Different Types of Share Capital: An Overview

Share Capital is the lifeblood of any business. It gives business the very foundation through which a company thrives. So, it becomes important to understand the meaning, importance, and different types of share capital a company can raise for the smooth functioning of its operations. When we talk about Share Capital it becomes important for us to understand the difference between share and share capital.

A layman views capital as the money that a company has raised to start its business. The term “share capital” often means slightly different things depending on the context.

What is a Share?

A “share” is defined as the interest or stake held by a member of a company. According to the Companies Act of 2013, share means a share in the share capital of a company and includes stock. A share represents ownership in the share capital of a company. Essentially, it serves as a unit into which the company’s share capital is divided, signifying a shareholder’s interest in the company, which is significant for assessing liabilities and dividends.

The money raised by a company through issuing shares is called Share Capital. The amount of share capital a company has can change over time with additional issues of shares from time to time. The different types of share capital help the companies to pump funds into the business and help in carrying out various activities.

The term share capital can have different meanings depending on the context. In Accounting the types of share capital have a much narrower definition. It means the total amount raised by the company in sales of shares. Share capital is always shown by a company on its balance sheet in the shareholder’s equity section. A company may opt for a new offer of stock to increase the share capital on its balance sheet.

Types of Share Capital

There are different types of share capital based on the information that may be listed, depending on the source of the funds. This usually includes common stock, preferred stock, and a third for additional paid-in capital.

Authorized Share Capital

Before any company can raise equity capital, it must obtain permission to carry out the sale of shares from the relevant authorities. The company must decide the amount of equity it wants to raise and the face value of its shares. The maximum amount approved to be raised by a company through the issuance of shares is known as authorized share capital.

The number of shares that may be issued by a company is not limited; however, a ceiling is placed on the total amount of money that can be raised through the sale of those shares. For example, if a company obtains authorization to raise Rs. 50 lakhs and its share has a face value of Rs.10, it may issue and sell up to 5 lakh shares.

Issued Share Capital

The total value of the shares chosen to be sold to investors is referred to as issued share capital. The value of the issued share capital cannot exceed the value of the authorized share capital

Paid-up Share Capital

The amount that members have paid on their shares, excluding any premium from the issued share capital. 

Share Capital Based on Rights

Equity Shares Capital:

Those shares that are not Preference Shares are equity shares, Equity shares have voting rights and are the actual owners of the company.

Types of Equity Shares

1. Equity shares with voting rights

Equity share capital with voting rights is a type of ownership in a company where shareholders own a portion of the company’s equity (which represents their ownership stake in the company) but also have the right to vote on certain corporate matters. These voting rights generally include decisions on the composition of the board of directors, corporate actions such as mergers or acquisitions, and other significant issues affecting shareholders’ interests.

• Equity shares with differential rights in terms of dividend, voting, or otherwise by such rules as may be prescribed

Equity shares with differential rights refer to a class of shares issued by a company where shareholders within this class may have different rights compared to other shareholders holding ordinary equity shares. These differential rights can include:

• Dividend Rights: These shares give shareholders rights to receive dividends at different rates or amounts compared to ordinary shareholders. For example, one class of shares might receive higher dividends per share than another class.
• Voting Rights: These shareholders have different rights when it comes to voting in a particular matter which means they have more or fewer votes per share compared to ordinary shares, or they may have restricted voting rights on certain matters.
• Other Rights: These can include rights related to participation in the company’s management, special rights in the event of liquidation or winding up, or other privileges that are distinct from those of ordinary shareholders.

Equity Shares can be issued in the following types:

1. Public Issue
2. Initial Public Offer [IPO]
3. Financial Public Offer [FPO]
4.  Private Issue
5. Right Shares
6. Bonus Shares
7. QIP Qualified Institutional investors

• Preference Share Capital

Preference Shares are those shares that have preferential rights regarding dividends and refunds of capital. They get fixed dividends. Preference shares form a part of Share Capital but do not hold any ownership rights in the company. Preference shareholders can Vote in a meeting only on the matters that affect their rights. Apart from this preference shares holders do not have any voting rights in the company.

