SHARE CAPITAL

Introduction
In the post-pandemic era, there is a significant increase in retail investments in
connection with the financial markets. The return from equity instruments tends to
outperform any other investment avenues. Within equity instruments, there are
various alternatives available to investors. The most common source of equity
investment is share capital.

The shareholders of a company invest in the company. The maximum liability of the
shareholders is capital investment. In return, shareholders attain voting rights to
company matters. The shareholders also appoint the board of directors.
Additionally, shareholders earn returns by way of dividends and capital
appreciation. There are various types of share capital based on the rights and
obligations offered to the investors.

Share capital, often referred to as equity capital or stock capital, is a fundamental

concept in the world of corporate finance and business. It represents the total value
of ownership stakes in a company, typically divided into shares, which are sold to
investors. Share capital serves as a primary source of funding for a company's
operations, investments, and growth. In this explanation, we'll delve into the
meaning of share capital, its components, and its significance in corporate
ownership and financing.

MEANING OF SHARE CAPITAL-

The Share capital definition refers to the funds raised by an entity to issue shares to
the general public. Simply put, share capital is the money contributed to a firm by
its shareholders. It is a long-term capital source and facilitates smooth operations,
profitability, and financial growth.

Primarily, capital represents the assets used to carry on a business. Alternatively, it

may be the resources required to launch a venture. The terms capital and share
capital are interchangeable. In the Indian Companies Act, share capital refers to a
company's percentage of capital or interest.

Share capital is the total value of all shares issued by a company and held by its
shareholders. Each share represents a portion of ownership in the company, and
the ownership rights and privileges associated with those shares depend on the
type of shares held (e.g., common shares or preferred shares).
Kinds of Share Capital
Section 43 of the Companies Act, 2013 defines Kinds of Share Capital.

The share capital of a company limited by shares shall be of two kinds, namely:

Equity Share Capital

Equity share capital with reference to any company limited by shares means all
share capital which is not preference share capital. It refers to the portion of the
company’s money which is raised in exchange for a share of ownership in the
company.

Common equity refers to share capital raised with the issuance of ordinary
shares. Equity share capital extends a share in profits and voting rights to the
shareholders. However, the company is under no obligation to pay dividends.
Additionally, the company may offer bonus shares or right issues to its common
shareholders.

Preference Share Capital

Preference shares are one of the special types of share capital having fixed rate
of dividend and they carry preferential rights over ordinary equity shares in
sharing of profits and also claims over assets of the firm People who buy
preferential share capital gets priority in dividend declaration and at the time of
winding up they are the first people to receive money. They have right to vote
only when the matter directly or indirectly affects them.

Preference share capital with reference to any company limited by shares,

means that part of the issued share capital of the company which carries or
would carry a preferential right with respect to:

1. Payment of dividend, either as a fixed amount or an amount calculated

at a fixed rate, which may either be free of or subject to income-tax;
and
2. Repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum
or articles of the company.
Types of Share Capital
1. Authorized Share Capital
Authorized share capital refers to the maximum number of shares a company may
issue. The Memorandum of Association limits the authorized capital to a fixed
amount. Authorized share capital is more than the total outstanding shares.

A company may increase its authorized capital for several reasons, such as
acquiring another company or employee stock options. Any change in the
authorized capital requires shareholder approval since an increase in the authorized
capital may shift the balance of power between the shareholders and other
stakeholders.

2. Unissued Share Capital

Unissued shares still need to be issued to the general public or employees.
Unissued stock forms part of the company's treasury and does not impact the
shareholders. The Board of Directors controls unissued shares. Unissued shares are
not tradeable in the secondary market.

Most companies hold a significant percentage of their unissued shares. The value of
unissued share capital is low. The objective is to sell or allocate unissued shares at
a premium in the future. The company may use unissued stock to pay off debt or to
raise money for new investments. Directors may even allocate unissued shares to a
minority shareholder if necessary.

