Classification of Share Capital
Classification of Share Capital
Share capital refers to the amount of money raised by a company through the issue of shares. It represents the financial base of the company and the contributions made by shareholders in return for ownership rights.
Under the Companies Act, 2013 in India, share capital is classified based on different criteria. The main types are:
1. Authorized Capital (Nominal or Registered Capital)
Definition:
The maximum amount of share capital that a company is authorized to raise through the issue of shares, as specified in its Memorandum of Association (MoA).
It sets an upper limit, but the company does not need to issue the entire amount at once.
It can be increased with shareholder approval and filing with the Registrar of Companies (ROC).
Example:
If a company has an authorized capital of ₹10 crores, it cannot issue shares beyond that amount without altering the MoA.
Relevant Provision:
Section 2(8) of the Companies Act, 2013.
2. Issued Capital
Definition:
That portion of the authorized capital which is actually offered to investors (public or private) for subscription.
A company may not issue all its authorized capital at once.
Issued capital can be increased gradually.
Example:
If the authorized capital is ₹10 crores, and the company issues shares worth ₹6 crores to the public, then ₹6 crores is the issued capital.
3. Subscribed Capital
Definition:
Part of the issued capital that investors (shareholders) agree to buy and actually subscribe to.
May be fully or partly paid-up initially.
The company cannot treat the unsubscribed portion as its capital.
Example:
Out of ₹6 crores issued capital, if investors agree to buy ₹5 crores worth of shares, then ₹5 crores is the subscribed capital.
4. Called-up Capital
Definition:
That portion of the subscribed capital that the company has called upon the shareholders to pay.
Companies usually do not require full payment upfront.
The balance can be called up in stages.
Example:
If a shareholder subscribed to 1,000 shares at ₹10 each (₹10,000), and the company has called up ₹5 per share, the called-up capital is ₹5,000.
5. Paid-up Capital
Definition:
That part of the called-up capital which has been actually paid by the shareholders.
It is the actual amount received by the company from shareholders.
Paid-up capital must be at least ₹1 lakh (for private companies) and ₹5 lakh (for public companies) as per earlier norms (not mandatory under Companies Amendment Act, 2015).
Example:
If ₹5 per share has been called and shareholders pay ₹5 per share, then paid-up capital is equal to called-up capital.
6. Uncalled Capital
Definition:
The portion of subscribed capital that has not yet been called up by the company.
It remains a liability of the shareholder until it is called.
Example:
If the company has called ₹5 out of ₹10 on each share, the remaining ₹5 is uncalled capital.
7. Reserve Capital
Definition:
A part of uncalled capital that a company reserves to be called only in the event of winding up of the company.
It is a legal concept created by a special resolution.
Helps protect creditors during liquidation.
Relevant Provision:
Section 65 of the Companies Act, 2013.
Example:
A company may resolve that ₹2 per share will be called only during winding up. This ₹2 becomes reserve capital.
Case Laws Related to Share Capital Classification
1. Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. (1963) SC
Issue:
Whether reissue of forfeited shares amounts to fresh issue.
Held:
The reissue of forfeited shares does not amount to an issue of new shares; it is a sale of existing shares.
Relevance: Clarifies that forfeited shares remain part of the issued capital.
2. Ramaswami Iyer v. Brahmayya & Co. (1951) Madras HC
Issue:
Difference between called-up and paid-up capital.
Held:
The court explained that shareholders are liable to pay the unpaid amount on the called-up capital, and the company can enforce this payment.
Relevance: Clarifies distinction between called-up and paid-up capital.
3. National Textile Workers' Union v. P.R. Ramakrishnan (1983) SC
Issue:
Rights of stakeholders during winding up.
Held:
Though focused on workers’ rights, the case highlighted the importance of reserve capital in protecting creditors during winding up.
Relevance: Shows the protective function of reserve capital.
Summary Table: Types of Share Capital
| Type of Share Capital | Meaning | Key Point |
|---|---|---|
| Authorized Capital | Max capital company can raise | Mentioned in MoA |
| Issued Capital | Portion of authorized capital offered to investors | Cannot exceed authorized capital |
| Subscribed Capital | Part of issued capital taken by public | Indicates investor interest |
| Called-up Capital | Part of subscribed capital called by company | May be less than face value |
| Paid-up Capital | Amount actually paid by shareholders | Used to calculate company’s financial base |
| Uncalled Capital | Subscribed capital not yet called | Liability of shareholders |
| Reserve Capital | Uncalled capital reserved for winding up | Created by special resolution |
Conclusion
The classification of share capital plays a crucial role in understanding the financial structure of a company. It not only reflects the company's ability to raise funds but also determines the rights and obligations of shareholders. Courts have reinforced these distinctions and principles through various judgments, ensuring transparency and accountability in corporate finance.
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