Share Capital Explained: Types of Shares & Capital Hierarchy — CBSE Class 12 & CA Foundation

Share capital is the backbone of company accounts — and one of the highest-scoring topics in CBSE Class 12 Accountancy. Before you can tackle issue, forfeiture, or reissue problems, you need a solid grip on what share capital actually is and how its layers connect.

Types of Shares

1. Equity Shares (Ordinary / Common Shares)

Equity shareholders are the true owners of the company. In good years they benefit most; in bad years, they are last to be compensated.

2. Preference Shares

Types of Preference Shares to Know:

• Cumulative: Unpaid dividends accumulate and must be paid in future years before any equity dividend is declared
• Non-cumulative: Unpaid dividends lapse — they do not carry forward
• Participating: Entitled to share in surplus profits after equity dividend is paid
• Non-participating: Entitled to fixed dividend only — no share in surplus

Exam tip: "Cumulative" is the default assumption unless stated otherwise. If a question is silent on the type, treat preference shares as cumulative.

The Capital Hierarchy

This is one of the most commonly tested concepts in both board exams and CA Foundation MCQs. Know each level and how they relate.

1. Authorised Capital (also: Registered or Nominal Capital)

• The maximum amount of share capital a company is legally permitted to raise
• Stated in the Memorandum of Association
• Sets the ceiling — the company cannot issue shares beyond this limit without legal amendment

2. Issued Capital

• The portion of authorised capital that the company has actually offered to the public
• Cannot exceed authorised capital
• The company may choose not to issue all of its authorised capital at once

3. Subscribed Capital

• The portion of issued capital that members of the public have actually agreed to take
• For a public issue to succeed: minimum 90% subscription is required
• If applications received are less than 90% of the issue, the entire issue fails and all application money must be refunded

4. Called-up Capital

• The portion of subscribed capital that the company has actually demanded payment on
• Companies rarely call the full amount at once — they collect it in instalments:
  • On application
  • On allotment
  • On first call, second call, etc.

5. Paid-up Capital

• The amount actually received from shareholders
• May be less than called-up capital if some shareholders have defaulted on payment
• Represents the real cash the company has received

The Relationship at a Glance

Each level is a subset of the one above it. No level can ever exceed the one above.

The 90% Minimum Subscription Rule

This is a critical rule for public issues:

• If the company receives applications for less than 90% of the shares offered, the issue is considered to have failed
• All application money must be refunded in full within a stipulated time
• The company cannot proceed with allotment on a failed issue

Why it matters in exams: Questions sometimes describe a scenario where subscription falls short of 90%. The correct treatment is full refund — not pro-rata allotment.

Quick Recall Table

What's Next?

In Part 2, we cover the issue of shares — at par, at premium, and at discount — including the securities premium account rules that are a favourite in CA Foundation MCQs, and how pro-rata allotment works when a share issue is oversubscribed.