SHARE CAPITAL: Meaning, Features, Importance

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 SHARE CAPITAL: Meaning, Features, Importance

Share capital refers to the funds a business raises through issuing shares to investors. It constitutes the fundamental portion of a firm's financial structure and shows the equity part of its capital. Put differently, this is the proportion that shareholders contribute to the company out of which ownership is granted.


How it Works

A company normally starts with an authorized share capital, which simply denotes the maximum number of shares that can be issued by the company legally, as noted in its memorandum of association. This does not mean that the company has to issue all these shares at one time.


When a company decides to raise funds, it issues a certain number of shares which is called issued share capital. These are offered to investors, who can buy them. The amount received from there is the subscribed capital.


It doesn't all have to be paid upfront. The company can call for just part of the share price initially; this is called capital. The rest has to be paid later. The actual money received by the company from its shareholders is called paid-up capital.



FEATURES OF SHARE CAPITAL

Share capital is the sum of money a company receives from the issue of its shares. It represents the ownership interest of shareholders in the company. The following are the principal features and characteristics of share capital in detail:

1. Ownership

Equity Ownership: Share capital represents ownership in a company. Shareholders are the owners and have a claim on the assets and earnings of the company
.
Voting Rights: Each shareholder has the right to vote on significant matters concerning the company, such as the election of members to the board of directors and entering into significant corporate activities.

2. Types of Shares

Common Shares: These are types of shares that confer voting rights and the possibility of receiving dividends; however, dividends are not guaranteed. Common stockholders become the last shareholders to acquire the assets in liquidation.

Preferred Shares: These normally carry no voting rights, but the holders receive a fixed dividend, and in liquidation, have priority over common shares in the distribution of assets.

3. Issuance and Par Value

Par Value: It is the face value of a share as mentioned in the corporate charter. The shares can be issued at, above, or below par value.

No Par Value Shares: Some jurisdictions permit the issuance of shares without a par value.

4. Capital Structure

Authorized Share Capital: It is the maximum capital, that may be issued by a company. It is mentioned in the charter of the company.
Issued Share Capital: It is that part of the authorized capital, which has been issued to the shareholders.
Paid-Up Capital: It is a part of issued capital, which is paid up by the shareholders

5. Dividends

Right to Dividend: The shareholders have a right to receive dividend, which the company distributes as profit.
Preference: The preferred stockholders receive the dividends first followed by common stockholders.

6. Transferability

Liquidity: Most of the shares are transferable. This brings liquidity to shareholders. They are normally traded on a stock exchange and also in private dealings.

Restrictions: These may relate either to private companies or to particular classes of shares.

7. Risk and Return

Residual Claim: If the firm is liquidated, then the shareholders do have some residual claim over the assets only after all the debts and other obligations are paid.

Risk: They face the highest risk as they happen to be the last ones in the event of liquidation. Hence in case of failure of the company, they may lose their entire money invested in it.

Return: Chance of high returns to be obtained through dividends and capital appreciation.

8. Regulatory Compliance

Legal Setting: Acts and Legislation provide an environment that guides share issuance and trading to protect investors and ensure integrity in the market.

Disclosure Requirements: It requires a Company to disclose regular financial information to shareholders and the regulator.

9. Corporate Governance

Board of Directors: The shareholders elect members to the board of directors, which oversees the management of the company and makes strategic decisions.

Shareholder Meetings: Annual General Meetings and Extraordinary General Meetings are held for the shareholders to discuss and vote on major issues.
10. Dilution
Dilution of Ownership: The issuance of new shares can cause a dilution in the ownership percentage of existing shareholders.

Rights Issues: This is when a company gives existing shareholders the right to buy more shares before offering them to the public, hence preventing dilution.

It is important to understand such features and characteristics for investors to make a proper and correct decision regarding their investment in shares and for companies to manage capital structure properly.

BENEFITS OF SHARE CAPITAL

Share capital is the money raised by an entity through the issuance of various types of shares. The following are some of the main advantages that are associated with share capital:

1. Permanent Source of Finance: Share capital is a permanent source of finance for the company. Unlike loans, which have to be returned with interest, share capital stays with the company forever.

2. No Obligation to Repay: A company is not obliged to compulsorily repay its share capital. This reduces the financial burden on the company compared to debt financing, where interest and principal repayment are compulsions.

3. Creditworthiness: Substantial share capital can add to a company's creditworthiness and, hence, enhance its eligibility to avail loans or other sources of credit.

4. No Interest Payments: Unlike debt, share capital does not require interest payments, which can definitely enhance the cash flow and financial stability of the company.

5. Ownership and Control: The issuance of shares could lead to an increase in the ownership base without increasing the debt. This will bring about increased control and participation in the growth of the company from a larger pool of investors.

6. Improved Equity Ratios: An increased equity ratio can result in an improved financial ratio, such as the debt-to-equity ratio, making the company more attractive to investors and lenders.

7. Access to Capital Markets: Any company that has share capital is in a position to enter public capital markets for raising large amounts of capital by an initial public offer of shares and subsequent issues of shares.

8. Market Perception: Large share capital will change the market's perception of the company, resulting in increased prestige and, therefore, better valuation.

9. Incentivizing Employees: Share capital can be utilized for developing ESOPs, which can serve as a great incentive to staff by aligning their interest with the goals of the company.

10. Flexibility in Financing: Share capital provides flexibility in financing between equity or debt issues purely based on the strategic goals of the company and market conditions.

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