Capital in Companies

The amount of money needed to start and operate a

sole proprietorship business is invested by the sole
owner of the business. His or her liability is also
unlimited.
For example Ali wants to start a business and he needs
$1o,ooo. The $10,000 is actually the capital which he
wants to invest for starting a business. Only Ali
providing the capital to start and operate the
business so it is sole proprietor ship and 10,000 is the
capital in sole proprietor ship
In partnership form of business the money
needed to start and operate a business in
contributed in agreed upon proportions by the
partners. The liability of the business is limited
to the extent of capital contribution of each
partner.
 For example Momen and Hamza want to start a
combine business with $12000 and both of them
provide the required capital by mutual
contribution then its called partner ship and the
shared amount of money is capital in
partnership, like they contribute $6000 each
which equal to (6000+6000)=$12000, here the
$12000 is capital in partnership
The capital of the companies comes from the
investment made by the public by purchasing
shares of the company.

The shareholders are distributed some amount of

profit as a result of the company’s operations.
 For example when more than one person want to
invest their money in a business for the purpose
of getting profit, then it is called Capital in
companies, in private companies the minimum
number of share holders is 2 and maximum is 50,
while in public companies the minimum number
of share holders is 7 and maximum is unlimited, so
the combine amount of money of all these share
holders is capital in a company.
 Initial Public Offering
 Authorized Capital
 Issued and Unissued Capital
 Subscribed Capital
 Over Subscription
 Under Subscription
 Paid up Capital
 When a company sells its shares for the very first
time to the public.
It is also known as primary market.
For example Etisalat Telecom offer 25 @ $1000 per
share, to public for the first time then it is called
initial public offering.
 The maximum amount of money that a company
can raise by selling shares to public. The company
can’t sell shares more than the authorized limit.
 Since this amount is registered with the registrar
of the companies therefore it is also called
registered capital.
 For example Etisalat wants to raise funds by
issuing 30 shares at $1000 per share but the legal
limit is 25 for them. So they can raise a fund of
$25000 because it is legally allowed or authorized.
Now the $25,000 is authorized capital.
 The amount of capital that a company issues out
of its authorized limits to the public for
investment is called issued capital.
For example Itesalat Telecom issue 18 share to raise
funds of $18,000.Here the 18 shares are issued
capital.
 Unissued capital is the capital which is not issued.
If we see Etisalat issued 18 shares out of 25 and 7 are
Unissued ,here the 7 shares are unissued capital
 The amount of capital subscribed by the public or
purchased planned by people.

Over subscription: if the number of applicants

are more than the number of shares this situation
is known as oversubscription.
Under subscription: if the number of applicants
are less than the number of shares this situation is
known as under subscription.
 The capital which is subscribed to the buyer
and transferred in their name.
 OR the shares which are sold out by the
company is called paid up capital.
For example when the Itesalat Telecom offers
25 share in the market and they succeed to sale
20 share to raise funds of 20,000. then it is
called paid up capital.
 Share is a financial instrument which is used by the joint
stock companies to get funds from the financial markets.

 The share holders get the dividend as reward of their

investment in a company.

 The shares of a company may be;

1. Ordinary shares( Common stocks)
2. Preferred shares:
3. Deferred shares:
 Common shares or Ordinary shares: these
shares are also known as equity shares. The
holders of ordinary shares are the real owners
of a company. The ordinary share holders
have voting rights. They receive divided from
the profit of the company. The equity share
capital can not be redeemed during the life
time of the company.
 Merits of Ordinary or Equity shares:
1. Venture capital: ordinary shares are the most
important and popular type of shares it is
therefore, called as venture capital of the
company.
2. No burden on company resources: Since the
profits are to be paid out of the company,
therefore it imposes no burden on the resources of
a company.
3. Provision of long term finance: the ordinary
shares provide long term finance to a company.
4. Rate of dividend: the rate of dividend on ordinary
shares depends upon the profit of the company.
2. Preferred shares: Preferred share as the name
suggests have some preferences as compared to
other types of shares. The main preferences of these
shares are
a) Preference in dividend payment:
b) Preferences in repayments of capital
3. Deferred shares: Deferred shares are also known as
founders shares. They issued to the promoters of
the company and the dividend on these shares are
paid to them after all the dividends of all share
holders are paid.
 The term debenture is derived from a latin
word “debere” which means to have a debt. A
company may raise part of its capital by
obtaining loans. The short term capital is
mostly met by the company from banks in
the form of cash credits. The long term
finances may be raised by issuing debentures
and shares. Thus debenture like share is along
term finance generated by company through
public borrowing.
 Definition: Debenture is a security issued to the
investors under the seal of the company who
becomes creditors of the company. Or
 It is document which is issued by the company as an
evidence of its debt.
 Features of debentures: the main features of
debenture are
 1) it shows the debt of a company
 2) it has a nominal value like shares
 3) it is a document issued under the seal of the
company
 4) fixed rate of interest:
Types of debentures:
1) Ordinary or naked debenture: Ordinary or naked
debentures are those which do not carry any
security for interest and principal amount . OR
Ordinary or naked debentures are those which do not
carry any sec in respect the repayment of interest or
the principal. These have no priority and stand in the
same position as any other unsecured creditors at
the time of winding up the company.
2) Mortgage debenture: A mortgage debenture is
one which is secured by a mortgage. Mortgage
means the real property of the company
If the company fails to repay the borrowed
amount at a specified period, the debenture
holder has a legal right to sell the property and
recover the loan.
3) Redeemable debentures: the debentures
which are repayable after a certain period are
called redeemable debentures. The company
mostly borrows money on redeemable
debentures.
 4) Irredeemable debentures: A debenture
which is not payable during the life time of
the company is know as irredeemable
debentures. These are payable when the
company is winding up.
5) Registered debentures: A registered
debenture is issued in the name of the owner
on the debenture. The name of the owner
thus appears on the face of the bond.
6) Convertible debentures: in certain cases,
the company allows the debenture holders to
convert their debentures for the shares of the
company. If he or she converts his debentures
into shares he or she becomes the owner of
the company.
 The following are the main difference between a
debenture and a share:
 A person having the debentures is called debenture
holder whereas a person holding the shares is called
shareholder.
 Debenture holder is a creditor of the company and
cannot take part in the management of the
company while a shareholder is the owner of the
company. It is the basic distinction between a
debenture and a share.
 Debenture holders will get interest on
debentures and will be paid in all
circumstances, whether there is profit or loss
will not affect the payment of interest on
debentures. Shareholder will get a portion of
the profits called dividend which is
dependent on the profits of the company. It
can be declared by the directors of the
company out of profits only.
 Shares cannot be converted into debentures
whereas debentures can be converted into
shares.
 Debentures will get priority is getting the
money back as compared to shareholder in
case of liquidation of a company.
 There are no restriction on issue of
debentures at a discount, whereas shares at
discount can be issued only after observing
certain legal formalities.
 Convertible debentures which can be
converted into shares at the option of
debenture holder can be issued whereas
shares convertible into debentures cannot be
issued.
 There can be mortgage debentures i.e. assets
of the company can be mortgaged in favor of
debenture holders. But there can be no
mortgage shares. Assets of the company
cannot be mortgaged in favor of shareholder