Share Capital of a Company

A company is an artificial person — it cannot earn its own capital the way a natural person can. Instead, it must raise funds from many individuals. These individuals are called shareholders, and the total amount they contribute is the share capital of the company.

Because the number of shareholders is very large, it is impossible to open a separate capital account for each one. All the individual contributions are merged into a single account called the Share Capital Account.

Categories of Share Capital

From an accounting perspective, share capital is classified into the following categories:

• Authorised Capital: This is the maximum amount of share capital a company is legally allowed to issue, as stated in its Memorandum of Association. The company cannot raise more than this amount. It is also called Nominal Capital or Registered Capital. The authorised capital can be increased or decreased only by following the procedure laid down in the Companies Act. Importantly, a company does not have to issue the entire authorised capital at once; it can issue only what it needs, but never more than this limit.

• Issued Capital: This is the part of the authorised capital that the company actually offers to the public for subscription. It also includes shares allotted to vendors (in exchange for assets) and to the signatories of the company’s memorandum. The portion of authorised capital that is not offered to the public is called Unissued Capital. Unissued capital can be offered for subscription at a later date.

• Subscribed Capital: This is the part of the issued capital that the public has actually agreed to take (subscribed for). If the public subscribes to all the shares offered, issued capital and subscribed capital are the same. Subscribed capital can be equal to or less than issued capital. If fewer shares are subscribed than offered, the company allots only the number subscribed. If more are subscribed (oversubscription), the company allots only the number it offered — the fact of oversubscription is not recorded in the books.

• Called-up Capital: This is the part of the subscribed capital that the company has asked shareholders to pay. The company may call the entire face value or only a part of it. For example, if a share of face value ₹10 is allotted and the company has called up only ₹7 per share, the called-up capital is ₹7 per share. The remaining ₹3 can be collected later as needed.

• Paid-up Capital: This is the portion of the called-up capital that has actually been received from shareholders. If all shareholders have paid the called amount, paid-up capital equals called-up capital. If some shareholders have not paid, that unpaid amount is called Calls in Arrears. Therefore:

  Paid-up Capital = Called-up Capital – Calls in Arrears

• Uncalled Capital: That portion of the subscribed capital which has not yet been called up. The company may call this amount at any time when it needs further funds.

• Reserve Capital: A company may decide that a portion of its uncalled capital can be called up only in the event of the company being wound up. This is called Reserve Capital. It is available only for the creditors on winding up and cannot be called earlier.

The relationship between these categories can be shown as:

• Authorised Capital divides into Issued Capital and Unissued Capital.
• Issued Capital divides into Subscribed Capital and the unsubscribed portion of issued capital.
• Subscribed Capital divides into Subscribed but not fully paid up and Subscribed and fully paid up.

Illustration: Balance Sheet Presentation

Let us take the example of Sunrise Company Ltd., New Delhi.

• Authorised Capital: ₹40,00,000 divided into 4,00,000 shares of ₹10 each.
• Issued Capital: 2,00,000 shares of ₹10 each (₹20,00,000) offered to the public.
• Payment terms: ₹2 on application, ₹3 on allotment, ₹3 on first call, and the balance on final call.
• Subscription: Applications received for 2,50,000 shares. The company allotted 2,00,000 shares and rejected 50,000 applications.
• Calls made: The company did not make the final call. So, called-up amount per share = ₹2 + ₹3 + ₹3 = ₹8. …