Types of Share Capital

Share capital is the capital raised by a company through the issue of shares to the shareholders. In simple terms, it is the money invested by the shareholders in the company. The Companies Act, 2013 in India lays down the rules and regulations for the issuance and management of share capital by companies. There are different types of share capital as per the Companies Act, 2013. These are:

• Authorized Share Capital: Authorized Share Capital is the entire capital that a company takes from its investors by issuing shares that are listed in the company’s official documents. It is also known as Registered Capital or Nominal Capital since it is used to register a company.

The maximum of Authorised Capital is specified in the Memorandum of Association, according to Section 2(8) of the Companies Act, 2013. The company has the option to take the appropriate actions to expand the limit of authorised capital in order to issue more shares, but it is not permitted to issue shares that exceed the limit of authorised capital in any situation.

• Issued Share Capital: The portion of Authorized Share Capital that has been issued to the public for subscription is known as Issued Share Capital. This act of issuing shares is referred to as issuance, allocation, or allotment. To put it simply, Issued Share Capital is the subset of Authorized Share Capital. A subscriber becomes a shareholder after receiving shares.

• Subscribed Capital: Subscribed Capital is the portion of issued Capital that has been sold to the public. The public is not required to completely subscribe to the issued Capital. It is the portion of the issued capital for which the company has received an application. Let me illustrate this using an example: If a corporation sells 16000 Rs. 100 shares and the public only applies for 12000 shares, the issued capital is Rs 16 lakh and the subscribed capital is Rs 12 lakh. The total number of issued shares equals the entire number of outstanding shares plus treasury shares.

• Called-Up Capital: Called-Up Capital is a portion of the Subscribed Capital that includes the shareholder’s payment. The complete amount of Capital is not given to the company at once. It draws on a portion of the subscribed Capital as needed in installments. Uncalled Capital is the remainder of the Subscribed Capital.

• Paid-Up Capital: Paid-up Capital refers to the portion of Called-up Capital paid by the shareholder. The shareholder is not required to pay the amount requested by the company in question. The shareholder may pay half of the called-up capital, which is referred to as Reserved Capital.  As the term implies, reserving funds in the company’s treasury. This is very important if the company is going to discontinue or winds up.
  The Companies Amendment Act, 2015 altered the need for a minimum paid-up capital in the company. That means that, for the time being, a company can be formed with as little as Rs.1000 in paid-up capital. The paid-up capital must always be less than or equal to the approved share capital at all times, and the business is not permitted to issue shares in excess of the authorised share capital.

• Equity Share Capital: It shows the ownership in a company and grants the shareholder to receive a share of the profits if company is sold or liquidated, receive dividends, and vote on company’s decisions. Equity shareholders have a residual claim on the assets and earnings of the company, meaning they are last in line to receive payment after all other claims are satisfied.

  Types of Equity Share Capital

  Some of the different types of equity share capital are:

  • Ordinary Shares: These are the most common type of equity share capital issued by companies. It represents ownership in the company and entitles the shareholder to vote on company’s decisions.
  • Deferred Shares: These are carrying a lower entitlement to dividends and/or voting rights as compared to ordinary shares. They are often used to differentiate between shareholders who have been with the company for a longer period of time or those who have invested a larger amount of money.
  • Founders Shares: These are issued to the founder of a company. They often carry special voting rights or dividends entitlements to provide the founders huge control over the company.
  • Management Shares: These are issued to the company’s management team, permitting them to own a portion of the company that they are operating. It is often come with certain restrictions like to make sure management acts, limited voting rights in the best interests of the Company.
  • Preference Share Capital 

  Preference share capital is a type of share capital that entitles the shareholder to preferential treatment over equity shareholders in terms of receiving dividends or receiving the proceeds from the sale or liquidation of the company. Preference shareholders have a fixed rate of return and are entitled to receive their dividends before equity shareholders. Preference shares do not usually carry voting rights and are therefore less influential in the management of the company.

  Types of Preference Share Capitals

  There are certain types of Preference Share capitals are as:-

  • Cumulative Preference Shares: Cumulative preference shares are a type of preference share capital that entitles the shareholder to receive unpaid dividends from previous years before any dividends are paid to equity shareholders.
  • Redeemable Preference Shares: Redeemable preference shares are a type of preference share capital that can be redeemed by the company after a specific period or at a specific date. They are often used as a short-term financing option.
  • Participating Preference Shares: Participating preference shares are a type of preference share capital that entitles the shareholder to receive a share of the profits in addition to their fixed dividend payment. They are also entitled to receive their fixed dividend payment before equity shareholders.
  • Non-Cumulative Preference Shares: Non-cumulative preference shares are a type of preference share capital that does not entitle the shareholder to receive unpaid dividends from previous years. If a company does not declare a dividend in a particular year, the shareholder does not receive any payment for that year.
  • Sweat Equity Shares: Sweat equity shares are shares issued to employees or directors of the company as a reward for their contribution to the company’s growth. Sweat equity shares can be issued at a discount or for consideration other than cash.
  • Rights Issue: A rights issue is an offer of shares to the existing shareholders of the company in proportion to their existing shareholding. The purpose of a rights issue is to raise capital without diluting the ownership of the existing shareholders.
  • Bonus Issue: A bonus issue is an issue of free shares to the existing shareholders of the company in proportion to their existing shareholding. The purpose of a bonus issue is to reward the existing shareholders for their investment in the company.
  • Employee Stock Option Plan (ESOP): An employee stock option plan (ESOP) is a scheme where the company offers its employees the option to purchase shares of the company at a discounted price. The purpose of an ESOP is to motivate and retain employees by providing them with a stake in the company’s growth.