"Like we need blood in we vein, that’s how we feel about Port-of-Spain” might be the refrain that goes through your head on reading the above title given that we are in the midst of the Carnival season. But this article takes a look at the capital of a company, which might be considered to be its lifeblood, and more particularly at the term “stated capital” and what companies ought to know about it.

If you have ever heard the term “stated capital,” it is probably because you are a shareholder or a director of a private company. You are involved in the filing of annual returns for a non-public company with the Companies Registry (a requirement for all companies to keep them in good standing), you have read it somewhere in a business article, or, for some strange reason, you enjoy reading legislation about companies. The problem with the term, however, is: (i) it is not obvious what it means on the face of it; and (ii) there are so many other similar terms which can be confused with it, for instance: issued capital, market capital or paid-up capital, among others.

STATED CAPITAL

Let’s start with stated capital.
Simply put, stated capital is a record of the amount which is paid or credited to and received by a company for any shares which it issues; be it ordinary, preference, or redeemable shares.

Most non-public companies in T&T (and probably in most other jurisdictions as well) are required to keep a record or account of same in their books. There are three categories of companies in T&T which are excluded from this requirement:

(1) public companies;

(2) investment companies, ie companies that only carry on the business of investing the consideration they receive for shares they issue; and

(3) companies whose shares, or substantially all of whose shares, are redeemable upon demand by their shareholders.

Section 35 of the Companies Act (the act) requires a company (other than those excluded above) to maintain a separate account (basically a ledger in their books or on a computer, not a bank account) for each class and series of shares that it issues, in which it records the value (in dollars) which it received for those shares. Stated capital, therefore, keeps track of how much the shareholders of a company have injected into the company, whether cash or sweat equity. That’s right, persons can pay for shares with items other than cash, be it property or services, though sweating on the road on Carnival Monday or Tuesday probably won’t count.

When value (other than cash) is received by a company for shares it issues, the company also takes into account that value in determining the stated capital, as the act provides that a company may not issue any shares until it is fully paid for those shares, either in money or in property or past services that is the fair equivalent of the money that the company would have otherwise received (if the shares were issued for cash).

In determining whether property or past service is the fair equivalent of cash consideration, companies must take into account reasonable charges and expenses of organisation and reorganisation as well as payments for property and past services reasonably expected to benefit the company.

Note that a promissory note or a promise to pay is not treated as “property” for the purposes of this provision in the act, which brings us to the term paid-up capital.

PAID-UP CAPITAL

Paid-up capital is the amount that the company has received for the shares it has issued. In the past, this would not have necessarily represented the full value of the shares as it was possible (subject to the articles and the directors decision) for persons to pay for the shares that were issued to them over time, ie by instalments.

So, for example, a company could have issued $100 worth of shares to a shareholder, but the shareholder could have only paid $50 at the time and owed the company the balance to be paid later (called “partly paid shares”).

Shares issued since 1997 (when the Companies Ordinance was replaced by the act) must be fully paid up at the time they are issued (not unlike your Carnival costume).

As such, apart from companies with partly paid shares issued under the Ordinance on which amounts are still outstanding, paid-up capital is now essentially the same as stated capital, which gives us one less term to have to remember.

The good news is that we can also essentially disregard the term issued capital as it is essentially synonymous with stated capital, although sometimes it is used to refer to the number of shares of a company that have been issued as opposed to the value received for those shares that were issued (at the time they were issued). The distinction regarding the value for shares at the time they were issued versus the value of shares at some point in time after brings us to the term market capital, which is sometimes referred to as market capitalisation or abbreviated as Market Cap.

MARKET CAPITAL

Market capital is probably the term that is most often confused with stated capital. One of the main reasons that people buy shares in a company, whether public or non-public, is that they hope that the value of those shares will jump-up (couldn’t resist another Carnival reference) or increase over time as the company invests the share capital in the operations of the company.

Successful companies will usually see an increase in the value of their shares over time, although they can decrease of course when internal or external factors affect them eg product, liabilities, competition, raw material scarcity, etc.

Determining the market capital for a public company is a fairly simple matter. One looks at the total number of shares of the company that have been issued (available in the company’s published Annual Report) and multiplies that number by the published price of the shares on any given day. This calculation is based on the assumption that the price at which a share trades at on the public stock exchange reflects the true value of the shares, ie the price at which a willing buyer and a willing seller would be willing to purchase or sell the shares.

Of course, there are many factors which can affect that price one way or the other and which cause daily fluctuations in share prices, but that is a subject for a different article.

For non-public companies, determining the market capital or current value of the shares is much more difficult as there is no established market for those shares.

Determining same usually requires the hiring of expensive professionals (unfortunately usually even more expensive than our Carnival costumes and fetes), but as there is no obligation to keep track of your market capital (as there is for stated capital), this is not a regularly occurring expense.

In addition to adding to a company’s stated capital account every time it issues new shares (and receives value), there are also times when a company may have to reduce its stated capital; for instance, when it buys back or redeems shares from a shareholder.

More on that would also require another article. And, now that you know what stated capital is, and what it is not, I can leave you to return to enjoying that other capital—Port-of-Spain—for Carnival.

Have a safe and happy Carnival!