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.
Related Terms
- 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
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