Share capital represents the funds raised by a company through the issuance of shares to its shareholders. It serves as the financial foundation upon which companies build their operations and pursue growth opportunities.
As an investor, understanding share capital is essential for you, it allows you to assess a company’s financial strength and potential returns.
Share Capital: Meaning, Factors & Advantages
In this blog, we will be shedding light on the intricacies of share capital and its role in shaping the financial landscape.
What are Shares?
Shares represent units of ownership in a company. When a company issues shares, it allocates ownership to individuals or entities known as shareholders.
These shares give shareholders certain rights, such as:
- Voting rights in company meetings.
- Rights to receive dividends.
- Rights to a portion of the company's assets upon liquidation.
In essence, shares signify a shareholder's stake in the company and entitle them to a share of the company’s profits and assets.
What is Share Capital?
Share capital in company law refers to the total value of funds raised by a company through the issuance of shares to its shareholders. Share capital is also known as shareholders capital, equity capital, contributed capital, or paid-in capital.
Moreover, it is an essential component of a company’s capital structure. It plays a crucial role in determining its financial position and investment potential. The funds raised through shareholders’ capital can be used by the company to finance its operations, invest in new projects, acquire assets, or repay debts.
Minimum Share Capital Requirements in Nigeria
General Requirements
- Private Limited Company: The minimum share capital requirement is ₦100,000 (One Hundred Thousand Naira).
- Public Limited Company: The minimum share capital requirement is ₦2,000,000 (Two Million Naira).
- Foreign Companies: Foreign companies operating in Nigeria must have a minimum share capital of ₦100,000,000 (One Hundred Million Naira).
Understanding and adhering to these share capital requirements is essential for the smooth and compliant incorporation of companies in Nigeria. It ensures that businesses meet the regulatory standards set by the CAC and other relevant authorities, which is crucial for legal operation and market credibility.
Industry-Specific Minimum Share Capital Requirements
Certain industries have prescribed minimum share capital requirements, set by regulatory authorities such as the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). Below are the specific requirements for various market operators:
| Type of Company | Minimum Share Capital (₦) | Justification |
|---|---|---|
| Issuing House | 200 Million | SEC Guidelines |
| Broker/Dealer | 300 Million | |
| Trustee | 300 Million | |
| Fund/Portfolio Manager | 150 Million | |
| Stock Broker | 200 Million | |
| Stock Dealer | 100 Million | |
| Corporate Investment Adviser (Registrar) | 150 Million | |
| Corporate Investment Adviser | 5 Million | |
| Individual Investment Adviser | 2 Million | |
| Market Maker | 2 Billion | |
| Consultant (Partnership) | 2 Million | |
| Consultant (Individual) | 500,000 | |
| Consultant (Corporate) | 5 Million | |
| Underwriter | 200 Million | |
| Venture Capital Manager | 20 Million | |
| Commodities Broker | 40 Million | |
| Capital Trade Point | 20 Million | |
| Rating Agency | 150 Million | |
| Corporate/Sub Broker | 5 Million | |
| Asset Management (Intangible Assets) | 300 Million | |
| Commercial Bank (Regional) | 10 Billion | CBN Regulations |
| Commercial Bank (National) | 25 Billion | |
| Commercial Bank (International) | 50 Billion | |
| Merchant Bank | 15 Billion | CBN Regulations |
| Unit Microfinance Bank (Tier 1) | 200 Million | CBN Regulations |
| Unit Microfinance Bank (Tier 2) | 50 Million | |
| Microfinance Bank (State & FCT) | 1 Billion | |
| Microfinance Bank (National) | 5 Billion | |
| Primary Mortgage Institution | 2 Billion | |
| Finance Company | 20 Million | |
| Bureau de Change | 35 Million | |
| Non-Interest Bank (Regional) | 5 Billion | |
| Non-Interest Bank (National) | 10 Billion | |
| Insurance Broker | 5 Million | NICR Act, 2003 |
| Life Insurance | 8 Billion | NIC Regulations 2019 |
| General Insurance | 10 Billion | |
| Composite Insurance | 18 Billion | |
| Re-Insurance | 20 Billion | |
| Unit Microinsurer | 40 Million | NIC Guidelines 2018 |
| State Microinsurer | 100 Million | |
| National Microinsurer | 600 Million | |
| Takaful Insurance | 200 Million | NIC Regulations |
| Private Security Company | 10 Million | NSCDC Act, 2003 |
| Pension Fund/Asset Custodian | 2 Billion | Pension Reform Act, 2004 |
| Closed Pension Fund | 500 Million | |
| Pension Fund Administrator | 1 Billion | |
| Lottery | 5 Million | National Lotteries Regulation, 2007 |
| Sports Lottery | 30 Million | National Lottery Commission |
| Air Transport (International) | 2 Billion | NCAA |
| Air Transport (Regional) | 1 Billion | |
| Air Transport (Local) | 500 Million | |
| Air Ambulance/Fumigation/Private Jet | 20 Million | |
| Aviation (Ground Handling Services) | 500 Million | |
| Aviation (Air Transport Training Institutions) | 2 Million | |
| Agents of Foreign Airlines | 1 Million | |
| Travel/Tours | 30 Million | IATA |
| Agricultural Seeds | 10 Million | NASA Cap 5, LFN, 2004 |
| Shipping Company/Agent | 25 Million | NIMASA Guidelines |
| Cabotage Trade | 25 Million | |
| Life Micro-Insurance | 150 Million | NIC Guidelines |
| General Micro-Insurance | 200 Million | |
| Freight Forwarding | 5 Million | NIC Regulations |
| Payment Service Bank | 5 Billion |
Why Do Companies Raise Share Capital?
