Community hub
0 subscribers8 pages, 0 posts
Recent from talks
All channels
Be the first to start a discussion here.
Be the first to start a discussion here.
Be the first to start a discussion here.
Be the first to start a discussion here.
Contribute something
Welcome to the community hub built to collect knowledge and have discussions related to Share capital.
Nothing was collected or created yet.
Share capital
View on Wikipediafrom Wikipedia
A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash.
Definition
[edit]In accounting, the share capital of a corporation is the nominal value of issued shares (that is, the sum of their par values, sometimes indicated on share certificates). If the allocation price of shares is greater than the par value, as in a rights issue, the shares are said to be sold at a premium (variously called capital surplus or share premium, additional paid-in capital or paid-in capital in excess of par).[1]
This equation shows the constituents that make up a company's real share capital:
This is differentiated from share capital in the accounting sense, as it presents nominal share capital and does not take the premium value of shares into account, which instead is reported as additional paid-in capital.[1]
Legal capital
[edit]Legal capital is a concept used in European corporate and foundation law, United Kingdom company law, and various other corporate law jurisdictions to refer to the sum of assets contributed to a company by shareholders when they are issued shares.[2] The law often requires that this capital is maintained and that dividends are not paid when a company is not showing a profit above the level of historically recorded legal capital.[2]
See also
[edit]References
[edit]- ^ a b "Share Premium Account". Corporate Finance Institute. December 13, 2022. Retrieved September 2, 2025.
- ^ a b Thakur, Madhuri (August 29, 2020). Vaidya, Dheeraj (ed.). "Legal Capital". WallStreetMojo.com. CFA Institute. Retrieved May 12, 2022.
| International | |
|---|---|
| National | |
| Other | |
Share capital
View on Grokipediafrom Grokipedia
Fundamentals
Definition
Share capital represents the aggregate amount of funds contributed by shareholders to a company in exchange for shares, forming a core component of the entity's ownership equity.[1] This equity arises from the issuance of shares, which entitle holders to a proportionate claim on the company's assets and earnings after all liabilities are settled. Unlike debt capital, which involves borrowed funds that must be repaid with interest and imposes no ownership rights on lenders, share capital does not create a repayment obligation; instead, it grants shareholders voting rights, dividend entitlements, and residual claims on assets, aligning investor interests with the company's long-term success.[3] In the context of company formation, share capital serves as the initial funding raised during incorporation to acquire assets, cover startup costs, and support early operations, providing the financial foundation without relying on external borrowing.[1] This capital is recorded on the balance sheet as part of equity, reflecting the shareholders' investment in the entity's net assets.[4] For shares with a par value—a nominal amount assigned to each share at issuance—the nominal share capital is calculated using the formula: \text{Nominal share capital} = \text{Number of shares issued} \times \text{[Par value](/page/Par_value) per share} This computation applies specifically to par value shares, such as ordinary or preference shares, and represents the minimum legal capital contributed. Total share capital includes this nominal amount plus any share premium (additional paid-in capital).[1]Key Components
Share capital comprises several key structural elements that form its foundation in corporate accounting. The nominal value, also known as the par value, represents the arbitrary face value assigned to each share upon issuance, serving as the baseline for accounting purposes and legal considerations in many jurisdictions.[5] This value is typically set at a low, nominal amount—such as $0.01 or £1 per share—by the company's charter and does not reflect the market price but rather establishes the minimum issuance price to ensure shares are fully paid.[6] A critical component alongside nominal value is the share premium, which is the excess amount paid by shareholders over the par value when shares are issued. This premium is recorded separately in a share premium account, treated as a reserve within shareholders' equity rather than part of the core share capital, and can be used for specific purposes like funding expansions or offsetting losses, subject to regulatory restrictions.[7] For instance, if a share with a £1 par value is issued for £5, the £1 contributes to the nominal share capital, while the additional £4 is allocated to the share premium account.[8] The total share capital is calculated as the nominal value of all issued shares plus any share premium received, providing a measure of the company's foundational equity base from shareholder contributions.[1] This figure appears on the balance sheet under shareholders' equity and relates to the paid-up portion, though full details on payments are addressed elsewhere. In jurisdictions allowing no-par value shares, the entire amount received from issuance is recorded as share capital without a separate premium account.[1]Types
