Reserve share capital refers to a portion of the uncalled capital that is not called at the time of incorporation but is kept in reserve to be called only at the time of liquidation. This means that the reserve share capital is not available for use by the company during its ongoing operations, and is only available as a last resort in case the company is liquidated.

Explanation:

To understand reserve share capital better, let us break it down into its components:

Authorized capital: The authorized capital of a company refers to the maximum amount of capital that the company is authorized to issue. This is the amount that is mentioned in the company's memorandum of association and is approved by the Registrar of Companies.

Called-up capital: This refers to the portion of the authorized capital that has been called by the company and has been paid up by the shareholders.

Uncalled capital: This is the portion of the authorized capital that has not been called by the company and is still available for future use.

Now, reserve share capital is a portion of the uncalled capital that is not called at the time of incorporation. This means that the company has the option of calling this capital at a later stage, but only in case of liquidation. The reserve share capital is kept aside as a last resort to meet any outstanding liabilities in case of liquidation.

It is important to note that reserve share capital is not available for use by the company during its ongoing operations. This is because the shareholders have not yet paid for this capital, and it is only available to the company in case of liquidation.

Advantages of reserve share capital:

1. Provides a safety net: Reserve share capital provides a safety net to the company in case of liquidation. It ensures that the company has sufficient funds to meet any outstanding liabilities and obligations.

2. Enhances creditworthiness: Having reserve share capital enhances the creditworthiness of the company. This is because it shows that the company has a contingency plan in place in case of unforeseen circumstances.

3. Increases shareholder confidence: Shareholders are more likely to invest in a company that has a reserve share capital. This is because it shows that the company is financially stable and has a long-term plan in place.

Conclusion:

Reserve share capital is an important component of a company's capital structure. It provides a safety net in case of liquidation and enhances the creditworthiness of the company. While it is not available for use during the company's ongoing operations, it is an essential component of a company's long-term financial planning.