Are you going to raise share capital for your company? If so, this article will be helpful for you as you will know many important aspects of raising share capital.
Overview:
Share capital refers to the total value of shares a company is authorized to issue as per its memorandum of association. It represents the equity capital contributed by shareholders in exchange for ownership in the company. Authorized share capital is the maximum amount of capital a company is allowed to raise by issuing shares, as specified in its articles of association. This figure, determined during the company’s incorporation, can be altered with shareholder approval. While authorized share capital establishes the upper limit, issued share capital is the portion sold to investors.
Authorized Share Capital refers to the maximum value of shares that a company is legally allowed to issue to its shareholders. This limit is defined in the company’s memorandum of association and represents the upper boundary for fundraising through equity. Essentially, it signifies the maximum amount of capital that the company can generate by selling its shares to investors.
Authorised Share Capital
The total amount of money a company raises by diluting or selling its share to other individuals or a group of people. In simple words, if shares are defined as the ownership of a company, then are known as the total value of the shares issued by a company. It does not derive its value from the market price. Tells us the actual amount of money used to buy a company’s shares; on the other hand, the market value of that same share can be way higher if those shares are sold.
Features of Share Capital
Some of the features of Authorised Share Capital to be identified and distinguished from other capital are:
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Provide Trust and Reliability
Often companies listed themselves in the stock market to build trust among people to raise money by selling their shares. It provides the most reliable and trusted way of raising funds from the outsider to the company.
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It Remains With the Company
Until liquidation, the share capital remains with the company, and they can use it more for their company’s benefit.
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Shareholders Get Rights
When someone buys shares from a particular company, it also gives them the right to make the company’s management decisions.
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Dividend Payout
The most useful feature of shares is that investors get an amount of the company’s profit in the form of dividends. The amount of dividend depends on the invested amount by the shareholder.
Types of Authorised Share Capital
It is divided into many parts, each with its specialty. The types are:
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Authorized Capital
It is defined as the maximum share capital a company can issue. The authorised capital is always mentioned in the company’s official document presented to shareholders. Sometimes for specific purposes, it can be changed but requires the approval of board members and the investors. If we try to understand with an example, it will be like the authorised capital of a company is ₹1 lakh and the face value of each share is ₹10. So the maximum share capital the company can issue will be 10 thousand.
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Issued Capital
Issued capital is the number of shares issued for the shareholders, but it has a simple rule: the amount of issued capital can not be higher than the authorised capital.
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Subscribed Capital
When a company issues capital, the amount subscribed by the public is known as subscribed capital. So if you try to understand with an example, it will be like if a company issues 1000 shares at each ₹10 face value and the subscribed share is only 500, then the total subscribed capital will be 500*10 equals to ₹5000.
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Called Up Capital
When a shareholder has a number of the share capital of a company but is not paid the whole money but only pays the amount the company has called up, it is called up capital.
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Paid Up Capital
It is the amount the shareholder pays to buy a share of a particular company.
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Uncalled Capital
Uncalled capital is the remaining amount of total capital not called by the company to pay the shareholders.
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Reserve Capital
It is the amount of capital a company reserves when it is not liquidated yet.
Formula and Example of Authorised Share Capital
It can be defined in two ways,
- Share Capital = Total Outstanding Shares * Issued Price of Share
And there is another formula,
- Share capital = ( Total Outstanding Shares* Per Value of each Share) Additional Paid Capital.
Per value can also be introduced as face value, and the additional paid-up is defined as the extra amount paid by the investors to get the share.
One of the examples is,
Company A has issued 1000 shares with per value of ₹10 and Issues for ₹15
- The common Stock will be 1000*10 equals 10000
- In addition, Paid-up capital will be
- 1000*5 equals 5000
- Total Capital will be 10000+5000= 15000
Advantages of Authorised Share Capital
Some of the advantages are:
- No Burden of Monthly Payments
With the help of shares capital companies can raise money whenever they need to without worrying about interest or extra expenses. But in the case of loans, they have to pay installments. Then, if they want, they can distribute the extra profit by dividends to their shareholder.
- They Get More Freedom to use their Capital
When companies raise money through share, they get complete freedom to use the fund as they want. Sometimes even promoters can exit the company by raising share. But most companies use these funds for their growth and future projects.
- There is no Rule for Raising Funds
A company can issue shares at any time when they want, and it can also determine the amount they want to raise. If the company needs very few funds, they can call up only that portion they need.
- Lower Risk
Raising funds through shares is to have very little risk compared to debt. Unlike banks, a shareholder can not force the bank into bankruptcy. But in the case of loans, the company can go bankrupt if it cannot repay its loans.
Disadvantages of Authorised Share Capital
But every policy has advantages and some of the disadvantages are:
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Ownership Reduces
It is one of the main reasons many companies do not want to issue share capital because they lost one part of ownership. This is because each share represents some value to the company; if someone holds the majority of it, they can even remove the company’s owner from the leader position.
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Shareholders Expect Higher Returns
As there is no fixed rate of return, shareholders always want a higher rate of return from the company. In addition, shares are risky assets, so investors try to want as high as they expect.
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It is not Cost-efficient
Raising funds through shares is not an easy process. It involves a lot of processes and expenses. Companies sometimes need to wait months for the green signal before launching their IPO.
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There is no Exemption from Tax
When the company pays dividends to the shareholders, they pay it after paying taxes. But in the case of loans, companies can get a little exception from Tax after paying their installment of loans.
Conclusion
It is the raised money by selling shares to investors. After buying shares, the investor gets a part of the company’s ownership. Many companies issue shares because it has some very good advantages, but some do not want to issue them because of some negative points. However, it depends on the company and its board of directors whether they want to raise or not. Every company has different reasons for issuing or not issuing.