Authorized Capital
Authorized capital, also referred to as authorized share capital or authorized stock, constitutes the maximum amount of share capital that a corporation is legally permitted to issue, as stipulated in its foundational constitutional documents such as the memorandum of association or articles of incorporation.[9][10] This limit is expressed either in monetary terms or as a number of shares, encompassing all classes of stock the company may offer, and it establishes a predefined ceiling to govern potential equity expansion.[11] Unlike issued capital, which reflects shares actually offered to investors, authorized capital remains a prospective framework until utilized.[12] The core purpose of authorized capital lies in affording companies strategic flexibility for future fundraising endeavors, enabling the issuance of additional shares for purposes like acquisitions, employee incentives, or capital infusion without necessitating repeated amendments to constitutional documents or fresh shareholder consents for each transaction.[10] By setting this upper bound in advance, it curbs the board of directors' discretion in diluting existing ownership, thereby safeguarding shareholder interests against uncontrolled equity proliferation while allowing efficient adaptation to growth opportunities.[12][13] This mechanism balances operational agility with protective oversight, ensuring that potential capital raises align with the company's long-term objectives as originally envisioned by its incorporators. Increasing authorized capital generally involves a formal process that commences with shareholder approval, typically via an ordinary resolution in many jurisdictions, to amend the relevant constitutional provisions.[14] Subsequent steps include updating the memorandum or articles of incorporation and submitting the changes to the appropriate regulatory body for validation and public record.[15] For example, under India's Companies Act, 2013 (Section 61), companies must pass an ordinary resolution and file Form SH-7 with the Registrar of Companies within 30 days, often incurring nominal stamp duty based on the incremental amount.[14] In the United Kingdom, the Companies Act 2006 permits increases through special resolutions altering the articles, with filing obligations to Companies House to maintain transparency.[16] These procedures ensure that expansions reflect collective shareholder will and comply with statutory safeguards.Issued and Subscribed Capital
Issued capital represents the portion of a company's authorized capital that has been formally offered and allotted to investors in exchange for their commitment to purchase shares.[17] It constitutes the total nominal value of shares actually distributed, typically through public offerings, private placements, or rights issues. This allotment occurs after applications are received and vetted, ensuring that only the approved number of shares are distributed, often at a specified par value or issue price. The value of issued capital is recorded in the company's financial statements as part of shareholders' equity, reflecting the actual shares in circulation that confer ownership rights. For example, under Section 2(50) of India's Companies Act, 2013, issued capital is defined as the capital that a company issues from time to time for subscription. Subscribed capital refers to the total value of shares for which investors have applied or committed to purchase from the issued shares.[17] It measures investor interest and can equal the issued capital if fully subscribed, but it may differ in cases of under- or oversubscription. For instance, if applications exceed the issued shares (oversubscription), the company may allot shares pro-rata, resulting in subscribed capital surpassing the issued amount; conversely, undersubscription occurs when applications fall short, potentially leading to adjustments or cancellations. This metric highlights the success of the issuance in attracting commitments, though the actual payment status of these subscriptions determines the paid-up capital, as detailed in subsequent sections. For example, under Section 2(86) of India's Companies Act, 2013, subscribed capital is the part of the capital that is for the time being subscribed by the members of the company. To mitigate risks of undersubscription, companies often engage underwriters—typically investment banks—that guarantee a minimum subscription level by committing to purchase any unsold shares. In a firm commitment underwriting arrangement, the underwriter purchases the entire issue from the company at a fixed price and resells it to investors, assuming the risk of market absorption. This role ensures the company receives the targeted funds regardless of public demand, with the underwriter earning a fee or spread on successful placements. For example, a company with authorized capital of 1 million shares at $1 par value might issue 500,000 shares but secure subscriptions for only 450,000; an underwriter could cover the shortfall to achieve full issuance. Such mechanisms are common in initial public offerings (IPOs) to stabilize capital raising.[18]Paid-up Capital
