Explain the Classification of Share Capital | 12th HSC Secretarial Practice (S.P.) Chapter 3
The question "Explain the classification of Share Capital" is a 5-star topper's favourite 8-mark long answer question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 3: Issue of Shares. In the HSC Board Examination, this question frequently appears in Question 8 (Answer the Following) for 8 Marks. Because this answer includes a hierarchical classification chart and a step-by-step numerical illustration, examiners immediately award a full 8 out of 8 Marks! Below is the complete model answer strictly aligned with the latest Balbharati Textbook.
Board Examiner Marking Scheme (8 Marks):
1. Meaning of Share Capital & Classification Chart: 2 Marks
2. Explanation of all Sub-divisions of Share Capital (with numerical example): 6 Marks
Topper's Tip: Using the simple Rs. 10,00,000 (1,00,000 shares of Rs. 10 each) textbook numerical example under every point makes your explanation 100% crystal clear!
1. Meaning of Share Capital and Its Classification
Share Capital refers to the capital raised by a joint-stock company by issuing shares (Equity Shares and Preference Shares). In the balance sheet of a company, Share Capital is shown under several sub-headings depending on the stage of issue, subscription, and collection of money from shareholders. This step-by-step breakdown is known as the Classification of Share Capital.
2. Classification Chart of Share Capital (With Textbook Numerical Example)
Let us understand the complete hierarchy of Share Capital with the standard Balbharati textbook example of a company having an Authorized Capital of Rs. 10,00,000 divided into 1,00,000 Equity Shares of Rs. 10/- each:
| Level | Category of Share Capital | Sub-Division / Breakdown | Numerical Example (Face Value = Rs. 10) |
|---|---|---|---|
| Level 1 | 1. Authorized / Nominal / Registered Capital | Maximum capital authorized by Memorandum of Association (MoA) | 1,00,000 Shares × Rs. 10 = Rs. 10,00,000 |
| Level 2 | Divided into: 2(a) Issued Capital 2(b) Unissued Capital |
Shares offered to the public to buy Balance shares not yet offered to the public |
40,000 Shares × Rs. 10 = Rs. 4,00,000 60,000 Shares × Rs. 10 = Rs. 6,00,000 |
| Level 3 | Issued Capital is divided into: 3(a) Subscribed Capital 3(b) Unsubscribed Capital |
Part of Issued Capital actually bought by public Part of Issued Capital not subscribed by public |
30,000 Shares × Rs. 10 = Rs. 3,00,000 10,000 Shares × Rs. 10 = Rs. 1,00,000 |
| Level 4 | Subscribed Capital is divided into: 4(a) Called-up Capital 4(b) Uncalled Capital 4(c) Reserve Capital |
Amount actually demanded by the company (Rs. 5) Balance not yet demanded (Rs. 4) Kept reserved to be called only on winding up (Re. 1) |
30,000 Shares × Rs. 5 = Rs. 1,50,000 30,000 Shares × Rs. 4 = Rs. 1,20,000 30,000 Shares × Re. 1 = Rs. 30,000 |
| Level 5 | Called-up Capital is divided into: 5(a) Paid-up Capital 5(b) Calls in Arrears (Unpaid Capital) |
Amount actually paid by shareholders Amount unpaid by defaulting shareholders |
29,000 Shares × Rs. 5 = Rs. 1,45,000 1,000 Shares × Rs. 5 = Rs. 5,000 |
3. Detailed Explanation of Classification of Share Capital
1. Authorized, Nominal, or Registered Capital
- Meaning: Authorized Capital is the maximum amount of capital that a company is authorized by its Memorandum of Association (Capital Clause) to raise by issuing shares during its lifetime.
- Why Called Registered / Nominal Capital: It is also called Registered Capital because it is mentioned in the Capital Clause of the Memorandum of Association and the company pays stamp duty on this amount at the time of registration (incorporation). It is called Nominal Capital because a company usually never issues the entire authorized capital at once.
- Alteration: Authorized capital is calculated considering both present and future expansion needs. A company can increase its Authorized Capital later by altering its Memorandum of Association.
- Example: M/s Dynamic Ltd. has an Authorized Capital of Rs. 10,00,000 divided into 1,00,000 Equity Shares of Rs. 10/- each.
2. Issued Capital and Unissued Capital
- (a) Issued Capital: It is that part of the Authorized Capital which is offered by the company to the prospective investors (public) for subscription. Thus, it represents the shares that the company is offering the public to buy.
