Question

Answer the following question.

Explain the classification of share capital.

Answer 1

Meaning of Share Capital:

1. The term capital, in general, means the amount of money invested in a business. It includes not only the money invested at the time of inception of the business firms but also all the money invested subsequently.
2. The capital raised by the company by issuing Equity Shares and Preference Shares is called share capital.
3. Usually, in share capital, the proportion of Equity Shares is more than Preference Shares. The Companies Act uses the term capital in several senses.

The classification of Share Capital
1. Paid-up Capital and Calls in Arrears
2. Issued Capital and Unissued Capital
3. Called up Capital, Uncalled Capital, and Reserve Capital
4. Subscribed Capital or Unsubscribed Capital
5. Authorized Capital

(1) Paid-up Capital and Calls in Arrears:
- The Called-up capital may not be fully paid. Some shareholders may pay only part of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-up capital which is actually paid by the shareholders.
- The remaining part indicates the default in payment of calls by some shareholders, known as Calls in Arrears. In other words, the amount not paid by shareholders is called as Calls in Arrears or Unpaid Calls.

(2) Issued Capital and Unissued Capital:
- Issued Capital is that part of nominal capital which is issued to the public. Companies generally do not issue all its capital at once.
- They issue their capital in installments and so the issued capital is generally less than the nominal capital. It never exceeds the authorized capital.
- Whereas, Unissued Capital is the balance of nominal capital remaining to be issued to the public. The company can issue shares from the unissued capital, in the future.

(3) Called up Capital, Uncalled Capital, and Reserve Capital:
- The Called up Capital is the part of subscribed capital which the company has actually called upon the shareholders to pay.
- Called - up Capital includes the amount paid by the shareholder from time to time on the application, allotment, various calls, etc.
- The remaining part of subscribing capital not yet called up is known as Uncalled Capital. The Uncalled Capital may be converted into Reserve Capital by passing a special resolution.
- Reserve Capital is a capital that a company keeps aside a part of uncalled capital. It can be called up only in case of winding up of the company, to meet the liabilities arising then. It is kept reserved for the Creditors in case of the winding-up of the company.

(4) Subscribed Capital or Unsubscribed Capital:
- Subscribed Capital is that part of the issued capital which is taken up by the public. Sometimes, the public may not take up all the shares that are offered to the public, for a subscription.

- In such a case, the subscribed capital shall be less than the issued capital. If the public subscribe all the shares, it shall be equal to the issued capital
- Unsubscribed Capital is that part of the issued capital which is not allotted to the public.
- The unsubscribed capital is also known as Treasury shares, which are shares held by the corporation itself and have no exercisable rights.

(5) Authorised Capital:
- This is the amount of capital stated in the capital clause of the Memorandum of Association. It is also known as "Nominal Capital" or "Registered Capital".
The company is entitled to raise finance by the issue of shares only up to the amount of authorised capital. However, the company can increase the amount of authorized capital by altering the Memorandum suitably. The promoters generally fix the amount of nominal capital after considering both the long-term and short-term requirements of the proposed company.