Paid-up capital refers to the actual amount of money or assets received by a company from its shareholders in payment for the shares they have acquired, representing the realized portion of the capital contributed to the business. It forms the foundation of the company's equity base, reflecting genuine shareholder investment rather than mere commitments.[19] When shares are issued on a partly paid basis, companies often employ a process known as calls on shares to collect the remaining amounts in installments, rather than requiring full payment upfront at allotment. Called-up capital is the portion of the subscribed capital that the company has demanded payment for, including the initial allotment and subsequent calls. This mechanism, authorized by the company's articles of association, involves the board of directors passing a resolution to specify the call amount, due date, and interest (if applicable) for each installment, ensuring equitable treatment among shareholders of the same class. For example, under Section 49 of India's Companies Act, 2013, calls cannot exceed the nominal value of the shares and must provide shareholders at least one month to pay, promoting orderly capital infusion while minimizing immediate financial strain on investors.[20][21] Any portion of a call that remains unpaid by the due date constitutes calls in arrears, treated as a current asset (receivable) on the company's books but deducted from the total called-up capital to determine the effective paid-up amount. Failure to settle calls in arrears may result in share forfeiture, a remedial action where the company cancels the defaulting shareholder's shares after due notice, potentially retaining prior payments as liquidated damages, subject to the articles of association and good faith principles. This process safeguards the company's interests by preventing dilution from non-contributing shareholders.[22][23] The relationship between these elements is captured in the formula: Paid-up capital = Called-up capital - Calls in arrears, which adjusts the total called-up value for any outstanding payments to yield the net funds available to the company.[24]Legal Framework
Legal Capital Concept
The legal capital concept represents the minimum portion of a company's share capital that must remain intact and unavailable for distribution to shareholders, serving as a safeguard for creditors against the risk of insolvency due to unauthorized reductions in corporate assets. This regulatory mechanism ensures that the capital contributed by shareholders forms a protected fund to meet the company's debts, distinguishing it from accounting treatments that focus on financial reporting rather than legal prohibitions. Originating as a response to the rise of limited liability companies during the Industrial Revolution, the concept prioritizes creditor protection by treating share capital as a trust-like liability owed to external stakeholders.[25] The doctrine traces its roots to 19th-century English legislation, particularly the Joint Stock Companies Act 1844, which introduced mandatory registration for joint stock companies and required them to declare a nominal capital divided into shares of fixed amounts, thereby establishing early parameters for capital accountability and preventing fraudulent dilutions that could harm creditors. This statutory framework was reinforced by landmark judicial rulings, such as Trevor v Whitworth (1887), where the House of Lords held that a company cannot reduce its capital by purchasing its own shares without court approval, solidifying the principle that share capital must be preserved unless legally authorized. These developments addressed the vulnerabilities exposed by the proliferation of unincorporated partnerships and early corporations, where shareholders could extract funds at the expense of unsecured lenders.[25] Central to the legal capital concept is the par value rule, under which legal capital is generally defined as the aggregate par (or nominal) value of issued shares, constituting the irreducible core that shareholders are obligated to pay up and that the company must maintain. This rule, embedded in UK law since the 19th century and codified in section 580 of the Companies Act 2006, prevents shares from being issued below par value, thereby ensuring a baseline contribution that bolsters creditor confidence and avoids the issuance of "watered stock" that inflates perceived capital without real economic substance. The par value thus acts as a legal floor, tying shareholder liability and corporate distributions to a verifiable nominal amount rather than market fluctuations.