The owner’s interest in a limited company consists of share capital. The share capital is divided into shares. A share is the smallest unit of ownership in a company. The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. For instance, if a company decides to set up a share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
There are two main types of share capital
Preference share capital This is made up of preference shares and a preference share carries the right to a final dividend, which is expressed as a percentage of their par value. For example, 10% preference shares. Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value of the business during winding up, and all profits after the claim on the entire preference dividend have been paid. The more the number of ordinary shares one holds, the higher the control of the company.
Share capital may also have the following meaning:
Authorized share capital Also called, registered or nominal capital. It is the total of the share capital which the company is allowed to issue to shareholders. A company cannot issue more shares than the amount that is authorized. Issued share capital This is the total of the share capital actually issued to the shareholders.
Called up share capital This is the amount the shareholders have been asked to pay where the amount of capital required is less than the issued share capital. For example, if a firm issues ordinary shares of Kshs. 1 each and request the shareholders to pay 60cents. Assuming that the issued shares are 100,000 shares, then the called up share capital will be:
60cents 100,000 = Kshs. 60,000
Uncalled share capital This is part of the issued share capital for which the company has not requested for payment and therefore these amounts will be received in the future. In the above illustration, because the firm had not requested for 40cents, therefore the uncalled capital is
40cents 100,000 = Kshs. 40,000.
Paid-up share capital This is the total of the share capital, which has been paid for by the shareholders.
Market value This is the value of a share in the open market. It is the value at which a share can be bought/sold in the stock exchange.
Share premium This is the profit obtained on the sale of shares by company. It arises when shares are sold at a higher value than the par/nominal value. Share Discount This arises where shares are sold at a lower value than their nominal value during a public offer.
Issued share capital This is the capital that has already been subscribed by members of the public.
Authorized share capital This is the capital which directors are authorized by law to collect from members of the public. It is usually specified in the memorandum of association. Prospectus A document/advertisement inviting members of the public to subscribe for shares in a limited public company.
Bonus shares Are shares issued to existing shareholders free of charge. They are paid out from either the share premium, balance of retained profits of the General Reserves. A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a price lower than the market price. It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights are issued the shareholders have 2 options available. Buy the new shares and exercise their rights Sell the rights in the market, Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by the company.