Reserve Share Capital is a portion of a company’s authorized capital not offered to the public and reserved for future issuance. It’s typically used for specific purposes like mergers, acquisitions, or employee stock option plans, providing financial flexibility for future corporate needs.
Content:
- What Is Reserve Share Capital?
- Reserve Capital Example
- How To Calculate Capital Reserve In Share Capital?
- Types Of Share Capital
- Reserve Share Capital – Quick Summary
- Reserve Share Capital – FAQs
What Is Reserve Share Capital?
Reserve Share Capital is a part of a company’s authorized capital that isn’t issued to the public and is kept aside for future requirements. It’s an unissued segment of shares, serving as a reservoir for the company to tap into when needed.
This capital is often reserved for specific strategic actions such as mergers and acquisitions, expansion plans, or offering stock options to employees. By having this reserve, companies maintain a pool of capital that can be utilized without needing to increase authorized capital or issue new shares to the public.
Holding Reserve Share Capital allows a company greater financial flexibility and strategic preparedness. It enables the company to issue shares quickly when opportunities arise or when there’s a need for additional capital, without going through the lengthy process of increasing its authorized share capital.
For example: A company with an authorized capital of ₹100 crore may keep ₹20 crore as reserve share capital. This allows it to issue new shares for future acquisitions or employee stock options without additional authorization.
Reserve Capital Example
A company with an authorized capital of ₹50 crore, which issues only ₹30 crore to the public, exemplifies Reserve Capital. The unissued ₹20 crore is set aside as Reserve Capital, earmarked for specific future needs, like business expansion or issuing employee stock options, providing financial prudence and flexibility.
This Reserve Capital remains unissued and is not available for dividend distribution or general corporate expenses. It serves as a safeguard, reserved for specific purposes such as funding expansion projects, acquisitions, or issuing shares to employees under stock option plans.
Having Reserve Capital allows the company to raise funds swiftly without the need for external financing or increasing the authorized capital. This strategic reserve can be vital for responding to unforeseen business opportunities or financial challenges, thereby offering flexibility and security for the company’s financial planning.
How To Calculate Capital Reserve In Share Capital?
Capital Reserve in Share Capital is calculated by deducting the issued share capital from the total authorized share capital of a company. The difference represents the reserve capital, which is not currently distributed to shareholders and is reserved for specific future use.
To illustrate, if a company has an authorized capital of ₹100 crore and has issued shares worth ₹60 crore, the capital reserve would be the remaining ₹40 crore. This amount is not available for dividend distribution and is set aside for future strategic needs or emergencies.
Capital Reserve is crucial for a company’s financial health as it provides a cushion against unexpected expenses or opportunities. It ensures the company has a pool of funds readily available without needing to seek external funding or dilute existing shareholders’ stakes by issuing more shares.
Types Of Share Capital
The types of Share Capital include Authorized Capital, the maximum amount a company can legally issue; Issued Capital, part of Authorized Capital offered to shareholders; Subscribed Capital, actually purchased by investors; Paid-up Capital, the portion of Subscribed Capital that shareholders have fully paid for.
- Authorized Capital
The maximum share capital a company is authorized to issue, as stated in its charter. It sets the limit on how many shares can be issued, ensuring control over share distribution. This value can be altered with shareholders’ approval for further expansion or issuance.
- Issued Capital
Part of the Authorized Capital that the company decides to issue to the public or private investors. It represents the total value of shares actively distributed for subscription. Not all Authorized Capital must be issued initially; companies can choose the amount based on their funding needs.
- Subscribed Capital
The portion of Issued Capital that investors agree to buy. It represents actual investor interest in the company’s shares. While all issued shares might not be subscribed, the Subscribed Capital indicates the market’s response to the company’s equity offering.
- Paid-up Capital
The actual amount paid by shareholders for the shares they subscribe to can be less than or equal to the Subscribed Capital. If shareholders pay the full amount of the shares they subscribe, Paid-up Capital equals Subscribed Capital, reflecting the total equity funding received by the company.
Reserve Share Capital – Quick Summary
- Reserve Share Capital is an unissued portion of a company’s authorized capital, set aside for future needs. It serves as a financial reservoir, available for strategic use as required.
- Capital Reserve in Share Capital is the undistributed portion, obtained by subtracting the issued share capital from a company’s total authorized share capital, reserved for specific future purposes.
- The types of Share Capital encompass Authorized Capital (the legal issuance limit), Issued Capital (offered portion of Authorized Capital), Subscribed Capital (actually purchased by investors), and Paid-up Capital (fully paid portion of Subscribed Capital by shareholders).
Reserve Share Capital – FAQs
Reserve Share Capital is a portion of a company’s authorized capital, not yet issued to the public, and kept aside for specific future needs like expansion, mergers, or employee stock option plans.
Capital Reserve is calculated by subtracting the face value of issued shares and reserves not available for dividends, like premium on shares or debentures, from the total contributed capital and other reserves.
The main difference is that Share Capital represents funds raised by issuing shares to shareholders, while Reserves are profits retained in the company, not distributed as dividends, used for reinvestment, or as a buffer against future risks.
No, Share Capital is not a Revenue Reserve. Share Capital refers to the funds raised by issuing shares, whereas Revenue Reserves are profits earned by the company and retained for future use or reinvestment.
No, Reserve Capital is not shown on the balance sheet. It represents the unissued portion of authorized share capital, not reflected in financial statements until it’s issued and becomes part of the subscribed share capital.
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