Looking to alter or raise the Authorised Share Capital of your company? Then check out this article to understand the concept of share capital, various types of share capital, types of alteration of share capital and more related insights.
Alteration of Share Capital
A company’s share capital may be changed in a general meeting in the following ways, if permitted by its charter: By issuing additional shares, increase share capital. Any fully paid up shares can be converted into stock. Stock should be converted into fully paid up shares.
What Is Share Capital?
As per the Companies Act, 2013, share capital can be defined as the total amount raised or received by the company by offering ‘common stock’, ‘equity stock’, or ‘equity share capital’ (OR) ‘preferred stock’, ‘preference stock’, or ‘preference share capital’. These different types of shares can be issued either through a public offering known as an initial public offering (IPO) and follow-on public offer (FPO) or a private offering known as ‘private placement’. In accounting terminology, the ‘units of stock’ are known as “shares”.
In simple words, share capital is nothing but the amount received by the company on the account of the ‘sale of shares’. This share capital changes or alters over time through FPO and other additional offerings or buy-back of shares by the company. The alteration of share capital is a much wider term than the reduction of share capital since it includes both an increase and decrease in the share capital of the company.
One has to note that the company cannot issue the shares beyond the limit of ‘authorised share capital’. This is the maximum amount of share capital the company can issue. However, the authorised capital can be altered or raised by the company provided it followed the procedure for alteration of share capital and other relevant legal procedures.
This also includes alteration of AoA, MoA, and filing of various forms with ROC. Now you can seamlessly and quickly increase your company’s authorised share capital at ease with the help of experts and legal professionals at Vakil Search.
Understanding Share Capital
The share capital amount raised by the company comprises two vital components:
- Face Value
- Share Premium
The ‘face value’ or ‘par value’ is the nominal amount at which the stock sales are reported or accounted for in the ‘Balance Sheet’. Generally, one nominal share amount in India varies based on the company and its nature such as ₹5, ₹10, or even ₹100, etc. This is the original price of the share.
The ‘share premium’ or ‘additional paid-in capital’ is the excess amount of par value paid by the investors to the company. This is also known as capital in excess of par or ‘securities premium’. This securities premium account is reported in the Balance Sheet under the shareholders’ equity section.
Let’s look into easy example #1 to understand the share capital components:
XYZ Co. Issued 10,000 shares at the issue price of ₹50 per share where the face value is ₹10 per share. Ascertain the total amount of share premium.
Here, Issue Price = Par Value Share Premium (₹50 = ₹10 ₹40)
Share capital = Total number of outstanding shares x issue price per share. (10,000 shares x ₹50 per share = ₹5,00,000)
Therefore, the total amount of securities or share premium results in (10,000 shares x ₹40 per share = ₹4,00,000)
The nominal value of share capital reported in the balance sheet will remain unchanged irrespective of any market price fluctuations and only will change during FPO which increases the overall capital.
Types of Share Capital
- Authorised Share Capital: It is the maximum ceiling limit beyond which the company cannot issue shares without the alteration of share capital. Also called ‘registered capital’ or nominal capital’, this is the total of issued and unissued shares
- Issued Share Capital: A part of ‘authorised capital’ that is issued or offered to the investors
- Unissued Share Capital: As the name suggests, it is the capital that is still unissued and over time the company issues this to raise capital
- Subscribed Capital: It is part of ‘issued capital’ that is fully subscribed by the public. If the issued capital = 12,000 shares, then the subscribed shares can be 10,000 shares as per the above-mentioned example #1
- Called-Up Capital: It is the part of ‘subscribed capital’ that is called up by the company from investors in instalments. The capital that is still not called is known as ‘uncalled share capital’, which is the contingent liability of the shareholder
- Paid-Up Capital: A portion of ‘called-up capital’ that is paid by the shareholder to the company
- Reserve Share Capital: This is the special type of share capital that is only to be sold on the occasion of liquidation and bankruptcy. These shares make liquidation easier and have various restrictions attached to them
- Other types such as ‘fixed and circulating share capital’.
Share Capital on a Balance Sheet
| Balance sheet | |
| Liabilities | Amount in (₹) |
| Shareholders’ Equity – | |
| Common Stock or Equity Share Capital, ₹10 face value (assume 1,00,000 shares as authorised capital, 10,000 shares issued) ~ issue price @ ₹50 | 1,00,000 |
| Preference stock or Preference Shares, 5,000 shares issued (here, both face value and issue price @ ₹20) | 1,00,000 |
| Securities Premium or additional Paid-In capital | 4,00,000 |
| Retained earnings (Profit Amount) assume as – | 2,00,000 |
From the above table of the balance sheet; one can observe that common stock and preferred stock are reported in the balance sheet at the ‘par value’. However, here the preference shares have the same face value and issue price. So, when both example #1 mentioned above and this balance sheet are observed together, the securities premium includes only the ‘capital in excess of par’ of equity shares.
Types of Alteration of Share Capital
According to the relevant provisions of the Companies Act, 2013, the company which is deciding to alter its share capital can do it in a different number of ways by following the procedure for alteration of share capital and other relevant procedures. Below are some of how the company can alter its share capital:
- Increase in ‘authorised share capital’ by issuing fresh shares, which involves a lot of legal procedures, filing of forms with ROC, etc. Now experience the hassle-free and quick way of increasing your company’s authorised share capital with the aid of an expert legal team and business advisors only at Vakilsearch
- Consolidation and sub-division of share capital
- Cancellation of share capital
- Conversion of share capital
Conclusion
This is all you need to know about the concept of share capital, types, accounting of SC in the balance sheet, and different ways to alter the share capital. Over time the share capital changes with debentures, bonds, buy-back of shares, etc. The basic journal entry for the issue of shares and paid-up capital includes cash/bank as debit and share capital account as a credit.
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