Capital and its Types

• The term capital cannot be defined in one sentence or one line. The meaning of capital may vary. It depends on the different situation or context. Generally the meaning of capital is real value of property. So, capital has different meaning according to context.
• In simple word, the term capital denotes a particular amount of money with which, a business is started.
• In the case of company, the term share capital refers to amount raised by the issue of shares.
• Actually, the real value of business is capital.
• C. B. Gower ‘’ with the normal business capital is a simple name given to the ‘net worth of business’, the amount by which the value of assets exceeds the liabilities.
• By this definition only value of assets which exceeds the liabilities is the capital.
• So, what is net worth?
• As per Section (2 z 3) of the Companies Act 2063 of Nepal ‘’ net worth means the assets of a company remaining after deducting the paid up capital, reserve, fund or free reserve of whatever designation to which shareholders have right or all other liabilities other than goodwill, if any, of the company as well as loss provisions, if any, from the total assets of the company for the time being.
• Capital is highly important to run a company on the basis of limited liability.
• Creditors always recover their debt from only the capital of company, not by the shareholders individually or personally.
• So, company laws in every state have prescribed a guideline regarding capital raising or formation and its maintenance of limited liability of company.
• Mainly, there are three ways to raise capital for company.
• By issuing shares
• By issuing debenture
• By accepting other types of loan
• One of fundamental or basic source of capital in company is Share.

Share Capital

Share capital is an important source of company to raise a fund or capital.

By the phrase it is clear that share capital is the capital raised by issuing the share.
Share + capital=share capital.

If so, what is share?

• Share is certificate representing a unit ownership in a company.
• A share is the interest of shareholder in the company measured by a sum of money, for the purpose of liability in first place and of interest in second, but also consisting series of mutual covenants entered in to by all shareholders (Farwell J in Borland’s Trustee v. Steel Brothers, 1901, 1 Ch 279)
• Section 2 (n) of the Companies Act 2063 BS states that share is divided portion of share capital of a company.
• Share capital is equity of company. Share capital generally refers the nominal value of all share issued by company.
• Every company should mention its share capital in its MoA & AoA.
• Share capital refers to the amount of company raised by the issuing of shares.
• Issuing of share is mandatory legal provision as per section 18(1) e, f, g, h, i of the Companies Act 2006 of Nepal.

• As per these legal provisions;

  • The figure of authorized capital of company, the figure of share capital to be issued by the company and the figure of capital undertaken to be paid by promoters must be mentioned in memorandum.
  • Similarly, types of shares, inherent right in such shares, value and numbers of shares , restriction (if any) on purchase of shares, promoters’ shares (undertaken to subscribe for the time being) & terms of payment of share amount must be mentioned in MoA.

• The CRO will take certain fees on basis such share capital amount as registration fees of company.

• The person who has ownership in share of company is known as shareholder of company.

• As per section 2(r) of the Companies Act, Shareholder means a person having ownership in the share of company.

• According to section 2(n) Share means the divided portion of share capital of a company.

• According to Robert R. Pennigton (Pennigton’s Company Law 6th ed p. 136) –Share Capital is amount contributed by shareholders to company’s resources.

• The received amount for the price of share is share capital.

• The amount contributed by shareholders is main capital of company. Such share capital is the real property of company, not a loan, but property.

• Share capital is not refunded until company is liquidated.

• The company is not allowed to distribute dividend from such share capital, can distribute only from profit.

• There is statutory provision relating to prohibition on purchase by company of its own share.

• Section 61(1) of the Companies Act , No company shall purchase its own share (buy- back) or lend money against security of its own share except in particular conditions prescribed by the company Act.

• Company is not a creditor and debtor of its own.

• So, share capital is fixed capital of company.

• The desired goal or nature of business of company determines the share capital of company.

• The share capital is depended upon the nature of particular company. For example; Private company, public company, Banking Company, Insurance company, Company as school.

• Companies expect profit not sharing company should mention share capital in MoA & AoA in the form of Authorized Capital \ Issued Capital \ Paid up capital.

• The share capital is divided on different value units or shares.

• So, price value of each share is mentioned in share certificate.

Types of Capital

• There are so many types of share capital in the companies.
• Basically, The Companies Act 2006 (2063 B. S.) of Nepal has determined following types of share capital.

