Equity Share Capital is the capital raised by a company through its Equity Shares.
So, to understand the Equity share capital, we need to under the Equity Shares first.
Equity Shares are common stocks of the company and possess voting rights for its shareholders, enabling shareholders to become part owners of the company, i.e., fraction ownership of the company.
Companies issue these shares through IPO (Initial public offer) to the general public with the prime motive of generating capital for the company’s growth and expansion.
When a company raises capital by issuing an equity share, it dilutes its ownership at the cost of capital.
Equity shareholders benefit themselves by receiving capital appreciation and receiving dividends, and bonuses.
Investors with an excellent appetite for risk should invest in equity investment options. Businesses can also use equity shares in various ways, like paying off vendors in exchange for raw materials and supplies.
In addition, shareholders also enjoy a say in the critical matters of the company. Equity shareholders come last in the row of paying off dividends, whereas in the case of preference shares, shareholders have the preferential right to receive dividends and capital repayment when a company goes into liquidation.
These uses of Equity Shares make it essential for the company to have equity share capital.
The prices of equity shares are determined by the demand and supply when trading on the exchange.
Costs of the shares are inflated when people buy more and vice versa. This, in turn, results in mainly two outcomes. If the company’s growth prospectus seems promising, investors wish to invest in and reap the benefits of capital appreciation.
On the other hand, the company’s poor performance results in investors losing interest and withdrawing their funds or selling off their holdings.
The more the market price of a company’s Equity Share, the more the capital appreciation.
However, after so many uses and preferences of equity shares, we should also look into the definition of equity share capital for a crystal clear understanding.
Equity share capital, also known as share capital or equity of a company, money, and funds contributed by investors and owners of the company forms the part of equity share capital.
Equity share capital does not constitute part of a company’s assets, but it increases cash inflow as investors bring in cash in exchange for shares.
The formula for Equity Share Capital is of two types.
The first formula is as follows:
Equity Share Capital = No. of outstanding shares X Price per share.
Note – This formula is used when the company has issued no preference shares, only equity shares.
The second formula is as follows:
Equity Share Capital = No. of shares (par value of the stock + paid-in capital over par value)
The elements involved in the formula of equity share capital are as follows:
Let us explain Equity Share Capital with the help of an example.
Assume a company named Multiverse Corporation has a share capital that only consists of Equity shares, i.e. the company has issued no preference shares yet.
The information known about the share capital of Multiverse Corporation as of 30th March 2022 is as follows:
No. of outstanding shares of Multiverse Corporation = INR 58.75 crore.
Face value of each Equity Share of Multiverse Corporation = INR 2 per share.
Now, we need to calculate the Equity Share Capital of Multiverse Corporation.
So, we know that the calculation of Equity Share Capital is facilitated by multiplying the number of outstanding shares by the face value of one share.
We have been already provided with the no. of outstanding shares and face value per share of Multiverse Corporation.
The formula for Equity Share Capital calculation is as follows:
Equity Share Capital of Multiverse Corporation = No. of outstanding shares of Multiverse Corporation X Face Value per share.
Now,
The value of outstanding shares of Multiverse Corporation = INR 58.75 crore.
And,
The face value per share of Multiverse Corporation = INR 2 per share.
So,
Equity Share Capital of Multiverse Corporation = INR 58.75 crore X INR 2 per share.
Hence,
Equity Share Capital of Multiverse Corporation = INR 117.5 crores.
Note:
The equity share capital is calculated on face value and not on market value, and the market value keeps changing once the company is listed on the stock exchange.
Thus, the equity share capital rarely experiences any change except when specific corporate actions occur.
Corporate actions like right issues, bonus issues, mergers and acquisitions, etc., are responsible for changes in equity share capital.
The multiverse corporation has an equity share capital of INR 117.5 crores which means it has raised INR 117.5 crores of wealth from investors or owners in exchange for ownership certificates.
The significant quantity of owners dilutes the ownership. And the intensity of ownership is subjected to the number of stocks held by an investor or owner.
The ensemble of Equity Share Capital considers some components. The components are as follows:
An integral part of equity share capital is the number of outstanding shares.
It can be defined as the number of stocks a company has sold to its investors, and these shares are not generally purchased back by the company.
And instead, they are issued to the general public, company insiders, and officers as restricted shares.
The market capitalisation and earnings per share (EPS) are also calculated based on the outstanding shares.
Another component of Equity share capital is the additional paid-in-capital.
Additional paid-in-capital is the surplus amount paid for stock units above the stated par value. The difference after deducting the par value of shares with the price at which each share is sold is the additional paid-in-capital.
