What is Share Capital? Meaning, Types & Examples

A company, while its formation, needs capital finance to start its venture. Share capital, if explained, will refer to capital raised by a company by offering its shares to investors. This capital is known as a share capital. This blog will discuss the share capital meaning, lay out its importance and describe its types.

Share Capital Meaning and Definition

In commercial language, share capital refers to the capital that a company raises by offering shares out of its capital to interested investors. These investors are known as shareholders as they hold a right to the company’s share capital, and their ownership is crucial for the formation of a company. A shareholder’s capital is recognised as a long-term capital source for a business, as it allows a company to carry out its major operations in the present and future. For any type of company, having a substantial amount of share capital is the key towards a financially successful company. Let’s get to know the types of share capital now.

Types of Share Capital

Share capital is not a homogeneous whole; it covers several different types, each with distinct characteristics and meaning for the financial well-being of a company. Knowledge of these differences is vital to entrepreneurs as well as investors, and as a business owner, you must be aware of a few undertones in these concepts. Financial investors, MSME entrepreneurs and fund managers often deal with share capital in their regular course of business. However, the knowledge of the different types of shareholder’s capital is crucial for any investor or business owner to have. Here are the most common types of share capital to know:

Authorized Share Capital

Authorized share capital refers to the maximum number of shares which a company may issue to its shareholders as per the Memorandum of Association. It is also known as registered or nominal shareholder’s capital. One must understand that an authorized share is not the same as capital although they are used as interchangeable terms. An authorized share refers to the maximum number of shares that can be issued, while capital or paid-up capital refers to the capital raised by funding. For example, a startup firm raises a capital of ₹40 lakhs as a capital. Its authorized capital can be ₹1 crore, but never less than ₹40 lakhs.

Issued Share Capital

An issued share capital directly refers to the total shares out of authorized capital which a company has allocated to the investors. The issued share determines the actual structure of the company and the overall capital allocation. Any investor when looking to invest in a company’s shares, will be first looking at the issued capital structure.

Paid-up Share Capital

Paid-up capital refers to the capital that the company has issued from its issued capital to its shareholders. Paid-up capital shows the actual distribution of shares and which inverter has held more or less shares of the company. The paid-up capital means that the company has sold its shares to the investors, and not borrowed. This is the reason why paid-up capital is treated as an asset rather than a liability, as it refers to funding the company has received.

Unpaid Share Capital

This is another important concept among various kinds of share capital. This type of shareholder’s capital is not yet issued to the shareholders for a variety of reasons. There may be multiple reasons such as delay in payments or even lower number of investors interested.

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Called-up Share Capital

This capital is similar in concept to paid-up share but still is different in its actual weaning. A called-up capital directly means the amount of shares that are outstanding from the shareholders. This is the reason it’s called capital, as it is the amount of share capital that the company has “called up” for its shareholders to pay. .

Reserved Share Capital

Reserved share is solely raised for meeting any financial contingencies. This type of share capital is not allowed by any shareholder to be used unless there is a strong financial calamity which the company may deal with. Sometimes reserved share capital is also used to raise more capital funding, and is utilized for the company’s flexibility and growth.

Equity Share Capital vs Preference Share Capital

Now, we turn to the most important concepts in the context of shareholder’s capital - equity share capital and preference share capital. In the bibliography of shares and finance, these two concepts are the primary ones to denote. Let’s understand their inherent characteristics, ownership and differences below.

Get to know further in details about the main difference between equity and preference share.

Now that we have talked about the differences between equity shares and preference shares, let’s understand how share capital is shown in the balance sheet.

Share Capital in Balance Sheet

*Please note that the figures in this balance sheet are fictitious and do not resemble any real-life accounting records of any company.

Conclusion

Getting to understand share capital is the first step for any business owner or an investor. Shareholder capital is a vital part of a company’s financial structure, as it influences a company’s ability to raise capital by attracting more potential fundraisers. If a company is looking for better financial clarity and wants to improve its investment structure, knowledge of these financial concepts is the primary requirement. For example, your business can make sound financial decisions to increase more equity share if it has the correct understanding of the terms and their applications.

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