Example: Out of Rs. 10,00,000 Authorized Capital, M/s Dynamic Ltd. offers 40,000 Equity Shares of Rs. 10/- each to the public. Therefore, its Issued Capital is Rs. 4,00,000. - (b) Unissued Capital: The remaining balance of the Authorized Capital which is not yet offered to the public is called Unissued Capital. The company can issue shares from this unissued capital in the future when it needs further funds.
Example: The remaining 60,000 Equity Shares of Rs. 10/- each = Rs. 6,00,000 is the Unissued Capital.
3. Subscribed Capital and Unsubscribed Capital
- (a) Subscribed Capital: It is that part of the Issued Capital which has been actually subscribed (taken up or bought) by the investors (public). The public may or may not subscribe for the entire Issued Capital. Hence, Subscribed Capital may be equal to or less than the Issued Capital.
Example: Out of 40,000 shares offered, the public applies for and takes up 30,000 Equity Shares of Rs. 10/- each. Thus, the Subscribed Capital is Rs. 3,00,000. - (b) Unsubscribed Capital: That part of the Issued Capital which is not subscribed by the investors is called Unsubscribed Capital.
Example: The remaining 10,000 Equity Shares of Rs. 10/- each = Rs. 1,00,000 is the Unsubscribed Capital.
4. Called-up Capital, Uncalled Capital, and Reserve Capital
At the time of issue, the full face value of the shares is usually not demanded by the company all at once. Instead, the company collects the full value in installments as per its requirement of funds (Application Money, Allotment Money, and Calls).
- (a) Called-up Capital: It is that part of the Subscribed Capital which the company has actually called (demanded) from the shareholders up to a given date.
Example: If M/s Dynamic Ltd. demands Rs. 5/- per share on 30,000 subscribed shares, the Called-up Capital is Rs. 1,50,000 (30,000 × Rs. 5). - (b) Uncalled Capital: The balance of the Subscribed Capital which is not yet demanded from the shareholders is called Uncalled Capital. This amount can be collected in the future by making calls.
Example: If Re. 1/- is set aside as Reserve Capital and Rs. 5/- is called up, the remaining Rs. 4/- per share on 30,000 shares = Rs. 1,20,000 is the Uncalled Capital. - (c) Reserve Capital: Reserve Capital is a part of Uncalled Capital. A company can decide by passing a Special Resolution that a certain portion of its Uncalled Capital shall not be called up except in the event of winding up (liquidation) of the company to meet the claims of creditors.
Example: M/s Dynamic Ltd. decides to keep Re. 1/- per share on 30,000 shares to be called only at winding up. Thus, Reserve Capital is Rs. 30,000.
5. Paid-up Capital and Calls in Arrears
- (a) Paid-up Capital: It is the total amount of money actually paid up by the shareholders when the company has called up (demanded) the money.
Example: Out of 30,000 shares on which Rs. 5/- per share was called up, shareholders holding 29,000 shares paid the full Rs. 5/- per share. Thus, the Paid-up Capital is Rs. 1,45,000 (29,000 × Rs. 5). - (b) Calls in Arrears (Unpaid Capital): The amount not paid by defaulting shareholders despite being called up by the company is called Calls in Arrears or Unpaid Capital. Every shareholder has to pay calls as and when demanded; failure to pay may lead to forfeiture of shares.
Example: If shareholders holding 1,000 shares fail to pay Rs. 5/- per share, the Calls in Arrears is Rs. 5,000 (1,000 × Rs. 5).
Quick Memory Trick to Remember the Hierarchy in the Exam
Memory Shortcut (5-Step Ladder — "A → I → S → C → P"):
Just remember the 5 main rungs of the ladder from top to bottom:
1. Authorized Capital (Splits into: Issued + Unissued)
2. Issued Capital (Splits into: Subscribed + Unsubscribed)
3. Subscribed Capital (Splits into: Called-up + Uncalled + Reserve Capital)
4. Called-up Capital (Splits into: Paid-up + Calls in Arrears)
5. Paid-up Capital (Actual cash received from shareholders!)
Key Concept Summary for Objective Questions (Q.1)
- Capital Clause of MoA: Authorized Capital (also known as Nominal or Registered Capital) is always stated in the Capital Clause of the Memorandum of Association.
- Reserve Capital vs. Capital Reserve: Reserve Capital is that part of Uncalled Capital kept aside to be called only at the time of winding up of the company, whereas Capital Reserve is created out of capital profits.
- Formula for Paid-up Capital: Paid-up Capital = Called-up Capital − Calls in Arrears.