APIC can only result when a company directly sells its shares to the investor. When a company launches its IPO (initial public offering), shares are offered to the general public at the list price.
The additional expense that the investor pays for the share over the face value of the share is the APIC. One can find this figure in the company’s balance sheet in the Equity section.
Retained Earnings form the most extensive item of the Equity Share Capital.
Retained Earnings are developed when a company maintains its income rather than giving it out to the investors as a dividend.
Companies use these retained earnings to pay off debt or reinvest in the business. Retention Ratio or Retained Surplus is a common term used by companies to refer to their retained earnings.
The last component of equity share capital is treasury stock. Companies sometimes re-purchase their stocks from the investors. These shares which are re-purchased by the company are known as treasury stock.
You might ask – Why does a company repurchase its own shares?
Well, there are primarily two reasons for this.
First, a company can use these stocks in the future to raise capital to expand its business.
Second, the company can use treasury stocks to prevent the company from a hostile takeover.
Treasury stock reduces the total equity share capital and is a negative number on the balance sheet, and this figure is subtracted from the company’s equity share capital.
Other terms for treasury stock are “treasury shares” or “reacquired stock.”
There are numerous types of share capital that one comes across while understanding equity share capital.
These share capital form a part of equity share capital or are required to calculate equity share capital to get a holistic view of the financial requirements and aids of the company.
The various types of Equity Share Capital are as follows:
When a company wants to get listed on the stock exchange, it must declare the amount of capital they wish to raise. This amount is mentioned in the Memorandum of Association (MOA).
Authorised share capital is a specified amount that states the amount of money a company can generate from the public.
A company cannot generate more capital than the amount specified as authorised share capital.
The authorised share capital is also known as registered share capital or nominal share capital.
After a company has specified its authorised share capital; it doesn’t need to issue the whole amount altogether.
The company can issue any amount depending on its financial requirements, irrespective of the amount stated as authorised share capital.
But, the company cannot give more shares than the amount mentioned in the authorised share capital.
Issue share capital refers to all the shares held by the general public, vendors, directors, employees, and Memorandum of Association (MOA) signatories of the company.
The company can also decide to issue a part of the share capital earlier and the remaining portion later.
Unissued Share Capital is the part of Authorised Share Capital that has not yet been issued to the general public.
It can be calculated by deducting the value of authorised share capital from the value of issued share capital. This value does not contribute to the share capital of a company in any way.
Subscribed Capital is the amount invested by the general public in the company. The amount of this Share Capital may or may not be equal to the Issued Share Capital.
Sometimes, the general public invests less than the company’s financial requirements. Then we say that the issued share capital has been undersubscribed.
However, sometimes the general public invests more than the financial requirements of the company. Then, we say that the issued share capital has been oversubscribed.
Called-up capital is a part of the amount per share asked by the company from the shareholders.
Let us explain with the help of an example.
Suppose a company named XYZ has issued 50000 shares of INR 5,00,000 with INR 10 per share. Assuming all the shares have been subscribed, it means the issued and subscribed share capital of the company is 5,00,000.
The share amount is divided into various parts like Application, Allotment, First call, Second call, Final call, etc.
Now let us say the company XYZ has decided to ask for
INR 2 per share during the application,
INR 3 per share during Allotment,
INR 1 during the First call,
INR 2 during the Second call, and
INR 2 during the final call.
So, this is how the company decides to acquire the INR 10 per share.
But, till now, the company has called up only the application and allotment money. So, the called-up capital is as follows:
Called-up capital = No. of shares X called-up amount per share.
Called-up capital = No. of shares X (application money per share + allotment money per share )
Called-up capital = (50000X (2+3))
Called-up capital = (50000X5)
Called-up capital = 2,50,000
Hence, the called-up capital of the company is INR 2,50,000.
Uncalled capital is the part of the amount per share that the company has not yet asked from the shareholders.
In the above example, the first call, second call, and final call have not yet been called by the company.
Hence, after deducting called-up capital from the subscribed share capital, the remaining amount can be termed uncalled capital.
This capital is the amount that the company will receive in future when it calls for the same.
The issued share capital is equal to the subscribed share capital, and then uncalled capital is calculated by deducting called-up capital with issued share capital or subscribed share capital.
However, if the issued share capital is not equal to the subscribed share capital, the uncalled capital is calculated by deducting called-up capital from the subscribed share capital.
When the company has called up a certain amount of capital, the public does not need to pay the whole called-up capital amount.
Only the amount of the called-up capital that the shareholders have paid is known as the Paid-up capital.
The remaining amount that has not been yet paid by the shareholders but has been called up by the company is known as outstanding capital.