Companies raise shareholders’ capital for several reasons, including:
- Expansion and Growth: One of the primary reasons for raising shareholders’ capital is to fund the expansion and growth initiatives of the company. The additional funds obtained through issuing new shares can be used to invest in new projects, expand operations, enter new markets, or acquire assets and resources.
- Capital Requirements: Companies may raise shareholders’ capital to meet their capital requirements. It allows them to raise funds without incurring debt, reducing their reliance on loans and interest payments. By increasing their shareholders’ capital, companies can strengthen their financial position and have more resources at their disposal.
- Funding Acquisitions: Companies can raise shareholders’ capital to finance acquisitions and mergers. When a company intends to acquire another business, a company may issue new shares to the shareholders of the target company as part of the consideration. This allows the acquiring company to use its shares as currency for the transaction.
- Debt Reduction: Companies may choose to raise shareholders’ capital to reduce their debt burden. By issuing new shares and using the proceeds to repay debts, companies can improve their financial stability, reduce interest expenses, and enhance their creditworthiness.
- Enhancing Investor Confidence: It can be seen as a positive signal by investors. As it indicates the company’s growth prospects and financial strength. It demonstrates the company’s ability to attract investments and can increase investor confidence in the business.
Types of Share Capital
CAMA 2020 recognizes several types of share capital, each serving a different purpose in the company’s capital structure:
a) Authorized Share Capital
This represents the maximum amount of share capital that a company is authorized to issue to shareholders as stated in its Memorandum of Association. CAMA 2020 abolished the concept of authorized share capital, replacing it with the minimum issued share capital.
b) Issued Share Capital
Issued share capital refers to the portion of authorized share capital that a company has actually issued and allotted to shareholders. Under CAMA 2020, a company is required to have a minimum issued share capital of ₦100,000 for private companies and ₦2,000,000 for public companies. This change replaced the previous system of authorized share capital.
c) Paid-up Share Capital
It represents the portion of subscribed shareholders’ capital that has been paid by shareholders. It reflects the actual amount of money received by the company in exchange for the shares issued.
d) Unpaid Share Capital
Unpaid share capital refers to the portion of the issued share capital that shareholders have yet to pay. Shareholders are required to pay this amount upon request from the company.
Features of Share Capital
Here is a list of several key features that may define its role and impact on investors.
- Divisibility: Shares, the units of share capital, are divisible. Investors can own part of a company through fractional shares, making ownership accessible to a wider range of investors.
- Limited Liability: Shareholders’ liability is limited to the amount of capital they have invested in the company. This means, they are not personally liable for the company’s debts beyond their investment.
- Voting Rights: Each shareholder is granted voting rights on every resolution concerning the company. Shares often come with voting rights, allowing shareholders to participate in certain company decisions like dividend distribution or board member appointments. This empowers investors and ensures stakeholder involvement.
- No Charge: When issuing share capital, no charge is created on the company’s held assets.
- Bonus Shares: Companies may choose to reward shareholders by periodically offering them bonus shares at no cost.
Classes of Shares
CAMA 2020 recognizes different classes of shares that companies can issue to meet their financial and structural needs. Each class of shares carries specific rights and obligations. The most common types include:
a) Ordinary Shares
Ordinary shares are the most common type of shares issued by a company. Holders of ordinary shares have voting rights at company meetings and are entitled to dividends, which are paid after other obligations, such as preference dividends, have been settled.
Ordinary shareholders also share in the company's assets upon liquidation after creditors and preferred shareholders have been paid.
b) Preference Shares
Preference shares offer certain preferential rights over ordinary shares. Shareholders holding preference shares typically receive dividends before ordinary shareholders.
Additionally, if the company is liquidated, preference shareholders are paid before ordinary shareholders. However, preference shareholders often have limited or no voting rights in company meetings.
c) Redeemable Shares
CAMA 2020 allows companies to issue redeemable shares, which can be repurchased or "redeemed" by the company at a future date under conditions set by the company's Articles of Association.
d) Cumulative and Non-Cumulative Shares
In the case of cumulative preference shares, if the company does not declare dividends in a particular year, the dividends accumulate and must be paid out in subsequent years.
