MEANING OF TERM CAPITAL
The term Capital has variety of meanings. It may mean one thing to economist, another to accountant while another to businessman. A layman views capital as the money invested in business to meet its requirement by way of acquiring business premises and stock-in-trade.
In relation to company limited by shares, the word 'capital' means the share capital i.e., the capital in terms of rupees divided into specified number of shares of a fixed amount each.
TYPES OF SHARE CAPITAL
Before going ahead let's understand meaning of Share. As per section 2(84) of companies act 2013, "share" means a share in the share capital of company and includes stock. In general terms it means part of share capital of company.
Following are the types of Share Capital:
- Nominal, Authorised or Registered Capital:
It is the maximum amount company can raise as capital in its lifetime. We can find authorised capital of any company through its Memorandum of Association. This amount is chosen by company at the time of its incorporation & it can be increased by following provisions of the companies act later on.
- Issued Capital:
It is that part of Authorised Capital which is actually issued by the company. It will be always less than or equal to Nominal Capital as company cannot go beyond that limit.
- Subscribed Capital:
It is the part of Issued Capital which is actually subscribed. It will be always less than Issued Capital as no one can subscribe for capital which is not issued.
- Called-up Capital:
It is that part of Subscribed Capital for which money has been called by the company. Nowadays full amount is called on Subscription.
- Paid-up Share Capital:
It is the part of Called-up capital which is actually paid by the subscriber. Similarly, the shares on which amount is not paid shall be classified as unpaid Capital.
MEANING AND TYPES OF SHARES
Shares are broadly divided into two types:
- Preference Share Capital:
As per section 43 of the companies act, Preference share capital means a part of share capital with a preferential right with respect to:
a.Payment of dividends at fixed rate or fixed amountb.Repayment of capital at time of winding up
Section 47(2) states that preference shareholder have a right to vote only on resolutions directly affecting the rights attached to preference shares and resolution for winding up of the company
Provided further that where dividend in respect of class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Types of Preference Shares
a. Cumulative and Non-Cumulative:
In cumulative preference shares, the dividends are accumulated and paid before anything paid to equity shares. If in current year company can't pay dividend to preference shareholders, it can be claimed in year in which company has sufficient profits but same is not the case with non-cumulative Preference Shares.
b. Convertible and Non-Convertible:
Convertible Preference Shares are converted to Equity Shares of company on maturity but in case of Non-Convertible Preference Shares, Cash is paid on Maturity.
c. Participating and Non-Participating:
In case of participating preference shares, shareholders have right to participate in surplus profit and assets apart from preferential dividend & repayment at time of winding up but same is not the case with non-participating preference shares.
d. Redeemable and Non-Redeemable:
Redeemable Preference Shares are redeemed i.e., amount is paid back to preference shareholders & their shares are taken back after specified period of time. Non-Redeemable Preference Shares are repaid only at the time of winding up.
As per section 55 of companies act, Issue of non-redeemable preference shares are not allowed.
- Equity Share Capital:
As per section 43 of companies act, Equity Share Capital means all share capital which is not preference share capital. Equity capital is also known as "Common Stock" or common share capital that represents ownership in a company.
Common share capital is divided into unit called shares & holders of these units are called equity shareholders.
They are real owners of the company but they do not have access to day to day affairs of the company. They appoint their representatives called Board of Directors.
Important characteristics of Equity Shares are:
a. Equity Shares have voting rights at all general meetings of the company.
b. Equity Shares have the right to share the profits in form of dividend and bonus shares. However, equity shareholders cannot demand the declaration of dividend which is left at discretion of Board of Directors.
c. In the event of winding up, repayment of capital will be done only after making payment of outside debts, debenture holders & preference shareholders.
It is of two types - with ordinary voting rights & with differential voting rights
- Nominal, Authorised or Registered Capital:
It is the maximum amount company can raise as capital in its lifetime. We can find authorised capital of any company through its Memorandum of Association. This amount is chosen by company at the time of its incorporation & it can be increased by following provisions of the companies act later on.
- Issued Capital:
It is that part of Authorised Capital which is actually issued by the company. It will be always less than or equal to Nominal Capital as company cannot go beyond that limit.
- Subscribed Capital:
It is the part of Issued Capital which is actually subscribed. It will be always less than Issued Capital as no one can subscribe for capital which is not issued.
- Called-up Capital:
It is that part of Subscribed Capital for which money has been called by the company. Nowadays full amount is called on Subscription.
- Paid-up Share Capital:
It is the part of Called-up capital which is actually paid by the subscriber. Similarly, the shares on which amount is not paid shall be classified as unpaid Capital.
It is the maximum amount company can raise as capital in its lifetime. We can find authorised capital of any company through its Memorandum of Association. This amount is chosen by company at the time of its incorporation & it can be increased by following provisions of the companies act later on.
It is that part of Authorised Capital which is actually issued by the company. It will be always less than or equal to Nominal Capital as company cannot go beyond that limit.
It is the part of Issued Capital which is actually subscribed. It will be always less than Issued Capital as no one can subscribe for capital which is not issued.
It is that part of Subscribed Capital for which money has been called by the company. Nowadays full amount is called on Subscription.
It is the part of Called-up capital which is actually paid by the subscriber. Similarly, the shares on which amount is not paid shall be classified as unpaid Capital.
