Share Capital refers to the total amount of capital raised by a company through the issue of shares to shareholders. It represents the ownership interest of shareholders in the company and forms a major part of the company’s funding. Share capital is divided into Equity shares and Preference shares, and it can be further categorized into authorized, issued, subscribed, and paid-up capital. The concept of share capital is crucial in determining voting rights, dividends, and the extent of liability of shareholders. It enables companies to raise long-term funds without incurring debt and provides investors with an opportunity to share in profits and ownership.
Features of Share Capital:
Share capital is the money raised by a company through the issuance of shares. It forms the financial foundation of a company and signifies the shareholders’ stake in the ownership of the business. The features of share capital reflect its role in corporate structure, investor relations, and financial stability.
1. Permanent Source of Capital
Share capital is a long-term and permanent source of finance for a company. Unlike loans or debentures, it is not repaid during the lifetime of the company. It stays invested in the business to support growth, operations, and expansion. This permanence strengthens the company’s financial structure and gives confidence to creditors. It is repayable only at the time of winding up, subject to the provisions of the Companies Act and satisfaction of liabilities.
2. Ownership Right
Share capital represents the ownership of the company. Shareholders are regarded as owners and not creditors of the company. The extent of their ownership depends on the number and type of shares they hold. Equity shareholders, in particular, have voting rights, control over company decisions, and a share in residual profits. This ownership right makes share capital unique as compared to borrowed funds, where lenders do not hold any ownership interest in the business.
3. Divisible into Small Units
Share capital is divided into small and equal parts called shares. This divisibility allows companies to raise capital from a large number of investors, even with small contributions. Each share has a nominal (face) value, and the shareholders receive share certificates as proof of ownership. This feature makes it easier for the company to mobilize large capital through public participation and offers flexibility to investors to invest as per their capacity.
4. Variety of Types
Share capital can be classified into different types to suit both company requirements and investor preferences. Major types include:
-
Authorized capital: maximum capital a company can raise
-
Issued capital: part offered to investors
-
Subscribed and paid-up capital: actually bought and paid for
-
Equity and preference shares: based on rights and returns
This classification helps companies structure their capital efficiently and offer flexibility in fundraising.
5. Limited Liability of Shareholders
A key feature of share capital is that it comes with limited liability for shareholders. Their financial responsibility is restricted to the unpaid amount on the shares they hold. They are not liable for company debts beyond this amount. This limitation encourages wider public investment as individuals are assured that their personal assets are protected. It distinguishes shareholders from proprietors or partners in firms who may face unlimited liability.
6. Transferability
In the case of public companies, shares representing share capital are generally freely transferable. Shareholders can sell their shares to others without seeking company approval (subject to applicable regulations). This feature ensures liquidity for investors, allowing them to exit when needed. However, in private companies, share transfer is usually restricted by the Articles of Association. Transferability adds flexibility and encourages investment in the corporate sector.
7. Right to Receive Dividends
Share capital entitles shareholders to dividends, which are a share in the company’s profits. While equity shareholders receive variable dividends declared by the company’s board, preference shareholders receive a fixed rate of dividend. Dividends are distributed only out of available profits and are not guaranteed. Still, the right to earn returns in the form of dividends makes shares an attractive investment, aligning investor interests with the company’s success.
Types of Share Capital:
-
Authorized Share Capital
Also known as nominal or registered capital, it refers to the maximum amount of capital that a company is authorized to raise through the issue of shares, as mentioned in its Memorandum of Association (MOA). A company cannot issue shares beyond this limit unless it amends the MOA by passing a resolution and obtaining regulatory approvals. Authorized capital determines the upper ceiling of a company’s financial base and is not necessarily fully issued or subscribed initially.
-
Issued Share Capital
Issued capital is the portion of authorized capital that the company actually offers to the public or investors for subscription. It may be equal to or less than the authorized capital. The company may issue shares in one or more stages, depending on its funding needs. For example, if a company has ₹10 lakh authorized capital and offers ₹5 lakh worth of shares to the public, then ₹5 lakh is the issued capital. It reflects the company’s active fundraising efforts.
-
Subscribed Share Capital
Subscribed capital is the part of issued capital that has been subscribed or agreed to be purchased by investors. It shows how much of the issued capital has actually been taken up by the public or private investors. For instance, if a company issues ₹5 lakh worth of shares and the public subscribes to ₹4 lakh, then the subscribed capital is ₹4 lakh. This type indicates the market response and investor confidence in the company.
-
Called-up Share Capital
Called-up capital is the portion of subscribed capital that the company has asked shareholders to pay. Companies may not ask for the full face value of shares immediately but may demand it in installments. For example, if a shareholder subscribes to 1,000 shares of ₹10 each and the company has called up only ₹6 per share, the called-up capital is ₹6,000. It indicates the actual demand made by the company for capital infusion.
-
Paid-up Share Capital
Paid-up capital is the portion of called-up capital that the shareholders have actually paid to the company. It is the real amount received by the company and forms part of the permanent capital. If some shareholders default in paying calls, then the paid-up capital is less than the called-up capital. For example, if ₹6,000 was called up and ₹5,800 was paid, then the paid-up capital is ₹5,800. It reflects the actual cash inflow from share capital.
-
Uncalled Capital
Uncalled capital is the portion of subscribed capital which has not yet been demanded (or “called”) by the company from its shareholders. This amount can be called in the future if the company needs additional funds. It represents a potential source of funding and is common in cases where shares are not fully paid up. It remains with shareholders until the company makes a formal call.
-
Reserve Capital
Reserve capital is a part of the uncalled capital that the company decides will be called up only at the time of winding up. It cannot be used during the lifetime of the company. The company must pass a special resolution to create reserve capital. It acts as a safety buffer for creditors in the event of liquidation, ensuring that some capital remains available to settle liabilities when the company is dissolved.