Authorized Capital versus Paid-up Capital
Every company’s share capital may be classified in various ways within its financial statements, regardless of size, business type, or category. The Companies Amendment Act of 2015 eliminated the requirement for a minimum paid-up capital for corporations, but the idea of authorized share capital is still crucial to keep in mind.
This article will thoroughly discuss the difference between authorized and paid-up share capital. Authorized and paid-up share capital are the two fundamental components of every company’s capital structure. These two elements have separate functions and varied effects on the business’s operations and financial stability.
Example to understand Authorized Capital and Paid-up Capital
In this scenario, let’s consider XYZ Ltd., which has an authorized capital of Rs. 60,00,000 (€ 66279 approx.) outlined in its Memorandum of Association (MOA). This authorized capital consists of 6,00,000 shares with a face value of Rs 10 each. However, the company has only issued 2,00,000 shares at Rs. 10 each for subscription.
Consequently, the authorized capital remains at Rs. 60,00,000 (€ 66279 approx.), while the paid-up capital amounts to Rs. 20,00,000 (€ 22093 approx.).
Authorized Capital
The maximum amount of money a corporation can obtain to fulfil its operational needs is authorized capital, often referred to as registered capital or nominal capital. This amount is decided upon at the time of the company’s creation, usually by its shareholders, and is explicitly stated in the Memorandum of Association. Being the maximum, a firm cannot issue or sell more shares than this set limit.
Importantly, by following the legal formalities and procedures required by law, the authorized capital may be increased at any time.
For Example:
Example 1 (Within Authorized Capital): If XYZ Pvt Ltd has a Rs. 20 lakh authorized capital and has distributed shares worth Rs. 15 lakh to its stockholders, it has not exceeded this limit. Without raising its authorised share capital, It is free to issue more shares in the future, up to a maximum of Rs. 5 lakhs. This proves that the business hasn’t exceeded the upper bound outlined in its MOA.
Example 2 (Exceeding Authorized Capital): On the other hand, XYZ Pvt Ltd would break the law if it issued shares valued at Rs. 25 lakh to shareholders, but its authorized capital remained at Rs. 20 lakh. The number of shares issued by the corporation exceeds the ceiling outlined in its authorized capital. To correct this scenario and issue more shares, XYZ Pvt Ltd must first increase its authorized share capital through the proper legal channels before issuing new shares to shareholders. This guarantees adherence to the law and the company’s MOA.
In conclusion, authorized capital determines the maximum shares a corporation may issue. To ensure that the company continues to comply with legal requirements, exceeding this threshold necessitates following a formal process to enhance the authorized capital.
Paid-up Capital
The real sum of money shareholders have given the business in exchange for their shares is known as paid-up share capital. It displays the money shareholders have given the business. The approved share capital must always be equal to or less than the paid-up capital since a corporation may not issue more shares than the authorized share capital allows.
It’s important to note that the Companies Amendment Act of 2015 eliminated the need for a minimum paid-up capital when forming a company. As a result, enterprises can now be formed with a paid-up capital as low as Rs. 1,000, illustrating improved business formation flexibility.
Authorized Capital Vs Paid-up Capital
A company’s authorized capital and paid-up capital have different functions. Paid-up capital is the capital that is actively used for ongoing business activities. In contrast, authorized capital defines the envisioned capital target or funding goal that a firm seeks to attain. The following table highlights the key differences between approved and paid-up capital while considering their definitions, uses, and effects on a company’s net value. This comparison provides a more comprehensive understanding of these two types of capital.
Authorized Capital:
- Defines the maximum number of shares that a corporation may lawfully issue.
- Documented in the Memorandum of Association for the Company.
- Has no impact on the business’s net worth.
- There is no mandated minimum allowed capital; shareholders decide what is appropriate.
- A business is not permitted to issue more shares than its authorized capital.
Paid-up Capital:
- The actual price of the shares the company receives.
- Documented in the balance sheet of the business.
- Directly depicts the value of the business.
- Companies may be founded with no paid-up capital; there is no set legal minimum.
- Imposes no limitations on the company’s share sales.
How to Raise the Authorized capital and Paid-up capital of a company?
You may increase a company’s investment capacity to raise its authorized and paid-up capital. As a result, the business can issue extra shares to current and new owners. The company can issue and sell more shares once the amount of authorized capital is raised. Conversely, a rise in paid-up capital indicates that the corporation has already sold more shares than are currently valued.
It’s crucial to remember that raising either of these capital limits requires the consent of shareholders and that the Registrar of Companies must be notified using the appropriate documents. Here is a step-by-step guide to completing this.
- Check the company’s articles of association (AOA) to see if the process for raising approved and paid-up capital is described there. The AOA should be changed to incorporate this method if it isn’t included.
- Call a Board of Directors meeting after ensuring the AOA has the required procedure. The directors should approve two resolutions at this meeting. The decision to raise the company’s capital should be approved in the first resolution, and the date, time, and venue of the next Shareholders’ general meeting should be decided in the second resolution.
- It is crucial to update the company’s Memorandum of Association (MOA) before the shareholders meeting to reflect the new capital restrictions.
- Holding shareholders’ Extraordinary General Meeting (EGM) is the next step. Shareholders will formally adopt the modified MOA and approve the increased capital restrictions at this meeting via an ordinary resolution. The authorized and paid-up capital modifications will be confirmed upon the shareholders’ approval.
- Notify the Registrar of Companies (ROC) of the revised MOA and the updated capital restrictions. Use Form PAS-3 to record any changes to the paid-up capital. Use Form SH-7 to report changes to permitted capital. The notification of the EGM, the shareholders’ resolution recorded in MGT-14, the updated MOA, a list of new shareholders, and a valuation report for the newly allotted shares should all be included in the supporting material for these applications.
Minimum Capital To Register a Company
The minimum mandated limit for authorized capital and paid-up capital while registering a company was eliminated by the Companies (Amendment) Act of 2015. Instead, the company’s capitalization must be sufficient to sustain its activities, especially in the early operation phases. It’s crucial to remember that a corporation may only fund its operations with stock contributions from its shareholders. A company’s capital is determined by the nature of its operations and the magnitude of those operations.
It’s a good idea to make a budget for your company’s potential commercial operations to determine the proper capital requirement. The financial requirements of the business for efficient operation and achievement of its goals should be considered in this budget.
Conclusion
To thoroughly analyse a company’s financial situation and potential for future growth, it is essential to comprehend the difference between authorized capital and paid-up capital. Paid-up capital represents the shares that shareholders have subscribed to and for which payment has been made. In contrast, authorized capital represents the maximum amount of capital a corporation can raise through issuing shares. This distinction has important effects on the company’s financial situation, how investors view it, and how it complies with legal regulations.
Understanding the distinction between authorized and paid-up capital enables investors and business owners to make well-informed decisions supporting their strategic goals and laying the groundwork for long-lasting commercial ventures. This information makes it possible to assess a company’s financial health and potential for future growth more accurately.
Kanakkupillai offers services to enhance knowledge of and control over authorized and paid-up capital. We assist clients in honing their capital frameworks by providing them with educational resources and financial advice. We make sure that laws are followed, help with planning, and provide crucial information about a company’s financial health. Kanakkupillai additionally promotes open investor connections. We emerge as an invaluable tool, enabling individuals and businesses to make informed financial decisions and adhere to regulatory standards.