- Preference Share Capital:
As per section 43 of the companies act, Preference share capital means a part of share capital with a preferential right with respect to:
a.Payment of dividends at fixed rate or fixed amountb.Repayment of capital at time of winding up
Section 47(2) states that preference shareholder have a right to vote only on resolutions directly affecting the rights attached to preference shares and resolution for winding up of the company
Provided further that where dividend in respect of class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Types of Preference Shares
a. Cumulative and Non-Cumulative:
In cumulative preference shares, the dividends are accumulated and paid before anything paid to equity shares. If in current year company can't pay dividend to preference shareholders, it can be claimed in year in which company has sufficient profits but same is not the case with non-cumulative Preference Shares.
b. Convertible and Non-Convertible:
Convertible Preference Shares are converted to Equity Shares of company on maturity but in case of Non-Convertible Preference Shares, Cash is paid on Maturity.
c. Participating and Non-Participating:
In case of participating preference shares, shareholders have right to participate in surplus profit and assets apart from preferential dividend & repayment at time of winding up but same is not the case with non-participating preference shares.
d. Redeemable and Non-Redeemable:
Redeemable Preference Shares are redeemed i.e., amount is paid back to preference shareholders & their shares are taken back after specified period of time. Non-Redeemable Preference Shares are repaid only at the time of winding up.
As per section 55 of companies act, Issue of non-redeemable preference shares are not allowed.
- Equity Share Capital:
As per section 43 of companies act, Equity Share Capital means all share capital which is not preference share capital. Equity capital is also known as "Common Stock" or common share capital that represents ownership in a company.
Common share capital is divided into unit called shares & holders of these units are called equity shareholders.
They are real owners of the company but they do not have access to day to day affairs of the company. They appoint their representatives called Board of Directors.
Important characteristics of Equity Shares are:
a. Equity Shares have voting rights at all general meetings of the company.
b. Equity Shares have the right to share the profits in form of dividend and bonus shares. However, equity shareholders cannot demand the declaration of dividend which is left at discretion of Board of Directors.
c. In the event of winding up, repayment of capital will be done only after making payment of outside debts, debenture holders & preference shareholders.
It is of two types - with ordinary voting rights & with differential voting rights
As per section 43 of the companies act, Preference share capital means a part of share capital with a preferential right with respect to:
a.Payment of dividends at fixed rate or fixed amount
b.Repayment of capital at time of winding up
Section 47(2) states that preference shareholder have a right to vote only on resolutions directly affecting the rights attached to preference shares and resolution for winding up of the company
Provided further that where dividend in respect of class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Types of Preference Shares
a. Cumulative and Non-Cumulative:
In cumulative preference shares, the dividends are accumulated and paid before anything paid to equity shares. If in current year company can't pay dividend to preference shareholders, it can be claimed in year in which company has sufficient profits but same is not the case with non-cumulative Preference Shares.
Convertible Preference Shares are converted to Equity Shares of company on maturity but in case of Non-Convertible Preference Shares, Cash is paid on Maturity.
In case of participating preference shares, shareholders have right to participate in surplus profit and assets apart from preferential dividend & repayment at time of winding up but same is not the case with non-participating preference shares.
Redeemable Preference Shares are redeemed i.e., amount is paid back to preference shareholders & their shares are taken back after specified period of time. Non-Redeemable Preference Shares are repaid only at the time of winding up.
As per section 55 of companies act, Issue of non-redeemable preference shares are not allowed.
As per section 43 of companies act, Equity Share Capital means all share capital which is not preference share capital. Equity capital is also known as "Common Stock" or common share capital that represents ownership in a company.
Common share capital is divided into unit called shares & holders of these units are called equity shareholders.
They are real owners of the company but they do not have access to day to day affairs of the company. They appoint their representatives called Board of Directors.
Important characteristics of Equity Shares are:
a. Equity Shares have voting rights at all general meetings of the company.
b. Equity Shares have the right to share the profits in form of dividend and bonus shares. However, equity shareholders cannot demand the declaration of dividend which is left at discretion of Board of Directors.
c. In the event of winding up, repayment of capital will be done only after making payment of outside debts, debenture holders & preference shareholders.
It is of two types - with ordinary voting rights & with differential voting rights
ISSUE OF SECURITIES
Public Company can issue securities in following ways:
a. Public Issue
b. Private Placement
c. Right Issue
d. Bonus Issue
Private Company can issue securities in following ways:
a. Private Placement
b. Right Issue
c. Bonus Issue
Let's understand each type of issue in detail.
1. Public Issue:
It means giving offer to general public for subscription of securities through issue of Prospectus. It can be done only by listed company. For public issue, company has to comply with The companies Act and its rules & regulations, The Securities Contracts (Regulation) Act, 1956, The Securities Contracts (Regulation) Rules, 1957, The Securities and Exchange Board of India Act, 1992 and its rules & regulations.
It refers to giving offer to private persons for subscription of securities and upon acceptance of offer allotting them the offered securities. Only person to whom offer is given can accept it.
It refers to giving offer to members of company to subscribe to securities of company for consideration.
It means giving securities of company to existing members without consideration. It is to be noted that Bonus Shares cannot be issued instead of dividend.
That's all for this article read Meaning, Types & Issue of Prospectus for more detail.