Capitalization means the amount of capital invested in a business. The capital of the company may comprise various types of securities such as common and preferred stock, debentures, bonds and long term loans which are summed up in the capital account on a balance sheet.

This invested capital and debt, generally of the long-term variety, comprises a company’s capitalization, i.e., a permanent type of funding to support a company’s growth and related assets.


Capitalization may be classified into the following three important types based on its nature:
1 Over Capitalization

2 Under Capitalization

3 Water Capitalization

1. Over Capitalization:-

Over-capitalisation is that state of financial affairs of a company, in which the real value of company’s assets is much less than their book value; leading to a permanent decline in the earning capacity of the company.

2. Under Capitalization:-

A company is said to be under-capitalised when it is earning exceptionally higher profits as compared to other companies or the value of its assets is significantly higher than the capital raised. For instance, the capitalisation of a company is Rs. 20 lakhs and the average rate of return of the industry is 15%. But if the company is earning 30% on the capital investment, it is a case of under-capitalisation.

3. Water Capitalization:-

If the stock or capital of the company is not mentioned by assets of equivalent value, it is called as watered stock. In simple words, watered capital means that the realizable value of assets of the


The need of capitalisation arises not only at the time of incorporation or promotion of a company but may also arise as a going concern after promotion and during the life time of a corporation.

  1. At the time of promotion/incorporation of a company.
  2. At the time of expansion of an existing company.
  3. At the time of amalgamation and absorption of two or more companies.
  4. At the time of re-organisation of capital of a company.
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