Share Capital denotes to the amount of capital raised by the issue of shares (viz Equity, Preference, DVR or all of them), by a company. It is collected through the issue of shares and remains with the company till its liquidation. Share Capital is owned capital of the company, since it is the money of the shareholders & so these share holders are the owners of the company. The total share capital is divided into small parts & each part is called a 'SHARE'. Share is the smallest part of the total capital of company.
In India, Share holding of 51% in a company is considered as a controlled holding. Any company willing to go public or willing to have an IPO has to maintain at least 10% of its total issued shares with the general public. Recently SEBI have extended the deadline for all the companies in India to maintain at least 25% of their total issued shares with the general public. So, it means promoters cannot hold more than 75% of the total issued shares in a company. 25% public shareholding is must.
Types of SHARE CAPITAL :
Authorized Capital - The maximum amount of capital which a company can collect or raise by selling its shares, it is also known as Nominal Capital or Registered Capital. Issued Capital - Is the part of the Authorized capital which is actually issued to general public. Subscribed Capital - Is the part of the issued capital which is actually subscribed by the general public. Paid Up Capital - Is that part of the called up capital which is actually paid up by the shareholders. Now in general companies are not in practice to have partly paid up or call up money. The Company takes full face value money on the issue. So fully paid up Face value is the Paid Up Capital of the Company.
What is Share Capital Base :
When I form a company, I use my personal wealth as Capital i.e. I invest my own money into the company and into the business activities. In the process of forming & registering a new company under the Companies Act 1966 it needs to be Capitalized whereby I infuse money or assets into the company and get shares of that company in return. e.g. If I infuse Rs. 5000 or assets worth Rs. 5000 to form a company , I will be getting Shares worth Rs. 5000 of that newly formed company & so I become the promoter of the company. Capitalization is the process in which owners have to come with number of shares and its face value.
- Authorized capital is Rs. 5,000 i.e. 500 Shares x Rs. 10/share.
- Paid up Equity Capital is Rs. 5,000, thus Rs. 5,000 becomes the total capital base of my company at the time of registration or inception.
- Authorized capital will be Rs. 6,000 i.e. 600 shares x Rs. 10 each.
- Issued, Subscribed & Paid up Equity share capital is Rs. 5,000 i.e. issued capital is only of Rs. 5,000 & Issued equity shares is only 500 shares.
- Authorised capital is still Rs. 6,000 (600 sh of Rs.10 each).
- Issued, Subscribed & Paid up Equity is Rs. 5500 (original 500 sh & additional 50 share).
- Share premium Account will now come to existence with Rs. 9500 (Rs. 10,000 – 50 x 10)
Company issues lavish Bonuses of Shares before IPO -
If one reads the Draft Red Herring Prospectus of any IPO one will notice that before the IPO the promoters or pre IPO shareholders are given lavish bonuses of shares reducing the net worth of company and increasing the issued, subscribed & paid up capital base of the company. I have seen some issues whereby the promoters are given bonus in the ratio of 100 shares for every 1 share held before the IPO this makes the promoter's acquisition price of equity share less than its Face value, in some cases it goes into paise. This is because before IPO, the value of shares are much higher due to the past profits are accumulated as "Reserves" in the balance sheet. And to draw back my capital I issue fresh new shares as bonus thus reducing my reserve to that extend and hence increasing the share base reducing its value. You can see many big investors exit wholly or partially in the IPO as they already have taken back their invested money in the form of Bonus shares, So one should also consider this while investing in the IPO's.