Company Accounts: Method of Raising Capital
Meaning of share:
A share is a document that acknowledges the ownership of a company to the limit of the amount contributed. It is interest in the company reflecting the ownership. The share capital of a company is divided into fixed number of units, and each such unit is called share.
Share capital: Share capital is the ownership capital of a company raised by the issue of its shares. It is an amount invested by the shareholders towards the nominal value of shares. A company needs share capital in order to finance its activities.
The capital of the company is divided into different parts called shares. Each part of the share capital is called a share. The value, which is stated in share certificate, is called par value/face value/nominal value/stated value. Total amount of all the shares is called share capital. It is an amount invested by the shareholders towards the nominal value of shares.
Types of Share Capital,
- Authorized or registered capital: The capital which is mentioned in the Memorandum of Association as the maximum amount of share capital is called authorized or registered capital. It is the maximum amount of capital which a company can raise. The capital is divided into definite number of shares. For example, if a company has 20,000 authorized shares at the rate of Rs. 100 each, the total authorized share capital will be Rs. 2,000,000. The authorized capital is also known as nominal capital.
- Issued capital: It is the part of the authorized capital, which is actually offered to the public for subscription. Generally, a company does not issue the entire authorized shares at a time so that the issued capital is always less than the authorized capital. (50,000 shares @ Rs.100 each).
- Subscribed capital: It is that part of the issued capital, which is actually taken up by the investors. For example, if a company issues 50,000 shares @ Rs. 100 each and the application for 45,000 shares were received, the subscribed capital is Rs.45,00,000.
- Called-up capital: The amount of share capital due on shares is normally collected from the shareholders in instalments at different intervals. The called-up capital is that part of the nominal values of shares subscribed by shareholders, which is requested by the company for payment. The uncalled capital if retained by the company to be called up for the payment of creditors on liquidation is treated as reserve capital.
- Paid-up capital: It is the part of called-up capital, which has been actually received from the company’s shareholders. If the called-up capital is 45,000 shares @Rs. 80 each and a shareholder holding 100 shares fails to pay the second instalment of Rs. 20 per share, the paid-up capital is Rs. 35,98,000 since Rs.2000 due on 100 shares at Rs. 20 per share failed to pay.
Types of shares:
1. Equity shares: Equity shares are those, which will get dividend and refund of capital only after preference shareholders are paid. Equity shares are also known as ordinary shares or common shares. There is no fixed rate of equity dividend. The dividend on these shares is paid from profits only after paying interest on debentures and dividends on preference share capital. Equity shareholders can participate in management and enjoy the voting rights to elect some members of Board of Directors. Equity shareholders are the real owner of the business.
2. Preference shares: Preference shares are those shares that are entitled to certain privileges. The dividend on preference share is paid at a fixed rate. The dividend on such shares is paid before any dividend is paid to equity shareholders. Similarly, at the time of winding-up the company, the preference capital is repaid before such a repayment is made to the equity shareholders. Preference shareholders do not have any voting rights.
Types of preference shares are as follows:
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- Cumulative preference share: Cumulative preference shares are those shares on which the amount of unpaid dividends is accumulated and is carried forward as a liability.
- Non-cumulative preference share: They are those shares on which the arrears of dividend do not accumulate.
- Redeemable preference share: They are those shares that can be redeemed within a specific period of time. The terms and conditions for redemption of preference shares need to be specified at the time of the issue of shares.
- Irredeemable preference share: They are those, which can be redeemed only at the time of liquidation of the company.
- Convertible preference share: they are those shares, which can be converted into equity shares. The conversion becomes possible when the company provides such option.
- Non-convertible preference share: They are those shares, which cannot be converted into equity shares. Preference share are non-convertible unless otherwise stated.
- Participating preference share: They are those shares, which have the right to participate in any surplus profit of the company after paying dividend on equity shareholder.
- Non-participating preference share: They are those share, which do not carry such rights. If the Article of Association of the company is silent, preference shares are assumed to be non-participating preference share.
3. Right shares: The shares entitling to be subscribed by the existing shareholders of the company are called right shares. These are additional equity shares offered by a company of its shareholders to subscribe within a specified period at a specific price.
4. Deferred share: The share allotted to the promoters as a token of reward for the company is called deferred shares. Founders or management shares are the other terms which are used to refers such shares. Deferred shares enjoy rights to share on profit after paying off preference dividend and equity dividend.
