In commercial parlance, the word “capital” is generally used to denote the amount by which the assets of a business exceed its liabilities. However, in legal parlance, the word “capital” is used to denote the amount of money which a company raises from a sale of its shares.
Types of Capital
(a) Nominal or Authorized Capital
This is the capital that is stated in the memorandum pursuant to Section 5(4) (a) of the Act. It is authorized in the sense that, once the memorandum of association is registered, the company can take immediate steps to raise the capital from the public without applying for a permit. It is nominal because it is calculated on the basis of nominal or book value of the shares.
(b) Issued Capital
It is that position of the nominal capital which has been issued by the company. It is also known as subscribed or allotted capital. It may be equal or less than nominal capital but cannot exceed it.
(c) Paid-up Capital
It is that part of issued capital, which has been paid-up by the share holders. It may be equal to or less than the issued capital but cannot exceed it.
(d) Called-up Capital
It is that amount of issued capital which the company has asked its shareholders to pay by means of calls.
(e) Uncalled capital
This is the amount which remains unpaid on shares. The company may at any time, call upon the shareholders to pay the uncalled capital in accordance with the provisions of the articles.
(f) Reserve capital
Section 62 of the Act defines reserve capital as that portion of the issued but uncalled- up capital of a limited company, which the company’s members by special resolution, have resolved that the company shall not call up unless and until it is in liquidation. It is to be called up only for purposes of liquidation. As soon as a resolution is passed, the capital is put on reserve and the directors’ power under the articles to make calls on shares will not be exercisable in respect of that capital, unless the company is wound up. It is referred to in Section 62 as “the reserve liability” of a limited company.
(a) Prospectus Issue
Under prospectus issue, the company sells the shares directly to the public rather than selling them through intermediaries.
Company---->Sells shares to--->Public
The company issues a document generally called a prospectus. As a precaution against unsuccessful issue, the company may underwrite the issue.
A placing occurs if the company instead of selling its shares directly to the public arranges with a broker to sell them on its behalf.
Company---> Broker --->sells the shares to---> Public
(Acts as the company’s agent)
A placing may be “private placing” if the broker ‘places’ them with his clients instead of the general public.
(c) Offer for Sale
An offer for sale is an arrangement whereby a company sells the whole of its shares to an “issuing house” and the issuing house then resells the shares to the general public, usually at a profit.
Company---> Sells shares to----> Issuing House---> Resells shares to Public
The issuing house issues a document called “offer for sale”.
(d) Offer by Tender
An “offer by tender” occurs if a company writes tenders for its shares and resells them to the highest bidder. This is done with a view to obtaining the best price possible for the shares. Under this method, the company fixes a minimum price for the shares and accepts the highest tendered price above the minimum price.
(e) Rights Issue
This occurs when a company which has been trading for sometime makes an offer to the existing members to buy shares of a new issue in proportion to the number of shares they hold.
The existing members, rather than the public, are thereby given a ‘right’ to buy new shares. A member who does not want to keep the shares will have a right to sell them straight away if he accepts the company’s offer.
(f) Bonus Issue
It is a method by which a company instead of paying a cash dividend to its members retains the cash but issues new shares to the members. The company thereby increases the nominal capital and acquires the cash it needs for business expansion.
This method can only be used if the articles make a provision for it because the general rule at common law is that dividends are payable in cash (Wood vs. Odessa Waterworks Company).
(g) Conversion Issue
Occurs either during a re-organization of a company’s capital structure or when two or more companies amalgamate. What usually happens is that holders of one type of shares (preference shares) are offered the right to convert them into shares of another type in the same company e.g. ordinary shares, or in the case of amalgamation, the shares of another company.