Classes of Share Capital and illustration of how different type’s shares are issued  

The issue of shares refers to the process by which a company raises money by selling ownership stakes in the form of shares of stock to investors for a variety of purposes like expansion plans, repayment of debts, improving liquidity, or a plan to increase the long-term source of capital that helps a company operate smoothly, grow financially, and be profitable. The money that a company raises by selling shares to investors is known as shareholders’ capital, equity capital, contributed capital, paid-in capital or simply known as share capital.

Share capital can be divided into different classes and types based on the nature of the issue, the rights of the shareholders, and the stage of the issue:

Authorized share capital: Authorised share capital is the maximum value of shares a company can legally issue to its shareholders, as stated in its Memorandum of Association. It indicates the potential size of the company, and the company can issue shares up to this authorised capital to raise funds for future financing needs. The main difference between authorized capital and paid-up capital is that authorized capital is the maximum amount of capital a company can raise by issuing shares, while paid-up capital is the actual amount of money the company has received from issuing shares.”

Issued share capital: The total value of the shares a company elects to sell to investors is called its issued share capital. The par value of the issued share capital cannot exceed the value of the authorized share capital. It is a part of the Authorised Capital that the company has asked for investment from the general public for a subscription via shares. The par value of the issued share capital cannot exceed the value of the authorized share capital.

Subscribed share capital: Subscribed share capital refers to the fraction of a company’s authorized shares that investors have committed to but may not have paid for in full yet. It represents the commitment from the investors or shareholders that they are willing to buy the shares at a specific price.

Preferred share capital: Preference share capital is the money a company raises by issuing preference shares, which are a type of stock that gives shareholders certain rights. Preference Shareholders have the first right to receive dividends even before equity shareholders. Preferred shares have a special combination of features that differentiate them from debt or common equity. The shares provide their holders with priority over common stockholders to claim the company’s assets upon liquidation. The shares provide dividend payments to shareholders. Generally, preferred shares do not assign voting rights to their holders. However, some preferred shares allow their holders to vote on extraordinary events. Preferred shares may be converted to a predetermined number of common shares. Some preferred shares specify the date at which the shares can be converted to common shares, while others require approval from the board of directors for the conversion. Although terms may vary for the issuance of preferred shares, these shares can be repurchased by the issuer at specified dates.

Common equity share capital: Common equity is the total amount of money that all common shareholders have invested in a company. This includes the value of the common shares, retained earnings, and additional paid-in capital.

Bonus shares: Bonus shares are extra shares that a company gives to its existing shareholders. Companies issue bonus shares to use their saved reserves, enhance EPS, and boost their paid-up capital. Shareholders get these shares at no extra cost, also known as free shares or Bonus shares. As per Section 63 of the Companies Act 2013, Bonus Shares can be issued by utilizing only the following sources: (i) its free reserves (ii) the securities premium account; or (iii) the capital redemption reserve account: Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of fixed assets shall not be capitalised for this purpose.  Bonus shares shall not be issued instead of dividends.  A bonus issue, once announced, shall not be withdrawn.

Right shares: Right shares, also known as a rights issue of shares, are a way for companies to raise capital by offering existing shareholders the chance to buy more shares at a discount. This allows companies to raise money while keeping the voting rights of existing shareholders in proportion. The existing shareholders can also decline the offer of the right issue.

Non-voting Shares: A non-voting share is a share in the capital of a company that belongs to a class that has no voting rights. This is distinct from, for example, an ordinary share which gives the shareholder standard rights to vote at shareholder meetings in proportion to their shareholding. In the Companies (Amendment) Act of 2000, the concept of non-voting right equity capital was introduced in public limited companies. Non-voting shares can be used with great effect to achieve various transaction structuring objectives, such as, in the case of joint ventures, foreign collaborations, etc. The voting rights about preference shares are also laid down in s.87 of the Companies Act. The main advantage of non-voting stock is that it allows investors to benefit from a company’s financial performance without getting involved in its governance. This can be particularly appealing for passive investors or those who prefer to focus on a company’s financials rather than its corporate politics.

Sweat equity shares: These shares are given to employees or directors as a reward in exchange for their contributions to the company. It’s often used in startups and small businesses, where founders and early employees may not receive immediate cash compensation. Instead, they are rewarded with equity shares in the company.

Treasury shares:  Treasury shares are shares that a company buys back from its shareholders and holds for its own use. They are also known as reacquired stock. The treasury shares reduce the amount of outstanding stock on the open market.

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