[26] Jurisdictional approaches to legal capital differ significantly, with civil law systems like Germany's imposing stricter requirements under the Stock Corporation Act (Aktiengesetz) of 1965, mandating a minimum subscribed capital of €50,000 for public companies and prohibiting any distributions that would erode this amount below realized net assets, reflecting a paternalistic emphasis on mandatory reserves for creditor security. In common law jurisdictions such as the UK, post-1980 reforms via the Companies Act 1980—implementing the EU's Second Company Law Directive—introduced greater flexibility by permitting capital reductions through solvency-based tests and share buybacks under controlled conditions, shifting from rigid par value adherence toward profit-based distributions while retaining core protections. In the United States, many states have moved away from rigid legal capital requirements, adopting solvency or equity solvency tests for distributions instead, as seen in Delaware General Corporation Law.[27] These variations highlight a tension between creditor safeguards and corporate efficiency, with continental Europe favoring prescriptive rules and Anglo-American systems allowing more managerial discretion. Enforcement of maintenance rules, such as bans on unlawful distributions, builds on this foundation to operationalize the concept. However, the concept faces criticism for being outdated, with calls for replacement by solvency-based protections in various jurisdictions.[28]Capital Maintenance Rules
The doctrine of capital maintenance is a fundamental principle in company law that prohibits companies from returning share capital to shareholders except through specifically authorized lawful means, thereby preserving the capital base to protect creditors from potential losses.[29] This rule, originating from English case law such as Trevor v Whitworth (1887), ensures that the assets representing share capital remain intact unless statutory procedures are followed.[29] Under the UK's Companies Act 2006, the doctrine is codified and reformed to balance creditor protection with corporate flexibility, particularly for private companies.[30] Prohibited actions under capital maintenance rules include paying dividends out of capital rather than distributable profits, issuing shares at a discount below par value, and providing unlawful financial assistance for the acquisition of a company's own shares.[29] Distributions are restricted to realized profits less realized losses, with public companies required to satisfy a net assets test to ensure liabilities are covered.[30] These prohibitions prevent the erosion of the legal capital base, which serves as a buffer for creditors, and apply strictly to avoid indirect returns of capital.[29] Exceptions to the doctrine allow for capital returns through regulated procedures, such as court-approved reductions of share capital or mergers, where creditor interests are safeguarded via confirmation hearings.[29] The Companies Act 2006 introduces a solvency test for private companies, permitting reductions via a directors' solvency statement confirming the company's ability to pay debts as they fall due for at least 12 months post-reduction.[30] Share buybacks and redemptions are permitted under Part 18 of the Act, generally using distributable profits or proceeds of a fresh issue; for private companies, out-of-capital purchases are allowed without numerical limits subject to a solvency statement and special resolution. Additionally, a de minimis exemption applies to purchases out of distributable profits up to the lower of £15,000 or 5% of paid-up share capital per financial year, with simplified procedures.[31] These mechanisms replaced stricter common law bans, repealing the financial assistance prohibition for private companies effective October 2008.[29] Enforcement of capital maintenance rules involves personal liability for directors who authorize unlawful distributions, requiring them to repay the amounts to the company, alongside potential criminal penalties for false solvency statements.[30] Creditor protection is further reinforced through winding-up provisions, where reductions without proper procedure can lead to court intervention, and auditors must verify compliance under standards like ISA (UK) 250.[30] Violations undermine the legal capital concept by exposing creditors to uncompensated risks.[29]Accounting and Financial Reporting
Recording Transactions
In accounting for share capital, transactions are recorded using double-entry bookkeeping to reflect the inflow of resources and the corresponding increase in equity.[32] This method ensures that debits to asset accounts, such as cash or bank, are balanced by credits to equity accounts, maintaining the accounting equation.[33] When shares are issued for cash, the entry debits the bank or cash account for the total proceeds received and credits the share capital account for the par (nominal) value of the shares, with any excess allocated to a share premium (or additional paid-in capital) account.[32] This treatment applies under both US GAAP and IFRS, where the fair value of consideration received determines the amounts recorded.[34] For instance, issuing 100 shares with a par value of £1 at a price of £10 per share results in the following journal entry:Dr Cash £1,000
Cr Share Capital £100
Cr Share Premium £900
Dr Cash £1,000
Cr Share Capital £100
Cr Share Premium £900