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Banking Awareness : IPO, Share Capital

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Initial public offering (IPO)

An initial public offering (IPO) refers to the first time a company publicly sells shares of its stock on the open market. It is also known as “going public.”

HOW IT WORKS (EXAMPLE):

The proceeds from the sale of stock shares in an initial public offering provide the issuing company with capital. For this reason, many start-up companies issue IPOs because they’re seeking a source of capital to fund growth.

IPOs are introduced to the market by an underwriting investment bank, which aids the issuing company by soliciting potential investors. In addition, the underwriter helps the issuing company to settle on the price at which the stock should be offered to investors.

IPOs represent the first time an issuing company will financially benefit from the public sale of its stock. Following the IPO, shares trade between buyers and sellers on the open market, whereby the underlying company receives no compensation.

 

Share Capital

Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company till its liquidation.

Share capital is owned capital of the company, since it is the money of the shareholder and the shareholder are the owners of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of a company.

 

Features of Share Capital

 

  • Owned capital: Share capital is owned capital of the company. It is actually the money of the shareholders and since the shareholders are the owner of the company, so share capital is the owned capital.
  • Remains with the company: It remains with the company till its liquidation.
  • Dependable sources: Share capital is the most dependable source of finance for the joint stock companies.
  • Raises creditworthiness: It raised the credit worthiness of the company.
  • Substantial funds: It provides substantial funds to the company.
  • Available for: Share capital is easily available for expansion and diversification of business activities.
  • Amendment: The amount of share capital can be raised by amending the capital clause of the Memorandum of Association.
  • No charge: Share capital does not create any charge on the assets of the company.
  • Opportunity to participate: Share capital give its shareholders an opportunity to participate in the company’s management with normal rights of shareholders.
  • Benefit of bonus shares: It gives it shareholders the benefit of bonus shares.
  • Benefit of limited liability: Share capital also gives its shareholders the befit of limited liability as the liability of its shareholders is limited up to the face value of each share.
  • Meaningful participation: Share capital enables its shareholders to have a meaningful participation in the expansion of corporate sector.

Types of Share Capital:

 

  • Authorized capital: It is the maximum amount of capital which a company can collect or raise by selling it’s shares to the general public. Authorized capital is known as nominal capital or registered capital. For example: A company wants to sell 100 shares of Rs. 10/- each, so the total amount collected by the company is Rs. 1000/- i.e. 100 shares x 10 each = 1000

    The capital with which a company is registered is known as its authorized capital.

  • Issued capital: It is that part of the authorized capital which is actually issued to the general public. For example: A company has issued 80 shares of Rs. 10/- each so the issued capital is Rs. 800/-
  • Unissued capital: It is that part of the authorized capital which is not being issued to the general public.That is, company has not issued 20 shares of Rs. 10/- each, so the unissued capital is Rs. 200/-.
  • Subscribed capital: It is that part of the issued capital which is actually subscribed by the general public. That is company has issued 80 shares out of which 70 shares are being bought by the general public, so the subscribed capital is Rs. 700/-. That is 70 shares of Rs. 10/- each.
  • Unsubscribed capital: It is that part of the issued capital which is not subscribed by the general public. That is, if the the company has issued 80 shares out of which 70 are bought by the general public and 10 are not being bought by them, so the unsubscribed capital is 10 x Rs. 10 = Rs. 100. That is 10 shares of Rs. 10 each.
  • Called up capital: It is that part of the subscribed capital which is actually called up by the company. For instance, if a company has asked its shareholders to pay Rs. 5/- per share so on 70 shares, they have to pay 70 shares x Rs. 5 each = Rs. 350/-. This is the called up capital.
  • Uncalled up capital: It is that part of the subscribed capital which is not being called up by the company. It may be called up as and when the company need funds. That is out of Rs. 10/- per share, Rs. 5/- per share is being called up by the company and Rs. 2 is being uncalled up and Rs. 3 is kept as reserve, that is yet to be called.
  • Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extra- ordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company.
  • Paid up capital: It is that part of the called up capital which is actually paid up by the shareholders. For example, out of 70 shares which were subscribed for 60 shareholders have paid up their call money, that is 60 x Rs. 5 = Rs. 300/- is called as the paid up capital of the company.
  • Unpaid up capital: It is that part of the called up capital which is not being paid by the shareholders. For example: out of 70 shareholders, 60 shareholders have paid up their call money and 10 shareholders have not paid their call money, so 10 x Rs. 5 = Rs. 50/- is called as unpaid up capital.

    Unpaid up capital is also known as Calls in Arrears.

 

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