Starting a business in India, whether it is a small shop in a town or a large factory in a city, requires money. When a company grows, it often needs more funds than what the original owners can provide. This is where the stock market and public funding come into play. What is share capital? In simple terms, it is the money a company raises by issuing shares to individuals or institutions.
In the Indian context, the money raised by firms from NSE or BSE listing can be used to develop their business, settle their debts, or construct new facilities. An investor investing the money becomes a part-owner of the firm. The definition of share capital should be known by any person who intends to join in the Indian success story.
KEY TAKEAWAYS
- Share capital represents the total amount of money raised by a company through the sale of equity shares.
- It is a form of long-term funding that does not need to be repaid like a bank loan.
- Companies must register the maximum amount they can raise with the Registrar of Companies (ROC).
- Shareholders receive ownership rights and potential dividends in exchange for their capital.
What is Share Capital?
In order to understand share capital, you should picture yourself looking at a big cake that symbolises the entire value of the firm. Suppose that if the firm requires ₹10 lakhs to operate, then this cake will be cut into 1 lakh slices each costing ₹10. Now, when individuals purchase these pieces, the money raised through them forms share capital.
As per the Companies Act, 2013, which applies to all firms in India, this capital is considered a continuous form of financing. This means that, unlike a loan taken from banks such as SBI or HDFC, no interest is to be paid on this capital. The profit earned by the company will be divided among the contributors.
How Share Capital Works
It all starts with the business identifying that they require funds from the general public. This is done through filing an application with the Securities and Exchange Board of India (SEBI), allowing them to conduct an IPO.
When an investor buys these shares, the money moves from the investor’s bank account to the company’s capital account. In return, the investor gets shares credited to their demat account — a digital account used to hold shares in India. The company then uses this “pool” of money to run its business.
Why do Companies raise Share Capital?
There are several reasons why a company might prefer raising money through shares rather than taking a loan:
- No Debt Burden: Since this is not a loan, there is no obligation to pay fixed monthly interest, which helps during tough business cycles.
- Expansion: Companies use these funds to enter new markets, like a South Indian retail chain opening stores in North India.
- Research and Development: It provides the “risk capital” needed to develop new products or technology.
- Credibility: Having a large share capital base often makes a company look more stable to suppliers and customers.
Types of Share Capital
In the Indian accounting system, there are different kinds of share capital based on their stage of legal registration and payment. Understanding these types of share capital is crucial for reading a company’s balance sheet correctly.
1. Authorised Share Capital
It is the maximum share capital which can be issued by the company to its members. This amount is specified in the Memorandum of Association (MoA) of the company. If the authorised capital of a company is ₹50 crore, then it cannot issue ₹60 crore without prior approval of the ROC.
2. Issued Share Capital
A company may not need all the money at once. Issued capital is the portion of the authorised capital that the company actually offers to the public for subscription. For example, if the limit is ₹50 crore, the company might choose to issue only ₹30 crore worth of shares today.
3. Paid-Up Share Capital
This is the most important figure. It represents the actual amount of money that has been paid by the shareholders to the company. Sometimes, people subscribe to shares but have not yet paid the full amount. In India, most shares in the modern market are “fully paid-up” at the time of the IPO.
4. Called-Up Share Capital
This is the amount of money that the company has requested from shareholders to pay for the shares they have subscribed to. In the past, companies used to collect money in instalments (Application, Allotment, and Calls). Today, this is less common for retail investors but still exists in corporate structures.
5. Reserve Share Capital
It is a part of the uncalled capital which the firm sets aside with the passage of a special resolution. This amount is allowed to be “called up” when the firm either winds up or shuts down its operations.
6. Equity Share Capital
These are ordinary shares. People who hold these shares have voting rights and are the real owners of the company. They take the highest risk but also stand to gain the most if the company grows.
7. Preference Share Capital
As the name suggests, these shareholders get “preference.” They receive dividends (a share of the profit) before equity shareholders. However, they usually do not have voting rights in the company’s daily meetings.
Features of Share Capital
- Permanence: Except in specific cases like a “buyback” — where the company buys its own shares back from the market — this capital stays with the company forever.
- Risk-Bearing: It is the “buffer” for a business. If the company fails, shareholders are the last to get paid after all debts are cleared.
- Dividends: While not guaranteed, companies typically reward capital providers by sharing a portion of their annual profits.
- Transferability: In India, you can easily sell your shares to someone else on the NSE or BSE, making your investment “liquid” or easy to convert to cash.
How to calculate share capital?
Share capital calculations can easily be done using two basic pieces of information, namely, the number of shares and the face value of the share (cost price of one share from the accounting books).
The formula used is:
Total Share Capital = Number of Shares Issued × Face Value per Share
For instance, if a company in Mumbai issues 5,00,000 equity shares and the face value mentioned in its documents is ₹10 per share:
Share Capital = 5,00,000 × ₹10 = ₹50,00,000
It is important to note that the “Market Price” of the share (which changes every second on the NSE) is different from the “Face Value” used to calculate the share capital on the balance sheet.
Why Share Capital Matters
For an investor, the size and nature of a company’s share capital reveal its health. A company with a very large capital base might find it harder to give high “Earnings Per Share” (EPS), which is the profit divided by the number of shares.
On the other hand, a company that raises capital through equity instead of debt is generally seen as safer. During an economic slowdown, a company with no interest payments can survive much longer than one burdened by heavy bank loans.
Factors affecting the share capital of a company
- Market Conditions: Companies prefer raising capital when the stock market is doing well, as investors are more willing to buy shares.
- Government Policy: Changes in SEBI regulations or the Companies Act can make it easier or harder to issue new shares.
- Company Performance: A company with high profits can easily attract more kinds of share capital from big institutional investors.
- Expansion Plans: If a company plans a massive project, such as a new solar power plant, it will likely increase its authorised and issued capital to fund the project.
Conclusion
Knowledge about share capital helps one understand more about business growth and wealth creation in the Indian economy. Share capital makes it possible for companies to expand and gives citizens an opportunity to join the growing business in India. With knowledge of various share capitals, you can analyse and judge the companies that you hear about on TV and your investment applications.
FAQs on share capital
Yes, for the most part. In an ordinary conversation, “share capital” and “equity” are used synonymously. But then, on a balance sheet, there is also the category of “Equity,” which includes “Reserves and Surplus” along with share capital.
No, a company cannot simply “withdraw” its share capital and give it back to its owners whenever it wants. To return capital, the company must follow a legal process called a “Capital Reduction” or a “Buyback,” which requires SEBI and court approvals in many cases.
No. Share capital is money coming in from outside (investors). Retained earnings are profits that the company made from its business and decided to keep for future use instead of paying them out as dividends.
Yes, a company can issue more shares through a “Rights Issue” (offering shares to existing owners) or a “Follow-on Public Offer” (FPO) for the general public. They just need to ensure they stay within their authorised capital limits.
Indeed, this is the real amount of money that comes into the company’s account as a result of selling the shares for the first time. This money will be used for acquiring assets or covering the expenses of running the business. It is always prudent to seek advice from an expert when making investment decisions.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommended.
