Accounting for Equity Capital

1. Authorized Share Capital

This is the maximum nominal value of equity shares a company is legally permitted to issue, as specified in its Memorandum of Association. It represents the upper limit of the company’s equity fundraising capacity. To exceed this limit, the company must amend its MoA by passing a special resolution and filing the necessary forms with the Registrar of Companies (ROC). Authorized capital is not a source of funds by itself but a regulatory ceiling. A portion of it remains unissued, which the company can utilize for future fundraising, ESOPs, or bonus issues without further statutory amendments to the MoA.

2. Issued Share Capital

This is the portion of the authorized share capital that the company has actually offered to the public or specific investors for subscription through a prospectus, private placement, or rights issue. It represents the shares allotted or intended for allotment. Issued capital can be equal to or less than the authorized capital. It signifies the company’s active step to raise equity funds. The difference between authorized and issued capital is the unissued capital, which the board of directors can issue in the future subject to compliance with the Companies Act and SEBI regulations.

3. Subscribed Share Capital

This is the portion of the issued capital that has been applied for (subscribed) by investors. It reflects the actual public response to the share issue. When an issue is fully subscribed, the subscribed capital equals the issued capital. In cases of oversubscription, the subscribed amount may be higher, but the company cannot allot shares beyond the issued limit. The concept is crucial for determining the success of a public offering. The minimum subscription (as per prospectus and SEBI norms) must be met for the allotment to proceed; otherwise, the application money must be refunded.

4. Called-up Share Capital

This is the amount of the subscribed capital that the company’s Board of Directors has formally demanded (called) from shareholders. The total face value of a share is often not required to be paid at once. Called-up capital is the aggregate of the application money, allotment money, and any call(s) made to date. It represents the shareholders’ legal obligation to pay. Even if a shareholder has not paid, the amount remains part of the called-up capital, with the unpaid portion recorded as “calls-in-arrears” (deducted from called-up capital to arrive at paid-up capital).

5. Paid-up Share Capital

This is the actual amount of money received by the company from shareholders against the called-up capital. It is the real equity funding available for business operations. Paid-up capital = Called-up Capital minus Calls-in-Arrears. This figure is a key indicator of the company’s financial strength and is the basis for calculating dividends, which are declared as a percentage of the paid-up capital per share. An increase in paid-up capital (through fresh issues or rights issues) enhances the company’s net worth and borrowing capacity.

6. Reserve Capital

This is a unique, statutory concept where a company, by passing a special resolution, decides that a specific portion of its uncalled share capital shall not be called up except in the event of the company’s winding up. Once created, this reserve capital cannot be converted back into ordinary uncalled capital. It acts as an ultimate safety net for creditors during liquidation, ensuring a reserved pool of funds is available exclusively to meet liabilities in the worst-case scenario. It is a form of secured, uncalled capital locked for creditors’ benefit.