Partly Paid Share: Understanding Its Dynamics and Historical Context

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.

Types

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.

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

Importance:

• 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

Related Terms

• 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.

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.