1.

Meaning of Capitalisation:
Capitalisation is one of the most
important constituents of financial
plan. The term "Capitalisation" has
been derived from the word capital
and in common practice it refers to
the total amount of capital employed
in a business. However, financial
scholars are not unanimous
regarding the concept of capital.
Gilbert Harold refers to
capitalisation as any of the
following concepts:

(i) The total par value of all the

securities -shares and debentures
outstanding at a given time.

(ii) The total par value of all the

securities outstanding at a given time
plus the valuation of all other long-
term obligations.
(iii) The total amount of capital and
liabilities of corporation, i.e. amount
of capital stock plus bonds.

Thus, the essence of the above

definitions is that capitalisation is the
sum total of long-term securities
issued by a company and the surplus
not meant for distribution.

2. Modern Concept of
Capitalisation:
Though the narrower interpretation
of capitalisation is more popular
because of its being very specific in
the meaning, the modern thinkers
consider that even short-term
creditors should be included in
capitalisation.
In the words of Walker and Baughn,
"The use of capitalisation refers to
only long-term debt and capital
stock; and short-term creditors do
not constitute suppliers of capital
is erroneous. In reality total
capital is furnished by short-term
creditors and long-term creditors."

They further opine that the sum of

capital stock and long-term debt-
refers to capital rather than the
capitalisation.

Thus, according to modern

concept, capitalisation includes:

(i) Share Capital

(ii) Long-term Debt.

(iii) Reserves and Surplus.

(iv) Short-term Debt.

(v) Creditors.

3. Need of Capitalisation:
The need of capitalisation arises not
only at the time of incorporation or
promotion of a company but may
also arise as a going concern after
promotion and during the life time of
a corporation.
t. "Fair Capitalisation:

lt is the desire of every company to

have a fairly capitalised situation, i. e
neither over-capitalisation nor
under-capitalisation. To understand
this situation, it would be necessary
for us to understand and analyse the
situations of over and under-
ca-pitalisation of a company.