3. Issued Share Capital

Issued share capital is the number of shares a company issues to its shareholders.
Issued share capital is a mix of common equity shares and preferred capital.

It is a major component of the shareholder's funds under the liabilities of a balance

sheet. Also, analysts use issued capital to evaluate the worth of common equity
stock. For example, ABC Ltd issues thousand shares with a face value of Rs. 10.
The company issues the shares for Rs. 15 per share. Therefore, ABC Ltd. raises Rs.
10,000 from the initial sales of shares. Rs. 5,000 is surplus and constitutes the
company's reserves.

4. Subscribed Capital
A company's authorized share capital is equal to its registered capital. A fraction of
the issued capital is the subscribed capital. Shareholders promise to purchase or
subscribe to a company's shares. The payment of subscribed share capital may be
in instalments.
Subscribed capital represents the portion of a company's issued capital accepted by
the public. The public shows interest in a company by way of a subscription. A
company can only issue part of the share capital in one instance.

It may issue additional shares over time. Moreover, the company may only require
payment of part of the share's entire face value.

5. Paid-Up Capital
Paid-up capital is investment received by a company from a share issue. Typically,
a company issues fresh capital to raise funds. Fresh share capital constitutes the
company's paid-up capital. As per the Companies Act 2013, the minimum paid-up
capital requirement is Rs. 1 lakh.

Paid-up Capital is essential for fundamental analysis. A company with a low paid-up
capital may have to rely on debt to finance its operations. Conversely, high paid-up
capital signifies less reliance on borrowed funds.

6. Called-Up Capital
Called-up Capital is the subscribed capital section that consists of the shareholder's
payment. The balance sheet separately captures called-up capital under the
shareholders' equity. Called-up capital is useful for companies with unforeseen or
emergency fund requirements.

On issuance of shares, the company calls upon its shareholders to pay a part of the
capital. Thus, called-up capital offers more flexibility in the investment and payment
terms.

7. Reserve Share Capital

Reserve capital refers to share capital that a company cannot access except in case
of bankruptcy. The company can issue reserve share capital only with a special
resolution. Moreover, a company cannot modify the articles of association to issue
reserve share capital. The purpose of reserve share capital is to make liquidation
easier. Reserve capital represents the company's emergency funds and is subject to
multiple restrictions.

8. Uncalled Share Capital

Uncalled share capital is shares issued but not claimed. Uncalled share capital
appears in the company's contingent liabilities. It represents the balance amount
after the adjustment of the called-up capital from the total shares allotted.
Advantages of Raising Share Capital
a. Fixed Cost – Contrary to debt instruments, share capital restricts the
company's fixed cost. While the company must pay interest on loans or fixed
instruments, the dividend payment is voluntary.

b. Creditworthiness – Investors and lenders prefer companies with a minimum

level of share capital. Share capital signifies financial security. An overly leveraged
company may raise concerns for liquidity or stability.

c. Financial Flexibility - Share capital allows companies flexibility and discretion

for fund usage. However, lenders may prescribe certain conditions to use capital.
Companies also have a prerogative over issued capital and the share's nominal
value. They may raise additional funds in the future.

d. Default Risk - Share capital increases confidence level concerning default or

bankruptcy. Shareholders have an inherent interest in the company's overall
success and function in the company's best interest.

Disadvantages of Raising Share Capital

a. Control and ownership – Share capital bequeaths voting rights to investors.
Hence, it reduces the control and ownership of founders.

b. Share dilution – An additional share issue may dilute the cost of existing
shareholders. It will also affect dividend payments and voting rights.

c. Public Disclosure – Public companies are subject to extensive compliance and

reporting requirements. Also, it provides more access to the public about the
company's finances.

d. Shareholder Risk – An increase in the nominal value of shares increase the

shareholder's future limited liability. It is significant, especially in case of liquidation
or winding up.

