Consider the following statements:
1. Nominal Capital is the maximum capital which the company can raise in its life time
2. Subscribed Capital is the shares outstanding
3. Reserved Capital is used in case of the winding up of the company
Which among the above statements is / are correct?
There are various terms used in connection with the share capital of the company. They are as follows:
Authorized / Registered / Nominal Capital:
This is the Maximum Capital which the company can raise in its life time. This is mentioned in the Memorandum of the Association of the Company. This is also called as Registered Capital or Nominal Capital.
This is the part of the Authorised Capital which is issued to the public for Subscription. The act of creating new issued shares is called issuance, allocation or allotment. After allotment, a subscriber becomes a shareholder. The number of issued shares is a subset of the total authorized shares.
Shares authorized = Shares issued + Shares unissued
The issued Capital may not be fully subscribed by the public. Subscribed Capital is that part of issued Capital which has been taken off by the public i.e. the capital for which applications are received from the public. So, it is a part of the Issued Capital as follows:
Issued Capital = Subscribed Capital + Unsubscribed Capital
This can be understood by an example. If we say that 15000 shares of Rs. 100 each are offered to the public and public applies only for 12000 shares, then the Issued Capital would be Rs. 15 Lakh and Subscribed Capital would be Rs. 12 Lakh. Please note that once the shares have been issued and purchased by investors and are held by them, they are called Shares Outstanding. These outstanding shares have rights and represent ownership in the corporation by the person that holds the shares. The unsubscribed capital is also known as Treasury shares, which are shares held by the corporation itself and have no exercisable rights. Shares outstanding plus treasury shares together amount to the number of issued shares.
Called – up Capital
The Company may not need to receive the entire amount of capital of capital at once. It may call up only part of the subscribed capital as and when needed in installments. Thus, the called – up Capital is the part of „subscribed capital which the company has actually called upon the shareholders to pay. Called – up Capital includes the amount paid by the shareholder from time to time on application, on allotment, on various calls such as First Call, Second Call, Final Call etc. The remaining part of subscribe capital not yet called up is known as Uncalled Capital. The Uncalled Capital may be converted, by passing a special resolution, into Reserve Capital; Reserve Capital can be called up only in case of winding up of the company, to meet the liabilities arising then.
The Called-up Capital may not be fully paid. Some Shareholders may pay only part of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-up capital which is actually paid by the shareholders. The remaining part indicates the default in payment of calls by some shareholders, known as Calls in Arrears. Thus,
Paid-up Capital = Called-up Capital – Calls in Arrears.
As mentioned above, the company by special resolution may determine that a portion of the uncalled capital shall not be called up, except in the event of the winding up of the company. This part is called Reserved Capital. It is kept reserved for the Creditors in case of the winding up of the company.
This question is a part of GKToday's Integrated IAS General Studies Module