- Authorized Share Capital
- Issued Share Capital
- Subscribed Share Capital
- Right Shares
- Sweat Equity Shares
- Paid-up Capital
- Bonus Shares
Content:
- Equity Share Capital Meaning
- Types Of Equity Share Capital
- Types Of Equity Share Capital – Quick Summary
- Types Of Equity Share Capital – FAQs
Equity Share Capital Meaning
Equity share capital represents the capital raised by issuing shares to shareholders, granting ownership in a company. It serves as a vital financial instrument enabling companies to raise funds from the public and plays a crucial role in equity capital markets.
Types Of Equity Share Capital
Types of Equity Share Capital include Authorized Share Capital (maximum shares a company can issue), Issued Share Capital (shares offered to investors), Subscribed Share Capital, Right Shares (offered first to existing shareholders), Sweat Equity Shares (rewards to employees), Paid-up Capital, Bonus Shares.
Authorized Share Capital
Authorized Share Capital is a predetermined amount of share capital that a corporation can issue, as specified in its charter. It sets the ceiling on equity funding a company can secure by selling shares.
For Example, A company sets its authorized share capital at 1 million shares. This means it can issue up to 1 million shares to investors. If the startup grows and decides to expand, it may seek to increase this limit to 2 million shares, following approval and paying necessary fees.
Issued Share Capital
Issued Share Capital refers to the portion of the authorized share capital offered and sold to shareholders. It represents the actual equity capital raised by the company from investors.
For example, A family-owned restaurant decides to go public. It has an authorized capital of 500,000 shares but chooses to issue only 300,000 shares to the public for investment. These 300,000 shares represent the restaurant’s issued share capital.
Subscribed Share Capital
Subscribed Share Capital is the segment of issued share capital for which investors have shown interest and agreed to purchase. It indicates the amount of shares that shareholders have issued and claimed.
Example: A new green energy company issues 200,000 shares. Investors show interest in 150,000 shares and agree to buy them. These 150,000 shares represent the company’s subscribed share capital.
Paid-up Capital
Paid-up Capital is the total amount of money that shareholders have paid for their shares. It represents the portion of the issued capital that has been fully paid by investors and is available for use in the business.
For instance, A small bookstore raised funds through issuing shares. Of the total shares subscribed, 80% of the payment has been received from the shareholders. This received amount represents the bookstore’s paid-up capital, which is being used to expand its inventory and renovate the store.
Bonus Shares
Bonus Shares are additional shares distributed to existing shareholders without any additional cost, based on the number of shares they already own. These shares are typically issued from the company’s accumulated earnings.
For Example, A health and wellness startup has had an extraordinarily profitable year. To reward its shareholders, it issues bonus shares. For every 10 shares owned, shareholders receive 1 additional share at no cost. This gesture is a way of distributing part of the profits back to the investors.
Right Shares
Rights shares are offered by a company to its existing shareholders, providing them with the opportunity to purchase additional shares before the general public. It mirrors granting loyal customers priority access to a new product launch.
For example, an eco-friendly clothing brand that has been public for five years decides to issue new shares. It first offers these right shares to its existing shareholders, allowing them to maintain or increase their stake in the company before offering shares to new investors.
Sweat Equity Shares
Sweat Equity Shares are shares issued by a company to its employees or directors for providing know-how, making available rights like intellectual property rights, or value additions, often at a discount or for consideration other than cash.
Take an example of a software development firm that rewards its lead developers with shares in recognition of their exceptional contribution to a groundbreaking project. These shares, given instead of cash, are the firm’s way of appreciating their hard work and dedication.
Types Of Equity Share Capital – Quick Summary
- Equity Share Capital is the money raised by selling ownership stakes (shares) in a company. It helps companies get funds from the public, which is crucial in stock markets.
- Authorized Share Capital: The maximum number of shares a company can issue.
- Issued Share Capital: Shares actually sold to investors.
- Subscribed Share Capital: Shares investors agreed to buy.
- Paid-up Capital: Money shareholders have paid for their shares.
- Bonus Shares: Extra shares given to existing shareholders for free, based on the shares they already own.
- Right Shares: Existing shareholders get first chance to buy new shares.
- Sweat Equity Shares: Employees get shares instead of cash for their hard work.
Types Of Equity Share Capital – FAQs
What are types of equity shares?
Equity shares come in various forms, including Bonus Shares (issued free to current shareholders), Right Shares (offered to existing shareholders at a specific price), Sweat Equity Shares (awarded for non-monetary contributions like intellectual property), and more specialized forms like Voting and Non-Voting Shares.
What is the equity share capital?
Equity share capital is the amount a company raises by issuing shares, offering investors a fractional ownership of the company. It serves as a primary source of funds, where shareholders are entitled to dividends and have voting rights.
How many types of equity capital are there?
There are several types, including Subscribed and Authorized Share Capital, Bonus shares, Sweat Equity shares, Paid-up capital, Rights Capital, and Issued Share Capital, each with unique characteristics and implications for investors and the company.
What are the two sources of equity capital?
The two primary sources of capital for a company are retained earnings, which are profits reinvested into the company, and shareholders’ funds, derived from money raised by issuing shares to investors.
What are the main features of equity shares?
Key features include high liquidity, potential for dividends that vary based on company profits, voting rights in company decisions, and capital appreciation as a form of shareholder return. However, they also carry risks like dividend uncertainty and market value fluctuations.
