference Shares, Ordinary Shares and Deferred Shares. The Companies Act, 1956 has limited fie type of shares to only two— Preference shares and Equity Shares.
Different types of shares are issued to suit the requirements of investors. Some investors prefer regular income, though it may be low, others may prefer higher returns and they will be prepared to take risk. So, different types of shares suit different types of investors. If only one type of shares are issued, the company may not be able to mop up sufficient funds.
The amount of capital which a company may raise in future is mentioned in capital clause of the Memorandum of Association. The capital is fixed after making careful analysis of present and future requirements of the company.
The company’s capital may be divided into following categories:
(a) Authorized or Nominal Capital
This is the maximum amount of capital which a company can issue. The company, in no case, can issue more capital than authorized by its Memorandum. It is called Authorized Capital because the company has an authority to issue this much capital. The maximum limit of capital to be issued is fixed at the time of registration of the company that is why it is called Registered Capital also. While deciding about authorized capital, present and future needs of the concern should be taken into consideration.
The company can fix any amount as authorized capital. In case a company wants to issue more capital than authorized, it will have to alter capital clause in the Memorandum. The alteration of this clause involves lot of formalities. The authorized capital is divided into a number of shares. It may be written as the authorized capital of the company will be Rs. 10 lakhs, divided into 10,000 shares of Rs. 100 each. It is not necessary that the whole of authorized capital be issued for subscription. The company can issue shares as per its requirements. The authorised capital fixes only the maximum limits beyond which it cannot go.
(b) Issued Capital
The company will issue shares according to its requirements. It may not need the entire capital at one time. Rather, capital needs go along with its development stages. The capital which is offered to the public for subscription is known as Issued Capital. The part of capital which is not issued is known as unissued capital. If out of 10,000 shares of Rs. 100 each, the company issues 8,000 shares for public subscription, then Rs. 8 lakhs will be issued capital and Rs. 2 lakhs will be unissued capital.
(c) Subscribed Capital
The shares issued by the company for public subscription may not be applied for in full. Subscribed capital denotes the share capital taken up by the public. Continuing the earlier example, suppose the public subscribed for only 5,000 shares out of 8,000 shares issued ; then subscribed capital will be Rs. 5 lakhs. The issued and subscribed capitals can be same also.
If all the 8,000 shares are subscribed for by the public then issued and subscribed capital will be Rs. 8 lakhs. The subscription of share capital depends upon reputation of the company. If the company carries a sound reputation, it will have no problem in selling the shares.
The applications for shares may be more or less than the number of shares offered by the company. If the applications are for more shares than the issued, it is known as Over subscription. On the other hand, if applications are far less shares than offered for subscription, it is known as under subscription.
(d) Called-up Capital
After the receipt of share applications, the Board of Directors makes allotment of shares to the applicants. Certain amount is payable on application and the balance is called at the time of allotment and calls. The capital is called up as per requirements for funds. The amount of capital is called called- up capital.
Taking the earlier example, suppose the company calls for Rs. 50 per share out of Rs. 100; then called up capital will be Rs. 4 lakhs, if all the 8,000 shares have been subscribed for. The part of capital which has not been called-up is known as Un-called capital. The shareholders are under obligation to pay the money whenever it is called-up.
(e) Paid-up Capital
The amount of capital actually received is termed as Paid-up Capital. The shareholders are asked to pay the calls within a certain period. In case whole of the called-up money has been received from the shareholders, called-up and paid-up capital will be the same. There may be some defaulters and the money which has not been received is called calls-in-arrears. Continuing with the earlier example, if Rs. 3, 75,000 have been received out of Rs. 4 lakhs, then paid-up capital will be Rs. 3, 75,000 and Rs. 25,000 will be calls in-arrears.
(f) Reserved Capital
A limited company may earmark a part of uncalled capital as Reserved Capital. The reserved capital is called-up only in case of winding up of the company. This is done in order to create confidence in the minds of the creditors. Capital can be reserved by passing a special resolution by the shareholders.