Reserve share capital refers to a portion of a company’s issued share capital that is set aside for future use, such as expansion or contingencies. It ensures financial stability and helps companies address unexpected costs or fund strategic growth initiatives.
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What Is Reserve Share Capital?
Reserve share capital refers to a portion of a company’s capital that is set aside for specific purposes, such as future investments, expansion, or to cover unforeseen contingencies. It provides financial security and strengthens the company’s balance sheet.
This capital is typically not immediately accessible for day-to-day operations but is reserved for long-term strategic goals. It helps businesses maintain a solid financial position, ensuring funds are available when needed for growth or to absorb unexpected financial setbacks.
Reserve Share Capital Example
Reserve share capital refers to funds set aside by a company for specific future use, such as growth, expansion, or covering unforeseen contingencies. Here’s an example:
Example:
Company ABC Ltd. issues 1,00,000 shares at a nominal value of ₹10 each, raising ₹10,00,000. The company decides to allocate 20% of this amount, i.e., ₹2,00,000, as reserve share capital. This reserve capital will not be used immediately but set aside for future needs, such as expansion or as a cushion during financial downturns.
In this example, the ₹2,00,000 represents the reserve share capital. It is a portion of the raised capital that will not be available for regular operations but serves as a safeguard for the company’s long-term financial stability.
Purpose of Share Capital
The main purpose of share capital is to provide a company with the necessary funds to finance its operations, expansion, and growth. It represents the ownership interest of shareholders and acts as a buffer against financial risks.
- Funding Business Operations: Share capital helps the company secure the financial resources needed for daily operations, covering expenses like salaries, raw materials, and administrative costs.
- Business Expansion: It enables a company to invest in new projects, acquire assets, and expand its market reach without relying entirely on debt.
- Building Credibility: A strong share capital structure can enhance a company’s reputation and attract investors, indicating financial stability and long-term sustainability.
- Providing Security: Share capital acts as a safety net for creditors and helps the company withstand economic downturns by absorbing potential losses.
Capital Reserve Calculation
Capital reserve is a portion of a company’s profits that is set aside for long-term investments or future contingencies and is not meant for regular business operations. It is typically created from non-operating income or gains.
Calculation of Capital Reserve:
- Sale of Fixed Assets: If the company sells an asset at a profit, the profit is added to the capital reserve.
Formula:
Profit from the sale of an asset = Sale Price – Book Value of the Asset - Revaluation of Assets: If the assets are revalued and their value increases, the surplus is transferred to the capital reserve.
Formula:
Revaluation Reserve = Revalued Amount – Previous Book Value - Premium on Issue of Shares: When a company issues shares at a price higher than their nominal value, the excess is credited to the capital reserve.
Formula:
Premium = (Issue Price – Face Value) × Number of Shares Issued - Profit on Reissue of Forfeited Shares: When forfeited shares are reissued at a premium, the gain is credited to the capital reserve.
Formula:
Profit on Reissue = Reissue Price – (Paid-Up Amount of Forfeited Shares)
Reserve Share Capital Formula
The formula for calculating Reserve Share Capital is typically based on the amount of capital that is designated as a reserve in a company’s share capital structure.
Formula for Reserve Share Capital:
Reserve Share Capital = Issued Share Capital – Paid-up Share Capital
Where:
- Issued Share Capital refers to the total value of shares issued by the company to shareholders.
- Paid-up Share Capital is the amount of issued capital that shareholders have paid for.
This reserve represents the portion of the share capital that is set aside for specific future purposes, such as expansion, covering unexpected losses, or any special investments. It is usually shown under the “Reserve and Surplus” category in the balance sheet.
Reserve Share Capital Vs Share Capital
The main difference between Reserve Share Capital and Share Capital lies in their purpose and usage. Share Capital is the total capital raised by issuing shares, while Reserve Share Capital is part of the issued capital set aside for future uses.
| Aspect | Share Capital | Reserve Share Capital |
| Definition | Total capital raised by issuing shares to shareholders. | Portion of issued share capital set aside for specific purposes. |
| Purpose | Used to fund operations, growth, and expansion. | Serves as a safeguard for unforeseen financial needs. |
| Usage | Readily available for business activities like expansion or paying debts. | Not immediately available, can only be used for specific future needs. |
| Flexibility | Flexible; can be used for various business needs. | More restrictive; can only be used for certain purposes like covering losses. |
Reserve Share Capital – Quick Summary
- Reserve share capital is a portion set aside for future investments, expansion, or contingencies. It strengthens financial security and ensures funds for long-term goals.
- Reserve share capital is a portion of raised funds set aside for future needs, like expansion or financial security.
- Share capital provides funds for operations, expansion, and security, enhances credibility, and acts as a buffer against financial risks, supporting long-term growth and stability.
- Capital reserve is a portion of profits set aside for future contingencies. It is created through asset sales, revaluation, share premiums, or forfeited share reissues.
- Reserve share capital is calculated by subtracting paid-up share capital from issued share capital, representing funds set aside for future investments or contingencies.
- Share capital funds operations and growth, while reserve share capital is set aside for future needs, offering less flexibility and being restricted for specific purposes.
Reserve Share Capital – FAQs
Reserve share capital refers to a portion of share capital that is set aside by a company for future needs or contingencies. It helps ensure financial stability and can be used for funding expansion, paying dividends, or covering unforeseen costs.
Capital reserve is calculated by subtracting the amount received for the issuance of shares from the nominal value of those shares. It can also arise from profits not distributed as dividends. It’s a portion of retained earnings or surpluses, allocated for specific purposes.
No, share capital is not considered a revenue reserve. Share capital is the funds raised through the issue of shares, while revenue reserves arise from the company’s profits, which are retained for reinvestment or distribution.
Reserve share capital can be used in times of financial distress or for funding specific company activities. It may also be used for issuing new shares, paying off debts, or facilitating growth plans in line with company strategies.
The purpose of reserve share capital is to safeguard a company’s financial health, ensuring that it has funds available for future expansion, unforeseen circumstances, or capital requirements. It also helps in improving a company’s creditworthiness and financial flexibility.
No, reserve share capital is different from capital reserve. Capital reserve refers to surplus funds accumulated from profits or gains not distributed as dividends, whereas reserve share capital refers to the portion of share capital set aside for specific purposes.
No, reserve share capital is not mandatory for all companies. It is generally used by companies seeking to secure additional capital for future needs or meet specific regulatory requirements. However, smaller or less capital-intensive companies may not require it.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
Disclaimer: The above article is written for educational purposes, and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.
