Definition
A partly paid share is a share in which the shareholder has yet to pay the full par value of the security. Initially, an amount less than the par value is paid, with the outstanding amount due at a later date. This type of share was historically issued by banks and insurance companies as a mechanism to inspire confidence by providing a means to call on shareholders for additional funds if required. The practice fell out of favor due to the unappealing liability for shareholders but has resurfaced in some large new share issues and privatizations.
Examples
- Privatization Example: During the privatization of a national airline, the government issues partly paid shares. Investors initially pay 20% of the share’s par value, with the remaining 80% due in three installments over the next two years.
- Corporate Expansion: A tech startup issues partly paid shares to raise capital for expansion. Investors pay 50% upfront, with the remaining amount callable in the future when additional funds are needed.
- Bank Capitalization: A bank aiming to bolster its capital reserves issues partly paid shares, allowing investors to pay an initial 30% of the par value with additional payments scheduled over the next five years based on the bank’s funding requirements.
Frequently Asked Questions
What is the par value of a share?
Par value, also known as face value, is the nominal or legal value of a security as stated by the issuer. It does not typically reflect the market value of the security.
How does a partly paid share differ from a fully paid share?
A fully paid share is one where the shareholder has already paid the entire par value. For partly paid shares, the shareholder owes additional amounts that must be paid on specified dates.
What happens if a shareholder fails to pay the remaining amount of a partly paid share?
If a shareholder does not fulfill their payment obligation, the issuing company may take legal action or reclaim the shares, and the shareholder may forfeit any previously paid amounts.
Are partly paid shares common in current markets?
This practice is less common but can still be observed in large-scale share issues and privatizations, where it’s beneficial to distribute payment requirements over a period.
Why were partly paid shares unpopular historically?
Shareholders found the liability of potentially having to pay additional amounts on demand undesirable, leading to a decline in the issuance of partly paid shares.
- Fully Paid Share: A share where the shareholder has paid the entire par value.
- Called-up Share Capital: The amount of capital that the company has called for payment on issued shares, but that has not yet been paid.
- Paid-up Share Capital: The amount of money that has already been paid by shareholders in exchange for issued shares.
Online References
Suggested Books for Further Studies
- “Investment Valuation: Tools and Techniques” by Aswath Damodaran
- “The Intelligent Investor” by Benjamin Graham
- “Financial Accounting Theory and Analysis: Text and Cases” by Richard G. Schroeder
Accounting Basics: “Partly Paid Share” Fundamentals Quiz
### What is a partly paid share?
- [x] A share where the shareholder has not yet paid the full par value.
- [ ] A share that has been fully paid for in advance.
- [ ] A share that does not have a specified payment schedule.
- [ ] A share purchased at a discount.
> **Explanation:** A partly paid share is one where the shareholder has only paid part of the par value and owes the remainder later.
### Why were partly paid shares initially popular among banks and insurance companies?
- [x] To inspire confidence through the ability to call on shareholders for additional funds.
- [ ] Because they were cheaper to issue.
- [ ] To charge higher interest rates.
- [ ] To avoid taxes.
> **Explanation:** Partly paid shares were used by banks and insurance companies to ensure they could call on shareholders for additional funds if necessary.
### What was a primary reason for the decline of partly paid shares?
- [ ] Lack of regulatory support.
- [x] Shareholders' dislike of the liability to pay additional sums on demand.
- [ ] Increased company revenue.
- [ ] Better alternative investments.
> **Explanation:** Shareholders did not like the liability of being called upon to pay out further sums on demand, leading to a decline in the issuance of partly paid shares.
### In which scenarios have partly paid shares seen a revival?
- [ ] In small private companies.
- [x] In large new share issues, especially privatizations.
- [ ] In bond markets.
- [ ] In cryptocurrency markets.
> **Explanation:** Partly paid shares have been revived in large new share issues, particularly during privatizations where payments are structured over specified dates.
### What can a company do if a shareholder fails to pay the remaining amount on a partly paid share?
- [ ] Write off the unpaid amount.
- [x] Reclaim the shares and potential forfeits of previously paid amounts.
- [ ] Do nothing.
- [ ] Issue more shares.
> **Explanation:** If a shareholder fails to pay the remaining amount, the company may reclaim the shares and the shareholder may forfeit previously paid amounts.
### What is the main advantage for companies issuing partly paid shares?
- [x] They can obtain funds over a period rather than at once.
- [ ] They don't pay taxes.
- [ ] They instantly improve market value.
- [ ] They can manipulate stock prices easily.
> **Explanation:** Issuing partly paid shares allows companies to collect funds over time, which can be strategically beneficial.
### What is par value?
- [x] The nominal or legal value of a security stated by the issuer.
- [ ] The market value of a security.
- [ ] The price at a discount.
- [ ] The interest rate of a bond.
> **Explanation:** Par value, or face value, is the nominal or legal value of a security as defined by its issuer.
### What implication does a partly paid share have for shareholders?
- [x] They are liable to pay additional amounts in the future.
- [ ] They have no future payment obligations.
- [ ] They receive more dividends.
- [ ] They get voting rights in proportion to unpaid share values.
> **Explanation:** Shareholders of partly paid shares are obligated to make additional payments in the future as specified by the issuing company.
### Can a shareholder sell partly paid shares?
- [x] Yes, but the new buyer will assume the liability for outstanding payments.
- [ ] No, they must fully pay for the shares first.
- [ ] Only after approval from the issuing company.
- [ ] Only on specific exchanges.
> **Explanation:** Partly paid shares can be sold, but the buyer assumes any outstanding payment liability.
### How do partly paid shares affect a company's called-up share capital?
- [x] They increase the company's potential callable amount.
- [ ] They have no impact.
- [ ] They decrease callable capital.
- [ ] They require quarterly adjustments.
> **Explanation:** Partly paid shares increase the amount a company can call from shareholders in the future, affecting the called-up share capital.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
