Classification of Share Capital

Share capital is a fundamental aspect of corporate finance, representing the financial backbone of a company. It is the total value of funds raised by an organisation through the issuance of shares and understanding its classification is crucial for investors, stakeholders and anyone involved in the financial landscape of a company.

In this comprehensive guide, we delve into the various classifications of share capital.

Meaning of Share Capital

Share capital represents the total funds a company raises by issuing shares. It is the financial foundation of a business and shareholders, who contribute money by purchasing shares, become co-owners. The amount of share capital is detailed in the company’s Memorandum of Association, specifying the maximum sum it can raise through public subscriptions.

The classification of share capital includes authorised (or nominal) capital, issued and subscribed capital, called-up and paid-up capital, among others. Understanding share capital is crucial for investors, stakeholders and the company itself, as it reflects financial health, ownership and growth potential.

What are the Classification of Share Capital?

Authorised, Nominal or Registered Capital

At the core of share capital classification lies the concept of authorised, nominal or registered capital. This is the maximum amount of capital a company is legally allowed to raise through the issuance of shares.

Found in the Memorandum of Association, this figure sets the limit for the company’s fundraising efforts. It’s important to note that this amount can be adjusted based on the company’s evolving needs, following prescribed methods.

Issued Capital

Issued capital is the portion of the authorised capital that a company offers to the public for subscription in the form of shares. Companies may not choose to issue the entire registered capital at once but may do so gradually based on their financial requirements.

Issued capital includes shares allotted to various entities such as vendors, the public and signatories of the memorandum of association.

Unissued Capital

Unissued capital represents the portion of nominal capital that remains untouched, yet to be issued. In simpler terms, it is the difference between a company’s nominal capital and its issued capital. This unissued capital provides flexibility for future fundraising efforts.

Subscribed Capital

Subscribed capital is the part of the issued capital that has been accepted by the public. When shareholders subscribe to a company’s shares according to resolutions released by the company directors, it becomes subscribed capital. In cases where all issued shares are subscribed, issued capital and subscribed capital are the same.

Called-up Capital

Part of subscribed capital, called-up capital is the amount that a company calls upon shareholders to pay. This is not necessarily the entire subscribed amount; companies may call up only a portion of the subscribed capital at different intervals. The remaining amount is categorised as uncalled-up capital.

Uncalled-up Capital

Uncalled-up capital is the portion of subscribed capital that a company has not yet called up. It represents a contingent liability of shareholders on their shares, indicating the potential future financial obligations they may have to meet.

Paid-up Capital

Paid-up capital is the amount of money that shareholders have actually paid in response to the calls made by the company. It is calculated by subtracting outstanding calls from called-up capital, providing insight into the funds readily available for the company’s use.

Fixed Capital

Fixed capital is a category that comprises fixed assets used by the company. These assets, such as land, buildings, equipment and furniture, are essential for the company’s operations and represent a more stable, long-term form of capital.

Reserve Capital

Reserve capital is a unique category that comes with specific conditions. It cannot be called by the company unless it is in the process of winding up or being liquidated. Created by passing a special resolution with a 3/4th majority vote, reserve capital cannot be pledged as security for loans and requires a court order for conversion into ordinary capital.

Circulating Capital

Circulating capital, a part of subscribed capital, takes the form of operational goods and assets. Examples include bills receivable, bank balances and book debts. This type of capital is more fluid and directly contributes to the day-to-day operational needs of the company.

Conclusion

The classification of share capital is a nuanced and intricate aspect of corporate finance. From the authorised capital setting the upper limit for fundraising to the various stages of issued, subscribed, called-up and paid-up capital, each category plays a crucial role in shaping a company’s financial structure.

Understanding these classifications of share capital is essential for investors, regulators and company management, as it provides insights into the company’s financial health, obligations and capacity for future growth. The complexities introduced by reserve capital and the practical implications of circulating capital further emphasise the dynamic nature of share capital in the corporate landscape.