1.  INTRODUCTION
In this topic we will discuss further about capital, dividend and shares. You will
be exposed to the authorised, paid-up and uncalled capital. We will also look into
the various types of shares.
CAPITAL
Generally speaking, in order to run a business, a company needs monetary funds
to operate. The fund to run the business is known as the ÂcapitalÊ.
7.1
TTooppiicc
77
 Corporate
Finance 1:
Capital,
Dividend and
Shares
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Elaborate the capital of a company;
2. Identify the process of raising the capital;
3. Explain dividend;
4. Define shares; and
5. Classify the various types of shares.
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2.  TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES114
In reality, a company needs money to pay for Âoverhead costsÊ, such as, salary for
staff, office rental, etc. The capital is raised through the contributions of the
shareholders/contributors from the issuance of shares. Once the contributions or
payments are made, the money belongs to the company and is no longer owned
by the shareholders. They only hold their ÂinterestÊ in the company in terms of
shares but strictly not the sum of money invested.
Capital is defined as:
The money and assets contributed by members form the capital of the company.
In return for the ÂcontributionÊ, the company issues shares to the contributors,
that is, the members or shareholders. Capital of a company becomes payment of
the shares whether in full or partly paid. When a shareholder subscribes any
amount of shares, he is bound to pay for the amount of shares he holds. By
paying up for the shares, he is contributing to the capital of the company.
By virtue of section 62 (1)(b), the capital of a company may comprise of:
(a) Shares to be consolidated for bigger value; or
(b) Shares to be sub-divided for smaller value.
The maximum capital that a company could raise is called the Âauthorised
capitalÊ as provided by the memorandum. A company is at liberty to raise any
amount of capital subject to the amount permitted in the memorandum. What is
the authorised capital of the company?
„Money or other assets of a company contributed by its shareholders and
used to operate the business of the company‰
(Bishop, 1993, p. 25)
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3. TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES  115
Basically there are various types of capital in the operations of a company as
shown in Figure 7.1:
Figure 7.1: Types of capital
7.1.1 Authorised Capital
„Authorised Capital‰ is defined as:
The authorised capital is the maximum amount of money permissible for the
operations of the company. The amount of authorised capital could be altered or
increased by altering the Memorandum of Association, subject to the approval of
the Registrar of companies. It is a normal practice for a company that has just
commenced operations not to issue all of the shares to form up the capital.
Authorised capital is also known as nominal or registered capital.
ÂThe total of share capital a company is permitted to issue under its
Memorandum of Association. The Memorandum must specify that the total
is divided into shares of a fixed amount (par value). The authorised capital
can only be increased by alteration of the Memorandum at a general
meeting‰
(Bishop, 1993, p. 17)
ACTIVITY 7.1
Discuss what the figure for your authorised capital is if you were to
incorporate a private limited. The figure has to be realistic!
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4.  TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES116
7.1.2 Paid-up Capital
„Paid-up Capital‰ is defined as:
Basically the paid-up capital is the amount of money that has been fully paid by
the shareholders. The amount that has been paid is the fund to be utilised by the
company for business operations.
7.1.3 Uncalled Capital
The amount of money that has not been fully paid by the share subscribers is
known as ÂUncalled capitalÊ.
DIVIDENDS
„Dividends‰ is defined as:
The rationale of forming a company is to do business and the intention of doing
business is to gain profit. Shareholders will be rewarded with the profit of the
company in return for their contributions.
Since dividends are paid out of profit generated from the companyÊs business,
therefore no dividend will be paid if the company is not making profits. Paying
the dividends is indeed an internal matter. The amount of dividend to be paid is
decided based on the profit made annually, upon recommendations made by the
board of directors during the annual general meeting.
„Income paid periodically to the shareholders, out of the profit but not out of
the company and not out of its capital‰
(Bishop, 1993, p. 56)
„The amount of issued capital of a company which has been paid for by the
shareholders in the form of part paid shares‰
(Bishop, 1993, p. 124)
7.2
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5. TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES  117
SHARES
„Share‰ is defined by as:
As capital is divided into shares, shares are units to measure a memberÊs interest
in the company. The amount of shares held by any party determines the voting
power. Section 100 of the Companies Act states that the shareholder will be
issued share certificates as evidence that they are shareholders.
A company have the authority to issue shares with different rights. The ÂrightsÊ
here indicates special features in the shares issued, such as, carrying a voting
right; these are known as the ordinary shares. This is the important feature of the
ordinary shares.
7.3.1 Ordinary Shares
Ordinary shareholders are the ones who are taking the risk. Normally in a
company the ordinary shareholders are the ones who contribute most to the
companyÊs capital. If the companyÊs business fail and looses the capital, the
shareholders will lose their money. The shareholders will be rewarded
accordingly in terms of dividends paid if the companyÊs business is making
profits. In return for their contributions and the risk they are taking, they are
conferred with voting rights.