e. IPO cost – The cost of an initial public offering is extremely high. It involves
the preparation of a prospectus, underwriting cost, finance, legal fees, listing
charges, and advertising.
 PROCEDURE FOR THE ALLOTMENT OF
SHARES:
1. Preparation of Prospectus or Offer Document: Before the allotment process begins,
the company must prepare a prospectus or offer document containing all the necessary
information about the company, the shares being offered, and the terms and conditions
of the offer. This document is made available to potential investors.
2. Receiving Applications: Interested investors submit their applications for shares.
Applications can be received online or through physical forms, depending on the
company's chosen method of share subscription.
3. Application Processing: The company collects and reviews all received applications.
During this process, the company may verify the eligibility and compliance of the
applicants with the company's share subscription criteria.
4. Determination of Allotment: Once the application period is closed, the company's
management, typically the board of directors, decides the allocation of shares. They
consider various factors, including the number of shares applied for, the total number of
shares available, and any allocation preferences as mentioned in the prospectus (e.g.,
preferential allotment to employees or existing shareholders).
5. Allotment Letters: The company then prepares allotment letters or refund orders.
Allotment letters are sent to successful applicants, confirming the number of shares
allocated to them. Refund orders are sent to those whose applications have been
rejected, along with a refund of the application money.
6. Refunds: For those who have not been allocated shares, the company must refund the
application money within a specified time frame, as mentioned in the prospectus.
7. Listing and Trading: If the company is going public through an IPO, the allotted shares
are then listed on a stock exchange. This allows investors to start trading the shares on
the secondary market.
8. Communication and Reporting: The company must communicate the allotment
results to the stock exchange and regulatory authorities, as required by the law. This
includes disclosing information about the number of shares allotted, the issue price, and
the utilization of the proceeds.
9. Share Certificates or Demat Accounts: Share certificates are issued to allottees in the
case of physical shares. In the case of dematerialized shares (held electronically), the
shares are credited to the investors' demat accounts.
10. Payment of Balance Amount: Successful applicants are required to pay the balance
amount (the difference between the application price and the final issue price) as per
the allotment letter's instructions.

SHARES WITHOUT MONETARY

CONSIDERATION
Shares issued without monetary consideration are often referred to as "shares
issued for non-cash consideration." These shares are issued in exchange for assets
or services other than money. Companies may issue such shares for various
reasons, including the acquisition of assets, settling debts, or compensating
employees or service providers. Here's an overview of how shares without
monetary consideration are typically issued:

1. Identify Non-Cash Consideration: The first step is to determine the non-monetary

consideration that will be exchanged for shares. This consideration can take various
forms, such as tangible assets (e.g., real estate or machinery), intangible assets (e.g.,
intellectual property or patents), services, or the cancellation of debts.
2. Valuation: The company needs to determine the fair value of the non-cash
consideration. This valuation is crucial because it will be used to determine the number
of shares to be issued. The valuation method may be specified by accounting standards
or regulatory authorities.
3. Board Approval: The company's board of directors or shareholders must approve the
issuance of shares for non-cash consideration. This approval should be documented in
board resolutions or meeting minutes.
4. Agreement: A formal agreement should be drafted outlining the terms and conditions
of the share issuance. The agreement should specify the nature of the non-cash
consideration, its fair value, the number of shares to be issued, and any other relevant
terms.
5. Valuation Report: A valuation report may be required, especially for significant non-
cash transactions. This report, prepared by an independent valuer, provides a detailed
assessment of the fair value of the non-monetary consideration.
Conclusion
Share capital is the par value of a company's asset. The sale of shares to the
general public generates funds for the business and is a primary source of capital
finance. However, the issue of shares has its pros and cons. Therefore, companies
must carefully evaluate all possible alternatives while making financing decisions.

This article sums up the basic need to issue share and raising capital and its
importance in a company. Every business organization needs funds for its
business activities. It can raise funds either internally or through external
sources. It can further be concluded that issuing share and raising capital is an
integral part of any business/company. It not only helps in getting investment
from investors/shareholders but also helps the company in re-investing in itself.
It can be seen that when a company is in sound position it can take care of its
employees, directors & shareholders and motivate them to do better.