With non-cumulative shares, dividends do not accumulate, and shareholders are only entitled to dividends declared for that year.
e) Convertible Shares
Convertible shares give shareholders the option to convert their shares into another class of shares, such as converting preference shares into ordinary shares. CAMA 2020 permits companies to issue convertible shares, which provides flexibility for both the company and the shareholders.
How to Calculate Share Capital?
To calculate the shareholders’ capital of a company, you need to consider the following components:
Authorized Share Capital: Determine the maximum value of shares that a company is legally allowed to issue as specified in its constitutional documents.
Issued Shareholders’ Capital: Identify the actual portion of authorized shareholders’ capital that has been allocated and offered to shareholders. This information is usually disclosed in the company’s financial statements.
Nominal Value Per Share: Determine the nominal or face value assigned to each share issued by the company. Thus, the maximum amount of share capital of a company is mentioned in the Memorandum of Association (MoA).
Once you have the above information, you can calculate share capital using the following formula: Share Capital = Number of Issued Shares × Nominal Value per Share.
Let’s understand how to calculate shareholders’ capital with the help of an example. Suppose a company has issued 50,000 shares with a nominal value of ₦ 100 per share.
In this case:
shareholders’ capital = 50,000 shares × ₦ 100 = ₦ 50,00,000
Therefore, the shareholders’ capital of the company would be ₦ 50,00,000
Allotment of Shares
The allotment of shares is the process of allocating new shares to shareholders. Key points under CAMA 2020 include:
- Directors have the power to allot shares, subject to any restrictions in the company's articles (Section 149).
- Pre-emptive rights: Under CAMA 2020, existing shareholders have pre-emptive rights. This means that when a company issues new shares, existing shareholders must be given the first option to buy additional shares in proportion to their current holdings before the company can offer them to new investors. (Section 150).
- The company must register any allotment of shares within two months (Section 156).
Payment for Shares
According to Section 128 of CAMA 2020, when a company issues new shares increasing its issued share capital, at least 25% of this new share capital must be paid up for the increase to be effective. This provision ensures that companies maintain adequate funding levels.
Share Transfer and Transmission
Shares can be transferred between individuals or entities, but CAMA 2020 imposes certain conditions to regulate the process:
a) Share Transfer
The transfer of shares in private companies is typically restricted. Shareholders wishing to transfer their shares must first offer them to existing shareholders, a process known as the right of first refusal. This restriction ensures that ownership remains within a close circle of individuals and prevents external influence unless authorized by existing shareholders.
b) Share Transmission
In cases where shares are passed to legal heirs upon the death of a shareholder, the process is referred to as share transmission.
CAMA 2020 provides for the legal transfer of shares to a deceased shareholder’s legal representatives, and the company must register the legal heirs as new shareholders upon receiving the necessary documentation.
Alteration of Share Capital
Alteration of shareholders’ capital refers to the changes made to the existing share capital structure of a company. CAMA 2020 allows companies to adjust their share capital by reducing or increasing it based on their financial needs:
a) Increase of Share Capital
A company may decide to increase its shareholders’ capital to raise additional funds for expansion, acquisitions, or other business purposes. Companies do this through the issuance of new shares to existing or new shareholders. The increase in share capital leads to an infusion of fresh capital into the company, enabling it to finance its growth plans.
b) Reduction of Share Capital
In certain situations, a company may opt to reduce its shareholders’ capital. This could be due to reasons such as consolidation, restructuring, or eliminating accumulated losses. Shareholders’ approval and compliance with legal requirements are necessary for a decrease in shareholders’ capital.
c) Conversion of Securities
Alteration of share capital may also occur through the conversion of securities. For example, convertible preference shares or convertible debentures can be converted into equity shares based on predefined terms and conditions. This conversion leads to a change in the shareholders’ capital structure of the company.
Rights Issue
A rights issue is an offer of new shares to existing shareholders in proportion to their current holdings. CAMA 2020 provides detailed regulations for rights issues, including:
- The offer must remain open for a minimum of 21 days (Section 152).
- Shareholders can renounce their rights in favor of another person.
Dividends and Return on Shares
Dividends represent the portion of a company’s profits distributed to shareholders. Under CAMA 2020, dividends can only be declared from distributable profits, ensuring that companies are financially healthy before returning profits to shareholders. Preference shareholders receive dividends first, followed by ordinary shareholders.
Disclosure Requirements
CAMA 2020 mandates several disclosures related to shares and share capital:
- Companies must maintain a register of members (shareholders) (Section 182).
- Public companies must notify the Corporate Affairs Commission (CAC) of any purchased or acquired shares (Section 187).
- Companies must file annual returns including details of their share capital structure (Section 417).
Conclusion
Understanding share capital and its implications is crucial for both companies and investors. By comprehending the structure, benefits, and factors affecting shareholders’ capital, investors can make informed decisions, while companies can effectively manage their capital structure to support their growth and financial objectives.
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