Difference between equity shares and preference shares
| Basis | Equity share | Preference share |
| Payment of dividend | Dividend on equity share is paid after the payment of preference dividend. | Dividend on preference share is paid before the payment of equity dividend |
| Rate of dividend | Rate of dividend on equity share may vary from year to year. | Rate of dividend on preference share is fixed. |
| Cumulative dividend | The dividend cannot be accumulated in any case. | The dividend may be accumulated in case of cumulative preference share. |
| Return of equity
capital |
In case of dissolution of the company, equity share capital is refunded after the repayment of preference share capital. | In case of dissolution of the company, preference share is refunded before the repayment of equity share capital. |
| Convertible | It cannot be convertible. | It may be convertible. |
| Voting Rights | Equity shareholder enjoy voting rights. | Preference shareholders do not have voting rights. |
Issue of shares for cash
The shares of a company can be issued either at par or at discount or at premium. The amount of shares can be collected either on lump-sum or on installment basis.
1) Issue of shares on Lump-sum Basis:
If the whole amount of share is collected at once, it is called issue of share on lump-sum basis.
- Issue of share at par: A share issued at a price equal to its face or nominal value is called issue of share at par. For instance, if a share of Rs. 100 each is issued at Rs. 100, it is known as issue of share at par.
- Issue of shares at Discount: A share issued at a price lower then its face or nominal value is called issue of share at discount. For instance, if a share of Rs.100 each is issued at Rs.90, it is issue of share at discount.
- Issue of share at premium: A share issued at a price greater than its face or nominal value is called issue of share at premium. For instance, if a share of Rs.100 each is issued at Rs.110, it is issue of share at premium.
2) Issue of shares on instalment Basis: The amount of shares may be collected in different instalments. Generally, such amount of instalments is collected in the form of application, allotment, first call and second and final call.
- Share application: A prospective subscriber intending to purchase the share pays first instalment of the amount of share with an application form. The amount of first instalment paid is called share application.
- Share allotment: The Company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending for subscribing the shares, which is called ‘letter of Allotment’.
- Calls on shares: The remaining amount of the shares allotted is called up by writing letters to the shareholders, which is known as calls on share. Such remaining amount is called up after receiving the allotment money.
Calls in Arrears: When a shareholder fails to pay the due amount of share allotment or calls, the unpaid amount of share is called ‘calls in arrears’. In other words, any instalment money (either allotments or calls or both) called up by the company but not paid by the shareholder within the specified time is called “calls in arrears.”
Calls in advance: The company receives the amount of share in different instalments. Sometimes, the company may receive the uncalled amount of instalments in advance as well. The amount of instalments, which have not been called up but received, is known as calls in advance. Calls in advance are liability and it is shown in liability and it is shown in liability side of balance sheet.
Minimum subscription: It refers to the amount, which must be raised to meet the requirement of operation of the business. According to Nepal Company Act 2053, a company must receive subscription at least 50 per cent of its issued capital as minimum subscription.
Under subscription: Sometimes, the shares offered by the company may not be subscribed fully by the public. If the shares subscribed are less than the shares offered, it is called under subscription.
Over subscription: The condition where the share application received is more than the number of shares offered by the company is called over subscription of shares. For example, a company has issued 20,000 shares but it has received application for 30,000 shares in such condition it is called over subscription. In such case, the company cannot allot shares to all the applicants in full.
Forfeiture of Shares: It is the cancellation of shares. This happens when a shareholder fails to pay allotment or call or both within the specified date. The Board of Directors can forfeit the default shares. Forfeiture of shares is a process of withdrawing the shares allotted and seizing the amount already paid by the defaulters.
Issue of shares for Non-cash consideration: The issue of shares for consideration rather than cash is called ‘issue of shares for non-cash consideration.’ A company may issue shares for purchasing assets and other business. It may also issue shares for paying underwriting commission and remuneration its promoters.
Share underwriting: Underwriter is a person or a company who undertakes for issuing the shares or debentures at a nominal commission. Share underwriting is an agreement between the company and underwriter under which the underwriter under takes for an agreed commission for whole or part of the shares and guarantees to sale the shares of the company.
Underwriting commission: Underwriting commission is a commission paid by a company to any person or financial institutions who guarantees to take up any shares or debentures offered by the company to the public for which the application is not received.
Brokerage: Share broker is an agent acting for the company in issuing shares. Brokerage is a commission changed by the broker for completing any negotiations. A share broker charges commission for rendering services in the issue of shares and debentures of a company.
