Capital refers to the amount invested in the company which allows the business to get started and carry on its activities. A joint stock company has capital contributed by a large number of people who are issued share certificates as proof of ownership. This capital is called share capital.
A joint stock company has two important documents- Memorandum of Association and Articles of Association. The Memorandum of Association explicitly states the amount of capital with which the company is registered, the maximum number of shares and the different classes of shares which can be issued.
Different aspects of share capital:
This is also called authorized or registered share capital. This is the maximum capital which a company can raise without altering its Memorandum of Association.
The nominal capital which is mentioned in the Memorandum of Association need not be issued in its entirety. A company may issue shares only to the extent of the capital it actually needs. That part of the authorized capital which is issued to the public for subscription is called issued capital.
It may so happened that the public may not subscribe to the entire issued capital. A part of it may remain unsubscribed. That part of the issued capital which is actually subscribed for by the public is called subscribed share capital.
Called up capital:
A share of a company has a fixed value called the face value. For instance, the face value of a share of X company is Rs. 10. The company may ask for Rs. 5 to be paid up by the shareholder. This amount called up per share multiplied by the total number of shares is the company’s called up share capital. The balance amount can be called at any time by the company.
Paid up capital:
The amount that is called up by the company may not be paid by all the shareholders. That part of the called up share capital of the company which is actually paid up by the shareholders is called paid up share capital.
Share capital may be equity share capital or preference share capital.
Equity share capital:
All shares which have no preferential right regarding payment of dividend or repayment of capital are called equity shares. The capital raised by issuing equity shares is called equity share capital.
Preference share capital:
Those shares which have preferential right regarding payment of dividend are called preference shares. In the event of winding up of the company, the holders of these shares are repaid first. The amount raised by issuing preference shares is called preference share capital.
Preference shares maybe of different kinds:
Issue of shares at a premium: If a company issues shares at a price higher than the face value then the shares are said to be issued at a premium.
Issue of shares at a discount: If a company issues shares at a price lower than the face value then the shares are said to be issued at a discount.
Share capital is vital for starting and running large businesses. By issuing share capital, companies can tap large amounts from members of the public, in the process making them co-owners of the company with limited liability.