Reserve capital is the amount of capital mentioned in the article of association of a company.
The company cannot access this amount until the company has become insolvent or is in the process of liquidation or winding up.
If a company wants to establish reserve capital, it needs to pass a special resolution stating that 3/4th of the majority of voters favour the decision.
Even after successfully establishing the reserve capital, a company cannot use this capital as collateral for any type of loan.
The company requires a court order to change its equity share capital. And the share capital is available only to creditors during the liquidating process or winding up of the business.
Circulating capital is a part of the company’s subscribed capital that has been invested in the company’s business operations.
It is also known as working capital and is used to form operation assets like Bank reserves, account receivables, etc.
Bonus share Capital is the capital raised through Bonus Shares.
When a company has access to retained earnings, it decides to distribute its profit in the form of a bonus issue.
Hence, Bonus shares are the type of equity shares that the company issues to its existing shareholders from its earnings.
Since the issue is made to the existing shareholder, there is no increase in the company’s market capitalisation.
However, market capitalisation does increase when other types of equity shares are issued.
Right share Capital is the capital raised through Right Shares.
Right shares are exclusive shares reserved for only specific or premium investors, and these shares facilitate an increase in the equity stake of a particular shareholder.
The main objective behind issuing right shares is to raise money from premium investors for a specific financial requirement. Hence, the issue of such shares happens at a discounted price.
Sweat equity share capital is the capital raised through Sweat Equity Shares.
Sweat equity shares are those shares that are received only by the directors and employees of a company.
The shares are issued to the employees or directors as a token of appreciation for their excellent work.
It is issued to applaud the contribution of such employees and directors to the intellectual property rights, know-how, or value addition to the company.
Sweat equity shares are issued at a discount to such directors and employees.
A company invites applications for its shares through IPO (Initial Public Offer) in the primary market, allowing its shareholders to acquire fractional ownership.
Companies’ primary motive for issuing equity shares is for the capital generation to fund their future growth and development plans.
Secondarily, creditworthiness is enhanced when a company acquires a large capital base in the market.
Hence, it is an extended opportunity for shareholders to earn a part of the company’s profit in the form of dividends and its stake in that particular company.
The risk involved in issuing Equity Share Capital are as follows:
These days investors have developed a better understanding of the market functions and actual data, analysis of which helps them to judge the prospectus before investing.
When a company invites investors to acquire their equity, but that does not comply with investors’ requirements and expectations, they will not be willing to invest.
Hence, the company will fail to generate the desired applications for the equity share capital.
When a corporation issues a large number of equity shares at a low face value, it increases the likelihood of attracting many investors.
Having a large shareholder base proves effective only when the number of shareholders is within manageable limits.
When the numbers become unmanageable, it adds to the company’s liability burden as they have to pay a greater bulk of returns as a dividend than they had bargained for.
An increased liability burden defeats the purpose of raising equity share capital and is also bad for the company’s sustainability.
Shareholders can open an equity share capital account and maintain a ledger for such transactions to keep better track of their equity share investments.
Companies that offer equity shares should keep track of their equity share capital increase in an equity share capital account.
Even if a company can acquire enough shareholders for their company shares, the profitability of raising sufficient cash is still limited. Investors can choose from a wide range of equity share choices on the stock exchange market.
The availability of many investment options typically limits the capacity to raise adequate equity share capital, rendering ventures that issue shares ineffective.
The Equity Share Capital of a company is essential to ascertain the value of that company.
It is one of those metrics that an investor might consider while evaluating a company’s financial position.
By gaining insights into the company’s equity share capital, one can understand if the company has enough assets to cover its liabilities.
This insight is crucial while categorising an investment as risky or safe.
Hence, a basic understanding of Equity share capital can substantially improve your decision-making skills to make well-informed decisions.
An asset is not equity share capital. However, an investor who purchases equity shares in a corporation pays cash for the claims, and this boosts the company's assets.
Vendors can also be given equity shares in exchange for goods or raw materials they deliver. A small business's liability and equity share are two opposing factors.
Any debt owed by the corporation is considered a liability. The value of the company's shares is known as the equity share.
Bonus shares are free additional shares provided to current owners based on the number of shares they own. These are the company's accumulated earnings converted into free shares rather than being distributed as dividends.
The term "right shares" refers to discounted share offerings that a corporation gives to its current shareholders.
The company's shareholders have the right to accept or reject the plan, and there are minimum requirements for share subscriptions if the proposal is accepted.
A corporation will often invite the general public to purchase shares to gain fractional ownership.
Shareholders are entitled to receive dividends as a result of their ownership. Typically, a significant privately held corporation issues stock to the public.
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