Types of preference shares

a. Cumulative Preference Shares:

These shares allow the shareholders to receive dividends at a fixed rate or amount. If the company is unable to pay dividends in any particular year due to insufficient profits, the unpaid dividends accumulate (cumulate) and must be paid in future years before any dividends can be paid to ordinary shareholders.

b. Non-Cumulative Preference Shares:

Unlike cumulative preference shares, holders of non-cumulative preference shares are only entitled to receive dividends out of the profits of the current financial year. If the company does not declare a dividend in a particular year, the shareholders do not have the right to claim those dividends in future years.

c. Participating Preference Shares:

These shares give shareholders the right to participate in the profits of the company beyond the fixed rate of dividend specified. They may receive additional dividends based on certain conditions or events, such as a higher dividend payment to ordinary shareholders.

d. Non-Participating Preference Shares:

Non-participating preference shares only entitle their holders to receive dividends up toa specified fixed rate. Shareholders do not participate further in the profits of the company beyond this fixed dividend.

e. Convertible Preference Shares:

Convertible preference shares allow shareholders to convert their preference shares into ordinary shares after a specified period or under certain conditions. This conversion typically gives them ownership in the company with voting rights and potential for higher dividends if the company performs well.

f. Non-Convertible Preference Shares:

Non- Convertible Preference shares cannot be converted into ordinary shares. They remain as preference shares throughout their existence, with fixed dividend rights and other specified preferences.

g. Redeemable Preference Shares:

Redeemable preference shares are issued with a predetermined date or event upon which the company can redeem (buy back) the shares from the shareholders at a specified price. This gives the company flexibility in managing its capital structure.

h. Irredeemable Preference Shares:

 Shares that do not have a maturity date and that cannot be redeemed by the company are referred as Irredeemable Preference shares. They continue to exist indefinitely unless the company decides to buy them back in the open market or through other means.

i. Deemed Preference Shares:

Deemed preference shares are shares that, although not officially labelled as preference shares, are treated as such due to their characteristics and the rights they confer to their holders. These shares may have priority in dividend payments or other preferences similar to traditional preference shares.

Share Certificate

Every share in a company with share capital shall be distinguished by a distinctive number. This section is not applicable to shares held by a person as a beneficial owner in the depository.

Section 46 of the Companies Act declares that a certificate, issued under the common seal of the company, shall be considered prima facie evidence of the person’s title to such shares. Such certificate shall specify the shares held by any person. When the shares are held in dematerialized form, the record of the depository is regarded as prima facie evidence of the interest of the beneficial owner.

Frequently Asked Questions

1. Differentiate between share and share capital?

Share capital is the pool of money accumulated by the company in exchange for shares issued by them.

• Can share capital be increased?

Yes, Share Capital can be increased from time to time depending on the capital requirement of the company by following the steps as may be required.

• Why do companies raise share capital?

Companies can raise share capital for various reasons such as to finance new projects or expand their operations depending on the changing financial needs.

• Can a company have without share capital?

Yes, a Section 8 Company may be incorporated as a company limited by shares or by Guarantee (with or without share capital)

• What are the methods through which shares can be issued?

A company can raise Equity share capital through Public Issue, Initial Public Offer [IPO], Financial Public Offer [FPO], Private Issue, Right Shares, Bonus Shares and   Qualified Institutional investors.

Conclusion

Share capital is defined as the funding that has been raised by a company through the issuance of common or preferred. Authorized share capital is identified as the maximum amount of share capital that can be raised by a company. Issued share capital is described as the total amount of shares that a company opts to sell to investors. Additional equity can be raised and share capital can be increased by a company through the authorization obtained from its Board of Directors and shareholders to issue and sell more shares. At InstaFiling, we assist companies and investors in navigating the complexities of share capital issuance and management. Our expert services ensure compliance with regulatory requirements and help optimize capital structure for maximum growth and stability.