When a company decides to raise capital by issuing shares, it needs to determine the amount of money it wants to raise and the number of shares it will issue to achieve that goal. In doing so, the company must understand the difference between issued share capital and subscribed share capital.
Issued Share Capital: Definition
Issued share capital represents the total number of shares that a company has offered to the public for purchase. This includes all shares that have been sold and those that are still available for purchase. Essentially, issued share capital is the maximum number of shares that a company can legally sell to the public.
Subscribed Share Capital: Definition
Subscribed share capital represents the actual number of shares that have been sold to investors. It represents the portion of issued share capital that has been purchased by investors. Subscribed share capital is calculated by subtracting the unissued shares from the issued shares. Therefore, it is the portion of the company’s share capital that has been subscribed by investors.
Key Differences between Issued Share Capital and Subscribed Share Capital
- Legal vs. Actual: The primary difference between issued share capital and subscribed share capital is that issued share capital is the maximum number of shares that a company can legally sell, while subscribed share capital is the actual number of shares that have been sold.
- Rights and Privileges: Shareholders of both subscribed and issued share capital have equal rights and privileges, including voting rights and the right to receive dividends. However, issued share capital may have additional privileges that are not available to subscribed share capital.
- Company’s Capitalization: Issued share capital represents the maximum amount of capital that a company can raise, while subscribed share capital represents the actual amount of capital that a company has raised. Therefore, subscribed share capital is an important indicator of a company’s actual capitalization.
- Share Price: The price of a company’s shares is typically determined based on the demand and supply of its subscribed share capital. When the demand for shares is high, the price tends to go up, and when the demand is low, the price tends to go down.
Advantages of Issued Share Capital
- Flexibility: By issuing shares, companies can raise funds without incurring debt, which provides more flexibility in terms of financing.
- Limited Liability: Shareholders’ liability is limited to the amount of their investment, which means they are not personally liable for the company’s debts.
- Equity Financing: Issued share capital represents equity financing, which means that companies do not have to repay the capital raised through issuing shares.
Disadvantages of Issued Share Capital
- Dilution of Ownership: Issuing additional shares can dilute the ownership percentage of existing shareholders.
- Loss of Control: Issuing shares can lead to a loss of control for existing shareholders, as new shareholders may have different goals and objectives.
- Costs: Issuing shares can be expensive, as companies may have to pay underwriting fees, registration fees, and other costs.
Advantages of Subscribed Share Capital
- Capitalization: Subscribed share capital represents the actual amount of capital that a company has raised, which is an important indicator of the company’s financial health and capitalization.
- Share Price: The price of a company’s shares is typically based on the demand and supply of its subscribed share capital, which can result in higher prices when demand is high.
- Control: Subscribed share capital allows investors to have a say in the company’s decision-making process through voting rights.
Disadvantages of Subscribed Share Capital
- Risk: Investing in subscribed share capital can be risky, as the value of shares can go down as well as up.
- Failure to Meet Subscription Obligations
- Dilution of Existing Shareholders
- Increased Financial Reporting Requirements
- Investor Scrutiny
- Legal and Administrative Costs
In conclusion, issued share capital and subscribed share capital are two important terms that are closely related to a company’s capital structure. Issued share capital refers to the total number of shares that a company has offered and sold to its shareholders. Subscribed share capital refers to the portion of the issued share capital that has been subscribed to by the shareholders. Understanding the difference between these two terms is important for investors who want to evaluate a company’s financial health and growth potential. Additionally, it is important for companies to maintain a healthy balance between their issued and subscribed share capital in order to ensure they have enough funding for future growth while avoiding over-dilution of existing shareholders.