Authorized Share Capital or Nominal Capital
A

• uthorized share Capital is sum of money which is mentioned in MoA as the authorized capital of company.
• It is nominal or registered capital of company.
• It is maximum amount which a company is authorized to raise by issue of shares and upon which company pays the registration fees of company.
• Either the full amount or part of full amount can be issued whenever needs to rise.
• Total nominal value of shares which is mentioned in memorandum is authorized capital.
• Practically, the size of authorized capital is decorative significance for private company.
• Present company Act of Nepal is silent about how much authorized capital should be mentioned in a company, but it is understood that issued & paid up capital must not exceed the authorized capital.
• Paid up capital of a public company shall be a minimum of 10 million or one corer rupees. (Section 11 of Act).
• So, it is clear, there is a pre-condition regarding authorized capital of a public company that public company shall have a minimum of a 10 million share capital.
• No authorized capital is needed for a profit not sharing company.
• No such demarcation of authorized capital for a private company in Nepal.
• Life & non-life insurance company should maintain their paid up capital 25 corer & 10 corer or 250 million or 100 million respectively. It means the authorized capital of such insurance company should not be less than that figure of amount. Authorized capital of banking company is guided by BaFI Act and NRB Act.
• For private company, it depends upon the business volume, nature of business or transactions e.g. vehicle trading company, vegetable trading company, Hydropower Company, constructions company , consultancy service provider company etc.
• Authorized capital is maximum limitation of capital of company. So, company cannot issue share above the authorized capital, if issued it will be null & void.
• As per section 18(1) (e) of the companies Act, the authorized capital of company must be stated in MoA.
• As per legal provision of section 51 (2 ) (a) of Nepalese company Act every company shall prepare the inventory regarding authorized capital and shares of the company.
• Section 56 (1 )(a) &( 3) states that the company should give information within 7 days about alteration of authorized capital. If such alteration took place the MoA & AoA must be amended according to such alteration.

Issued Capital

• Part of authorized capital which is offered for subscription is known as issued capital of company.
• Issued capital is the portion of company’s authorized capital that can be issued to its shareholders.
• It is not obligatory for the company to issue the whole of the authorized capital for subscription.
• In almost situation, company need not necessary all its authorized capital, at that time company can issue lower share than its authorized capital. It depends upon business transactions of company.
• The capital that will be collected from issuance of such lower share is actually the issued capital.
• Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must not be below the 10 million.
• As per section 18(1) (e) of the companies Act, the issued capital of company must be stated in MoA.
• As per legal provision of section 51 (2 ) (b) of Nepalese company Act every company shall prepare the inventory regarding issued capital and shares of the company.
• As per Section 56 (5), if a company is required to increase its issued capital to the extent of its authorized capital, it may increase by adopting an ordinary resolution at the general meeting.
• Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must be maintained as per this legal provision.
• As per special law, some companies such as banking companies & insurance companies must have the issued capital as stated in special law relating to such companies e.g. for insurance company and banking companies.
• Private company can determine its issued capital as per the requirements of its business transactions.

Paid – up Capital

• In reality, paid up capital is that type of capital which the company actually gets from the shareholders.
• By the name, it is understood that paid up capital is the capital which is paid by the shareholders in company.
• The paid amount by the shareholders for share is paid up capital of company.
• Paid up capital is the amount that has actually been paid – up by shareholders.
• The paid – up Capital must be paid by the shareholders, otherwise it is treated as unpaid amount to the company. Like dues.
• Public company must have 10 million paid up capital as per section 11 of the Companies Act 2006 of Nepal. So, paid- up capital of public company must be maintained as per this legal provision. Private companies can manage its paid up capital as per its necessity, nature & volume of business transaction.
• As per section 18(1) (e) of the Companies Act, the paid-up capital of company must be mentioned in MoA. Private company can mention the paid up capital as per their needs, no any legal instructions for private companies.
• As per legal provision of section 51 (2 ) (c) of Nepalese company Act every company shall prepare the inventory regarding paid-up capital and shares of the company.
• As per Section 56(1)& (5),every company can make alteration on its share capital by adopting a special resolution in general meeting. It means the paid up capital of company may be altered, if altered, the MoA & AoA must be amended as per section 56(2) of the Companies Act.

Other Types of Capital

Subscribed Capital

• Subscribed capital is the amount of share capital which the shareholders have subscribed or agreed to subscribe.
• The subscribed capital should be described in balance sheet of company.
• Sometime the issued shares of a public company may not be sold or subscribed. The part of issued capital which has been actually taken up or subscribed for the public is the subscribed capital. Which the shareholders have actually subscribed or agreed to subscribe. All issued capital may not be subscribed or agreed to subscribe. So, subscribed capital is the capital which is actually subscribed or agreed to subscribe.
• The entire issued capital may be agreed to subscribe or subscribed by public in case of a reputed company because of has lot of good will, but in case of very unpopular or unsound companies the subscribed capital may be less than issued capital.
• The subscribed capital is not mentioned in MoA & AoA, it is mentioned only in balance sheet of company.
• Though there is no clear provision regarding subscribed capital in Nepalese companies Act, but the concept of subscribed capital is accepted by this Act. That can be found by reading of respective sections of chapter 4 of the Companies Actg. the provisions relating to alteration & reduction of share capital, mentioned in section 56 & 57 of the Companies Act.

Reserved Capital

• The capital of a company which can be generated by issuing of share in particular event, if the board feels necessary. The reserved capital is collected from the remaining part of issued capital which is not called for payment or subscribed before.
• The reserved capital is the part of issued capital of a company, which the company has not issued but that is the amount within the issued capital. From such part of issued capital, if the board feels necessary, the board can collect the reserve fund from that part of issued capital only in the event of liquidation or insolvency of company.
• There will not be provision of reserve capital in all companies. As per the legal provision of section 53(7) of the Companies Act 2063 “ a company which has been making profit for a period of 3 consecutive years or more may , by a special resolution adopted at its general meeting, determine that a call may not be made in respect of certain portion of its share capital not call in expect in case of liquidation or insolvency of company.’’ Such uncalled capital is reserve capital of company.