Private limited companies are one of the largest business entities in India, accounting for over 90% of registered businesses. Administered by the Ministry of Corporate Affairs under Section 2 (68) of the Companies Act, 2013, this form provides a middle framework for public limited companies and partnerships, thus attracting people who want to know the benefits of both. The flexibility of operation allows managers and business owners to enhance the reputation of the company as they wish. The profit is distributed to the shareholders of the company as dividends.
Eligibility Criteria for Private Limited Company Registration in India
The eligibility criteria for registration of an Indian private limited company are as follows:
- Number of Directors
Certain qualifications are required to set up a private limited company in India. So the company should have minimum 2 directors and a maximum of 15 directors.
- Shareholders
Also, a private limited company must have at least 2 shareholders and a maximum of 200 shareholders. Note that in this case, one person can take on the role of director and shareholder both.
- Citizenship Requirements
To comply with Indian law, a private limited company must have at least one director who is an Indian citizen. While foreign directors can be appointed, this also ensures that locals are included in the company’s leadership.
No Minimum Investment
Earlier, the minimum capital required to set up a private limited company in India was Rs 100,000/- (One Lakhs). However, the Companies (Amendment) Act 2015 has done away with this requirement. Consequently, entrepreneurs are no longer bound by a prescribed capital threshold, simplifying the process of forming Private Limited Companies and relieving them from any financial burdens associated with meeting a specific capital amount.
Importance of Minimum Paid-up Capital in a Private Limited Company
Capital payment plays an important role in the financial structure and health of a private limited company. The importance of minimum wage for private limited companies can be understood from the following points:
1. Debt dependence and equity
The amount of paid-up capital reflects the extent to which a company relies on equity investment rather than debt. The fact that a private company does have a large amount of paid-up capital means that it is less dependent on external borrowing or debt to funds in its operations and growth. This can be beneficial because it reduces the financial risk associated with debt repayment, such as interest and debt repayment.
2. Growth potential
A company that has fully issued all the shares which it have shares and has achieved full paid-up capital has the flexibility to increase capital. This can be done by issuing equity or loans. This indicates that the company has the ability to expand and invest in new projects, production or business expansion.
3. Market health indicators
In the eyes of investors and stakeholders, the amount of capital on the company’s balance sheet is an important indicator of the financial health of the company. Higher paid-up capital is generally indicative of greater financial stability and greater investor confidence. This is the company’s success in attracting capital from shareholders and can be understood as a vote of confidence in its business.
4. Equity vs. Debt
The equity-to-debt ratio in a company’s financial structure is an important indicator in assessing its financial stability. A higher ratio of equity (referred to as paid-up capital) to debt indicates financial strength. It shows how to reduce financial risk, reduce business risk, and maintain a healthy financial position. For example, companies with higher debt-to-equity ratios may face greater financial risk, which can lead to financial instability.
Classification of Investment Companies
To understand the minimum paid-up capital for a private company, it is important to know that capital is divided into 3 types. These categories include:
- Authorized investment of private limited companies
Authorized capital, also known as authorized shares, refers to the number of shares that a company is legally authorized to issue to its shareholders. At the time of registration, a private limited company must state its authorized capital in its articles of association. It sets a limit on the total number of shares that a company may issue during its lifetime.
- Paid-Up Capital for Private Limited Company
The paid-in capital of a private limited company is part of the company’s authorized capital that is issued and sold to shareholders. It represents the amount of capital invested by the shareholders through purchase. For example, if the authorized capital of a company is Rs. 8 Lakh, but it is sold and receives only Rs. 3 Lakh in its shares, then its paid-up capital is Rs. Three Lakh. The minimum paid-up capital and total paid-up capital of a private company can be considered as the actual financial commitment of the shareholders to the company.
- Subscribed capital
Suscribed capital is that part of the authorized capital which the members agree to purchase or subscribe. This is the number of shares that the owner has undertaken to purchase from the company but may not be fully paid. Capital gains are a significant part of the profits of the traders and contracts as they represent the money that will be injected into the company at the time of payment.
Various Sources of Capital for Private Limited Companies
As mentioned earlier, the minimum paid-up capital of a private limited company is an important part of the financial structure of a private limited company and can be achieved in a number of ways. The main sources of the minimum capital required by limited companies are:
- Par value of shares
It refers to the nominal value or face value of the company’s shares specified in the company’s memorandum of association. The share price issued during the capital increase is the basic price determined for each share. The nominal value is determined when the company is established and can be adjusted by changing the MOA
- .Share premium/discount
The private limited companies of India have the flexibility to raise money by issuing shares at a premium cost or at a discount to their par value. These conditions include:
Good products:
- Premium Shares: shares at premium are issued by a company at a price above their par value. For example, if a company issues shares of par value of Rs.10 at the price of Rs. 18 then these shares, each consisting of 18 shares, are called premium shares. Generally, companies prefer to issue shares at a premium when they are financially healthy, and there is high demand for their shares.
- Discounted Shares: Conversely, a discount share is a share issued by a company at a price less than its par value. For example, if a company is selling shares with a par value of Rs. 10 at a price of Rs. 4 them this share, is labelled as a discount share. When a business needs a quick injection or is facing financial problems, it may choose to offer discounted products.
Therefore, the minimum paid-up capital of a private limited company can be obtained by issuing shares at face value and at a premium price or at a discount. These options provide flexibility to companies to raise capital according to their financial profile and market performance.
What is the Minimum Paid-up Capital Required for a Pvt Limited Company?
Initially, the minimum paid-up capital for a private limited company was Rs. 1 lakh as per the provisions of the Companies Act 2013.
The Companies (Amendment) Act 2015 brings significant changes in this regard. As per the amendment, there is no minimum capital requirement for private limited companies in India. This means that investors will now be able to set up private companies that do not meet the minimum investment requirements.
While the removal of minimum paid up capital requirements, it is important that the authorized capital should be Rs. 1 Lakh is also required to set up a private limited company.
Therefore, from 2015 onwards, there is no mandatory minimum paid up capital for private limited companies in India. However, the authorized capital is Rs. Rs 1 lakh is still the prerequisite for setting up a company. This amendment makes it easier for investors to register a private company without being limited to the minimum paid up capital, without the financial liability of a private company.
Conclusion
Changes in the capital of private sector companies in India indicate a move towards corporate governance. The Companies (Amendment) Act of 2015 eased the financial barriers for entrepreneurs to set up private companies by removing the minimum paid-up capital requirement for private companies. This amendment promotes ease of doing business and encourages innovation and entrepreneurship by removing the need for a major capital investment of Rs 1 lakh. However, it’s essential to distinguish between paid-up capital and authorized capital, as an authorized capital of Rs. 1 lakh is still mandatory. While this authorized capital sets an upper limit on potential capitalization, it doesn’t necessitate immediate full payment.
