What Is Equity Share Capital And Its Types

Posted by Nirav Singhaniya on August 20th, 2019

Investing and trading in equity shares is quite popular among many people. However, when you’re investing, it is important to know what you’re investing in. So when it comes to shares, you must know what equity investment is? Making investments without knowing the instrument can be highly risky.

What is equity?

The primary form of capital for a company is referred to as equity share capital. In equity share capital, funds are raised in exchange for ownership of the company. This means that shareholders are the owners of the company. The profits that the company makes during the year are distributed to equity shareholders in the form of dividend. Equity shareholders can also get bonuses and apply for a rights issue since they are owners of the company.

Equity share capital is permanent. Once the company raises equity investment, it is not returned to the shareholder unless the company is wound up or liquidated. Even when the liquidation proceedings happen, Government dues, employee dues, secured and unsecured creditors will get their dues before equity shareholders. This means only if there is anything left after repayment of dues, the shareholders will get their money back.

However, not all companies get liquidated. Which means if you plan your investment properly, you can get a significant capital appreciation from investing in equity shares capital.

Types of equity share capital

The types of equity shares capital are those appearing in the balance sheet of the company.

Authorised share capital:

Authorised share capital is the maximum amount of capital that the company is allowed to raise as per the Memorandum of Association of the company. If the company wants to increase the authorised share capital then it can do so after taking consent from the shareholders.

Issued share capital:

Issued share capital is that part of the authorised share capital which is actually issued by the company in the form of shares. The Memorandum of Association clearly specifies the number of shares that can be issued and the face value of the share.

Paid up share capital:

The paid up share capital is that part of the issued share capital that is paid by the shareholders. When companies go for an IPO, the entire share capital amount is paid by the shareholder.

Called up share capital:

In case of rights issue or for a company that has not listed on the stock exchange, the company may decide to call up a portion of the face value of the share in batches as and when the company needs it. For example, a company with a face value of Rs. 10 can call up Rs. 2 for subscription and then the remaining Rs. 8 as and when it needs the funds. This type of capital will be shown in the balance sheet as called up capital.

Calls in arrears:

The share capital that is pending to be received from the shareholder is called calls in arrears. This is added to the called up share capital in the balance sheet.

Calls in advance:

Sometimes shareholders pay their calls in advance even when the company has not called for it. This amount is deducted from the share capital account since till the time the call is not made, the amount is not due.

Learning about equity share capital can help you decide whether to invest in shares or not. Shares can be purchased by opening a demat account and trading account with a reputed stock broker like IndiaNivesh who can help you with your trades.