What is Capital?
The term capital, in general, means the amount of money invested in a business. It includes not only the money invested at the time of inception of business firm but also all the moneys invested subsequently. Capital is must for all business concerns irrespective of their nature, size or constitution, and so without adequate capital no business can survive. The failure of many business concerns is only due to the lack of sufficient capital.
The term capital as used by a layman denotes only the contributions of the owner of a business firm i.e., owned capital. But the term capital is very wide in its scope. It means and includes owned capital as well as borrowed capital.
The capital raised by the company by issuing shares is called share capital. The Companies Act uses the term capital in several senses. They are the following:
1. Authorized Capital: This is the amount of capital stated in the capital clause of Memorandum of Association. It is also known as “Nominal Capital” or “Registered Capital“. The company is entitled to raise finance by the issue of shares only up to the amount of authorized capital. However, the company can increase the amount of authorized capital by altering the Memorandum suitably. The promoters generally fix the amount of nominal capital after considering both the long-term and short-term requirements of the proposed company.
2. Issued Capital: It is that part of nominal capital which is issued to the public. Companies generally do not issue all its capital at once. They issue their capital in installments and so the issued capital is generally less than the nominal capital. It never exceeds the authorized capital.
3. Subscribed Capital: It is that part of the issued capital which is taken up by the public. Sometimes, the public may not take up all the shares that are offered to the public, for subscription. In such case, the subscribed capital shall be less than the issued capital. If the public subscribes all the shares, it shall be equal to the issued capital.
4. Called up Capital: It is that part of the subscribed capital, which has been called up on shares. For example, if the face value of a share is Rs.10 and Rs.5 has been called up on each of the 10,000 shares, then the called up capital shall be Rs.50,000.
5. Paid-up Capital: It is that part of the subscribed capital which has been actually paid up by the shareholders. The amount not paid by the shareholders on the calls made is known as calls-in-arrears. The expression “Paid-up Capital” also includes the amount credited as paid up on the shares.
6. Uncalled Capital: It is that part of the capital, which is not called up on the shares already, issued. The shareholders continue to be liable to pay as and when the calls are made.
7. Reserve Capital: It is that part of the capital which the company has decided not to be called up except in the event of winding up of the company. Sometimes, a company may feel that the capital already paid up is sufficient for the proper conduct and smooth running of the company. In such case, it may decide not to call up a certain portion of its subscribed capital except in the event of winding up. The company law also sanctions the creation of a reserve capital otherwise known as “Reserve Liability“.
As per law, the company is required to pass a special resolution to determine that any portion of its share capital, which has not been already called-up shall not be capable of being called-up except in the event of its winding up. If such a resolution is passed, then that portion of its share capital shall not be called-up except in that event. The purpose of this capital is to protect the interest of the creditors in the event of winding up of the company.
Share capital is not a condition precedent for incorporation of a company because the Act allows registration of companies without a share capital. But for trading companies capital is essential at every stage. The term capital, in relation to a company, can be broadly divided into four kinds. They are as below:
1. Equity Capital: It consists of equity shares and denotes the capital raised by the issue of equity shares.
2. Preference Share Capital: It consists of preference shares and denotes the capital raised through the issue of preference shares.
3. Debenture Capital: It consists of debentures and denotes the money raised by the issue of debentures. The debenture is only a debt of the company and comes under the category of borrowed capital.
4. Public Deposits: Now-a-days companies like commercial banks, accept deposits from the public. The rate of interest is generally attractive.
Methods of Raising Capital
A private company cannot raise capital by the public issue of share. Only a public company can issue its shares and debentures to the public and thereby mobilise the funds. There are three methods of raising the share capital from the public. They are
- By directly selling the shares to the public (i.e., Public Issue),
- By entering into an underwriting contract with the underwriters, and
- By placing shares.
The company, when it feels that the whole issue may not be subscribed by the public it may either enter into an agreement with the underwriters or place the shares, so as to ensure the sale of the whole issue of the shares.