Normally there is no fixed rate of dividend that arises from the profits; it
depends very much on the companyÊs performance and policy in paying
dividends. Under this heading there are preference shares issued with special
features, as explained in the next subtopic.
„The capital of the company is divided into units called shares. A share
represents a legal right of its holder (shareholder) to participate in the
business affairs of the company. The share is negotiable and has monetary
value. It provides them with an entitlement to vote at a meeting, a share of
profits and a dividend paid each year‰
(Bishop, 1993, p. 161)
7.3
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6.  TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES118
7.3.2 Preference Shares
There are shares that do not carry any voting power. Shares that give the holder
the ÂpriorityÊ are called the preference shares. The subscribers are given the
priority to receive payment in the event the company is being wound up.
Subscribers of the preference share do not have the voting power and control of
the company; they shall have to leave the management (voting) powers to the
ordinary shareholders.
Holders of preference shares are given the privilege of a fixed amount of
dividend, normally at a fixed rate, before the ordinary shareholders receive their
dividend. The voting rights are restricted to matters concerning the interest of
preference shareholders. Preference share holder is given the priority of
repayment in case the company is being wound up.
A disadvantage of preference share holders is that it focuses towards monetary
gains but not the power to vote. On the other hand the idea of having power to
vote is a defence mechanism against Âhostile takeoversÊ which will be discussed
in a later topic. In terms of profit, they are entitled to a fixed rate irrespective of
the company making even higher profit; the entitlement for the dividend would
always be based on the same rate.
(a) Variation of Class right
As discussed earlier, shares issued by a company vary according to
categories of shares. These categories of shares carry different rights as the
shareholder may require for holding such shares.
These shareholders would want to protect and stick to their rights against
any attempt by holders of other classes or categories of shares to vary their
rights.
Section 65 of the Companies Act provides protection against any attempt to
vary or abrogate the rights of certain class. The general principle of this
particular provision is that the right of a particular share shall not be altered
except in accordance with the procedure, such as, the Articles of the
company.
However, the procedure being adhered to does not stop the particular
shareholderÊs right to make an application to enforce his rights in court.
Under this provision a shareholder of 10 per cent shares may apply to court
against any abrogation or variation of his rights.
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7. TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES  119
Another relevant provision is Section 181 of the Companies Act where the
shareholder may express any variation which is oppressive to him.
There are preference shares issued with special features, such as:
(i) Equity Shares
Equity shares are actually preference shares that carriy voting rights.
(ii) Redeemable Preference Share
Redeemable preference share is actually preference share that could
be redeemed by the company. The issuance of Redeemable Preference
Share is contrary to the basic principle of - a company may not buy
back its own shares, as it may cause a decrease in the companyÊs
capital. However, section 61 of the Companies Act allows this practice
if it is spelled out in the Memorandum and Articles of the company.
(b) Who may issue shares?
The power to issue shares is vested in the directors and members.
The relevant provision would be section 132(D) and 132(D)(3) of the
Companies Act. Directors may not exercise power to issue shares without
obtaining prior approval of members during the Annual General Meeting
via an ordinary resolution, which is to be lodged with the Registrar of
Companies by virtue of section 132(D)(5) of the Companies Act.
SELF-CHECK 7.1
Answer ÂYesÊ or ÂNoÊ
1. Since preference shares have no voting power, the subsciber is
rewarded monetarily, whereas ordinary shares which carries
voting powers are the ones which participate in the company.
2. Redeemable preference shares are meant for short term
investment.
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8.  TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES120
 A companyÊs authorised capital is the amount of the share capital which the
company is allowed to issue.
 Paid-up capital is the amount paid up by subscribers on shares issued which
forms the capital that has been raised.
 Uncalled capital is the amount unpaid up by subscribers on shares issued
which the company could call upon for a full settlement.
 Private company is not permitted by law to invite the public to become
subscribers of its share.
 Dividends are only paid if the company is making profit and it is illegal to
pay dividends out of capital, or if the company is running at a loss.
 Preference shares enjoy the privilege of being paid dividends but do not have
the right to vote of ordinary shareholders.
Authorised capital
Dividend
Equity share
Issued capital
Ordinary share
Paid-up capital
Preference share
Redeemable preference share
Uncalled capital
1. Define briefly in your own words the distintive features of a preference
share holder.
2. Define briefly in your own words the privilege of an ordinary share holder.
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9. TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES  121
3. In the earlier discussions, the general rule is that a private company is
prohibited from inviting the public to subscribe shares. A who is a member
of company XYZ Pte. Ltd. decided that he no longer desires to become a
member in company XYZ Pte. Ltd. due to health problems and old age.
Through his arrangement, A ÂtransferedÊ his shares to an outsider. Does this
act violate the law? Discuss.
4. When a person subscibes to shares in a company he is considered to be a
contributor to the capital of the company. Discuss the practical application
of the statement.
Bishop, J. M., (1993). Legal words & phrases simplified. Selangor: Tioman-
Blackstone Edition.
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