Share Capital
Share Capital
Share Capital
Introduction
In the post-pandemic era, there is a significant increase in retail investments in
connection with the financial markets. The return from equity instruments tends to
outperform any other investment avenues. Within equity instruments, there are
various alternatives available to investors. The most common source of equity
investment is share capital.
The shareholders of a company invest in the company. The maximum liability of the
shareholders is capital investment. In return, shareholders attain voting rights to
company matters. The shareholders also appoint the board of directors.
Additionally, shareholders earn returns by way of dividends and capital
appreciation. There are various types of share capital based on the rights and
obligations offered to the investors.
Share capital is the total value of all shares issued by a company and held by its
shareholders. Each share represents a portion of ownership in the company, and
the ownership rights and privileges associated with those shares depend on the
type of shares held (e.g., common shares or preferred shares).
Kinds of Share Capital
Section 43 of the Companies Act, 2013 defines Kinds of Share Capital.
The share capital of a company limited by shares shall be of two kinds, namely:
Common equity refers to share capital raised with the issuance of ordinary
shares. Equity share capital extends a share in profits and voting rights to the
shareholders. However, the company is under no obligation to pay dividends.
Additionally, the company may offer bonus shares or right issues to its common
shareholders.
A company may increase its authorized capital for several reasons, such as
acquiring another company or employee stock options. Any change in the
authorized capital requires shareholder approval since an increase in the authorized
capital may shift the balance of power between the shareholders and other
stakeholders.
Most companies hold a significant percentage of their unissued shares. The value of
unissued share capital is low. The objective is to sell or allocate unissued shares at
a premium in the future. The company may use unissued stock to pay off debt or to
raise money for new investments. Directors may even allocate unissued shares to a
minority shareholder if necessary.
4. Subscribed Capital
A company's authorized share capital is equal to its registered capital. A fraction of
the issued capital is the subscribed capital. Shareholders promise to purchase or
subscribe to a company's shares. The payment of subscribed share capital may be
in instalments.
Subscribed capital represents the portion of a company's issued capital accepted by
the public. The public shows interest in a company by way of a subscription. A
company can only issue part of the share capital in one instance.
It may issue additional shares over time. Moreover, the company may only require
payment of part of the share's entire face value.
5. Paid-Up Capital
Paid-up capital is investment received by a company from a share issue. Typically,
a company issues fresh capital to raise funds. Fresh share capital constitutes the
company's paid-up capital. As per the Companies Act 2013, the minimum paid-up
capital requirement is Rs. 1 lakh.
Paid-up Capital is essential for fundamental analysis. A company with a low paid-up
capital may have to rely on debt to finance its operations. Conversely, high paid-up
capital signifies less reliance on borrowed funds.
6. Called-Up Capital
Called-up Capital is the subscribed capital section that consists of the shareholder's
payment. The balance sheet separately captures called-up capital under the
shareholders' equity. Called-up capital is useful for companies with unforeseen or
emergency fund requirements.
On issuance of shares, the company calls upon its shareholders to pay a part of the
capital. Thus, called-up capital offers more flexibility in the investment and payment
terms.
b. Share dilution – An additional share issue may dilute the cost of existing
shareholders. It will also affect dividend payments and voting rights.
e. IPO cost – The cost of an initial public offering is extremely high. It involves
the preparation of a prospectus, underwriting cost, finance, legal fees, listing
charges, and advertising.
PROCEDURE FOR THE ALLOTMENT OF
SHARES:
1. Preparation of Prospectus or Offer Document: Before the allotment process begins,
the company must prepare a prospectus or offer document containing all the necessary
information about the company, the shares being offered, and the terms and conditions
of the offer. This document is made available to potential investors.
2. Receiving Applications: Interested investors submit their applications for shares.
Applications can be received online or through physical forms, depending on the
company's chosen method of share subscription.
3. Application Processing: The company collects and reviews all received applications.
During this process, the company may verify the eligibility and compliance of the
applicants with the company's share subscription criteria.
4. Determination of Allotment: Once the application period is closed, the company's
management, typically the board of directors, decides the allocation of shares. They
consider various factors, including the number of shares applied for, the total number of
shares available, and any allocation preferences as mentioned in the prospectus (e.g.,
preferential allotment to employees or existing shareholders).
5. Allotment Letters: The company then prepares allotment letters or refund orders.
Allotment letters are sent to successful applicants, confirming the number of shares
allocated to them. Refund orders are sent to those whose applications have been
rejected, along with a refund of the application money.
6. Refunds: For those who have not been allocated shares, the company must refund the
application money within a specified time frame, as mentioned in the prospectus.
7. Listing and Trading: If the company is going public through an IPO, the allotted shares
are then listed on a stock exchange. This allows investors to start trading the shares on
the secondary market.
8. Communication and Reporting: The company must communicate the allotment
results to the stock exchange and regulatory authorities, as required by the law. This
includes disclosing information about the number of shares allotted, the issue price, and
the utilization of the proceeds.
9. Share Certificates or Demat Accounts: Share certificates are issued to allottees in the
case of physical shares. In the case of dematerialized shares (held electronically), the
shares are credited to the investors' demat accounts.
10. Payment of Balance Amount: Successful applicants are required to pay the balance
amount (the difference between the application price and the final issue price) as per
the allotment letter's instructions.
This article sums up the basic need to issue share and raising capital and its
importance in a company. Every business organization needs funds for its
business activities. It can raise funds either internally or through external
sources. It can further be concluded that issuing share and raising capital is an
integral part of any business/company. It not only helps in getting investment
from investors/shareholders but also helps the company in re-investing in itself.
It can be seen that when a company is in sound position it can take care of its
employees, directors & shareholders and motivate them to do better.