It’s a common wisdom in business – “Always start business with borrowed money”. While this is true in most cases, it is important to understand the type of capital one wishes to raise and the stage of company your business is in so you can make the best use of the available options. Let us look at the Types of Share Capital and how they are important marketers for a company’s ownership.
We all broadly understand the meaning of Share Capital – Contribution by various individuals or bodies of individuals who with good faith in the business of the company have “invested” in the units of the capital and are known as “shareholders”. These shareholders expect a return on their investment called as “Dividend”.
The following are the types of capital in theory that you will find in most finance books –
- Authorized Share Capital – This is the maximum amount of capital which a company can raise by issuing shares to shareholders. It is restricted by the amount mentioned in the company’s Memorandum of Association (MoA). It is also called as “Registered Share Capital”.
- Issued Share Capital -is the portion of the Authorized Share Capital offered to the shareholders. Usually companies refrain from issuing all the shares to keep an empty ceiling of shares that can be issued later for control purposes. The shares issued by the company are called as “Ordinary Shares”.
- Subscribed Share Capital – It is that portion of the share capital, which represents that part of the issued share capital which has been accepted by the shareholders. The entire portion of the issued capital might not have been accepted by the public. This is an indication of the faith in the business and sometimes also the market conditions prevailing in the economy. Sometimes even good businesses might lose out on being subscribed fully due to lack of investor interest. These days to provide for this contingency, companies hire investment banks or syndicates to subscribe the left over shares in the Initial Public Offering (IPO).
- Paid-up Share capital – is usually the subscribed share capital of the company. It just means that the shares have been paid up by the shareholders. This is equal to the Issue Price multiples by the number of shares.
- Reserve Capital – This category of capital indicates the undistributed profits of the company from previous year operations. It is usually kept for future uses such as acquisitions and buy-outs of companies for strategic interests. It also includes the premium at which each share was issued as the Paid – up capital is quoted at Par-Value (or the face value of the share).
One can see how the 10-K filings of Apple Inc. shows its capital distribution. As on fiscal year ending 2018, it has common or ordinary stock of $40,201 million with an Authorized capital of 12,600,000 shares, 4,754,986 as Issued and the remaining as Outstanding share not yet issued. It is also showing a retained earnings of $70,400 million in September, 2018 compared to $98,330 million in September, 2017.
One interesting aspect of Equity is that it is part of Long term liabilities for the firm even though it provides money to the company!