Introduction
A partly paid share is a type of share in a company whose full par value has not been fully paid by the shareholder at the time of issuance. Historically, these shares were issued by banks and insurance companies to create a financial buffer, ensuring that they could call upon their shareholders for additional funds if necessary. Despite their decline in popularity due to shareholder liability concerns, partly paid shares have seen a resurgence in large new share issues, particularly during privatizations.
Historical Context
Partly paid shares were traditionally used to instill confidence in a company’s financial stability. Banks and insurance companies issued these shares to ensure that they could obtain further funds from shareholders when required. However, the liability associated with the possibility of further payments made these shares less attractive over time.
Historical Key Events:
- Early 1900s: Extensive use of partly paid shares by financial institutions.
- Mid-1900s: Decline due to shareholder discomfort with ongoing financial obligations.
- Late 20th Century: Revival in large share issues, especially during privatizations.
Types and Categories
1. Initial Partly Paid Shares:
- These shares are issued with a portion of their par value paid initially, and the remainder is called upon later.
2. Call-based Partly Paid Shares:
- These involve scheduled calls, where shareholders pay the remaining amount on specific dates.
3. Privatization-related Partly Paid Shares:
- Widely used during the privatization of state-owned enterprises, allowing a broad base of the public to participate in ownership over a staggered payment schedule.
Detailed Explanations
Key Mechanism
When a company issues partly paid shares, the shareholders pay an initial sum that is less than the full nominal value of the share. Subsequent payments (calls) may be requested by the company over time. This system allows companies to raise capital gradually, while also spreading the investment burden on shareholders.
Importance and Applicability
- Flexibility in Capital Raising: Companies can gradually raise the required capital.
- Affordability for Investors: Lower initial investment requirement allows more investors to participate.
- Control over Funding: Ensures a method for companies to call on shareholders for funds in the future, providing a financial cushion.
Applicability:
- Privatizations: Governmental privatizations often use partly paid shares to make ownership accessible.
- Large Corporations: Used for issuing large numbers of shares in a manageable manner.
- Strategic Fundraising: Helpful in periods of financial restructuring or new business expansions.
Mathematical Models
Partly Paid Share Value Calculation:
Call Schedule Example:
Let’s say a company issues a partly paid share at a nominal value of $100.
- Initial payment: $50
- 1st call after 6 months: $25
- 2nd call after 12 months: $25
Charts and Diagrams (Mermaid Format)
graph TD;
A[Partly Paid Share Issuance] --> B(Initial Payment)
B --> C[First Call]
C --> D[Second Call]
B --> E(Shareholder Holds Partial Equity)
D --> F(Full Share Ownership)
Considerations
- Financial Liability: Shareholders need to be prepared to make additional payments.
- Market Volatility: Changes in share value can affect the perceived equity.
- Company Solvency: Ability of the company to call on further payments can affect shareholder confidence.
Related Terms with Definitions
- Fully Paid Share: A share for which the entire par value has been paid.
- Called-up Share Capital: Portion of the capital that shareholders have been asked to pay.
- Paid-up Share Capital: The amount of the share capital that has been paid by the shareholders.
Comparisons
| Feature | Partly Paid Share | Fully Paid Share |
|---|---|---|
| Initial Cost | Lower | Higher |
| Future Financial Obligation | Yes | No |
| Shareholder Control | Less | More |
Interesting Facts
- Investor Strategy: Some investors use partly paid shares to leverage their positions without immediate full investment.
- Government Use: Many governments have effectively used partly paid shares in public-sector privatisations.
Inspirational Stories
During the privatization of the telecommunications giant, British Telecom (BT), partly paid shares were used to allow a broad segment of the population to invest, democratizing share ownership and fostering public trust and involvement in the company’s future.
Famous Quotes
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson, Economist.
Proverbs and Clichés
- Proverb: “Don’t put all your eggs in one basket.”
- Cliché: “A penny saved is a penny earned.”
Expressions, Jargon, and Slang
Expressions:
- “Call up”: The process of asking shareholders to pay the remaining amount due on their partly paid shares.
- “Call Schedule”: A timeline when calls for payments will be made.
- “Dough”: Informal term for money, often used when discussing calls for payment.
FAQs
Q1. Why would a company issue partly paid shares? A1. To raise capital in installments, making it easier for shareholders to invest gradually.
Q2. What happens if a shareholder fails to pay the call? A2. The shares may be forfeited or sold by the company to recover the unpaid amount.
References
- Investopedia. “Partly Paid Share.” Investopedia, www.investopedia.com.
- Financial Times Lexicon. “Partly Paid Share.” FT Lexicon, www.ft.com/lexicon.
- Corporate Finance Institute. “Share Capital.” CFI, corporatefinanceinstitute.com.
Summary
Partly paid shares offer a strategic method for companies to raise capital incrementally, while allowing investors to stagger their financial commitments. Historically significant yet cautiously approached due to associated liabilities, they provide a flexible and practical solution for large-scale capital raising initiatives. Understanding the dynamics, applications, and implications of partly paid shares is crucial for investors and financial professionals alike, ensuring informed decision-making and financial planning.
This detailed article provides comprehensive insights into partly paid shares, serving as a valuable resource for anyone interested in the intricate workings of share capital and investment strategies.
