Share Capital & Reserves

Share Capital

So far during this module, we have crafted several schedules to aid in comprehending the more specific components of financial statements. In this chapter, we will find out how to construct a different schedule – the ‘Reserves Schedule’.

We have combined the share capital and reserves into a single schedule to keep things simple. I call this the ‘Reserves Schedule’ as that reflects the focus of the analysis, which is primarily on these reserves and surplus.

To grasp how to generate a reserve schedule, we rely on a helper model. Once we have grasped the intricacies, we return to our primary model and resume working on it.

I’ve chosen Bata India to be the model for the ‘helper model’ and will focus just on the preceding year’s annual report for brevity.

From the current-year’s annual report, I point out the Equity part of the balance sheet. Notice that here we have two elements –

Equity share capital

Other Equity

Some firms expressly refer to it as Reserves & Surplus, while others, such as Bata, refer to these funds as “Other Equity”. Yet both are effectively the same.

Instead of calling it ‘Share Capital’ each time, Bata has three components comprising its Capital: Authorized, Subscribed, and Issued. Here’s a look at the figures –

Most people struggle to comprehend the terminology associated with categorisation, yet it is actually quite easy to understand. I can illustrate it for you using a useful metaphor.

If you are located in Bangalore and wish to construct a house on your empty plot, there are certain steps you must take.

You should consider employing an architect so that they can develop a design for your home.

Submit your design to the civic administration. eg. BMC in Mumbai and BBMP in Bangalore 

Get the design approved

Start the construction work

Let us assume you have a 2400 Sq feet plot, in which you plan to construct a house (built-up area) for 1000 sq feet, leaving the rest as a garden area.

BBMP will assess your 1000 Sq Feet plan and authorise it if the design adheres to municipal regulations.

Once the construction process has commenced and you decide that you would like to increase the constructed area, for example, by 200 Square feet for a total of 1,200 Square feet, you will need to seek approval for this extra area. You must only build what has been previously approved.

At the time of forming a company, the promoters, investors and management must decide how many shares to issue, which must be reported to the regulatory authorities (ROC/MCA). This number represents the company’s authorised share capital.

If the company plans to allot 50,000 shares among its key personnel, it may declare an authorised share capital of 75,0000 and seek approval from the regulator. This approach is commonly taken in order to prevent a need for repeated interactions with regulation authorities.

Once approval is given, the company has the option to issue any or all of their authorised share capital.

Using the analogy, I have the option of using all 1000 sq feet or only 800. The remaining 200 sq feet can be saved for future use.

The actual usage built area is akin to a company’s issued share capital, which cannot exceed its authorised shares but must be equal to or fewer than them. Think of the issued share capital as being the precise number of shares consumed.

Ultimately, an IPO must have the authorised share capital subscribed. For example, a company might have an allowed amount of 1000 shares and decide to offer 800 for public subscription.

The company’s IPO was met with a lacklustre response, with only 80% subscription. This translates to 640 of the 800 issued shares being subscribed and fully paid-up.

If the IPO is completely taken up, all 800 shares will be totally covered.