A company’s capital structure serves as a foundational framework that outlines how it mobilizes and allocates financial resources. It includes equity and debt components. Within the equity framework, Authorized Capital, Issued Capital, Subscribed Capital, and Paid-Up Capital form a structured hierarchy that reflects the company’s fundraising capacity and obligations. Authorized Capital and Paid-Up Capital are key components of a company’s balance sheet under the Indian Companies Act, 2013. Authorized Capital is the maximum capital a company can legally raise through share issuance, while Paid-Up Capital is the actual amount received from shareholders for issued shares. Authorized Capital is declared in the Memorandum of Association and can only be changed with shareholder approval and ROC filings. Paid-up capital must always remain within the authorized limit and increase through share allotments or bonus issues. Compliance involves filings like SH-7, PAS-3, MGT-7, and AOC-4.
In this blog, we will understand the meaning of authorized capital and paid-up capital of a company in India and the key differences between them.
What is Authorized Capital?
Authorized Capital, also known as Nominal Capital or Registered Capital, is the maximum amount of share capital that a company is legally allowed to issue to shareholders, as mentioned in its Memorandum of Association (MoA). This is not necessarily the amount the company has raised, but the upper limit within which it can raise funds through issuing equity shares.
Under Section 2(8) of the Companies Act, 2013, “Authorized capital” means the maximum amount of share capital authorised by a company’s memorandum.
- Every company is required to mention its authorised capital at the time of incorporation in the MoA.
- A company is permitted to issue shares only up to the value of its authorised capital.
- Any change in the authorised capital, whether an increase or decrease, requires the passing of an ordinary resolution by the shareholders in a general meeting and an amendment to the MoA.
What is Paid-Up Capital?
Paid-Up Capital refers to the actual amount of money received by the company from shareholders in exchange for shares issued. It is a part of the Issued Capital and shows the funds that the shareholders have already contributed. As per Section 2(64) of the Companies Act, 2013:
“Paid-up share capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up is equal to the amount received as paid-up with respect to shares issued.
- It is the portion of Subscribed Capital for which the company has received money from the shareholders.
- It is the amount that shareholders have committed to and fully paid for, in exchange for the company’s shares.
- A company’s paid-up capital must always remain within the limits of its authorised capital. If the company intends to increase its paid capital, then it must increase its authorised capital.
- If the company needs more funds, it can increase its paid-up capital by issuing fresh shares to existing or new shareholders, provided it is within the authorised capital limit.
Distinction Between Authorized Capital and Paid-Up Capital
| Aspect | Authorized Capital | Paid-Up Capital |
| Definition | Authorized capital is the maximum amount of share capital that a company is legally permitted to issue as per its Memorandum of Association. | Paid-up capital is the actual amount received by the company from shareholders in exchange for the shares that have been issued and allotted to them. |
| Timing of Recognition | It is determined at the time of incorporation and acts as the financial limit for issuing shares throughout the company’s life. | It arises only after shares are issued and the company receives payment from the shareholders. |
| Purpose | It reflects the maximum capital the company can raise through equity, providing a long-term limit for capital mobilization. | It represents the real amount of funds invested in the company by shareholders, which are used for running and expanding the business. |
| Regulatory Fees | Stamp duty and ROC filing fees during incorporation or capital increase are calculated based on the authorized capital. | No separate fees are based on paid-up capital, but it is relevant for determining compliance with certain legal thresholds. |
| Change Requirements | Increasing authorized share capital requires shareholder approval through a resolution and an amendment to the Memorandum of Association. | Paid-up capital increases through share allotment and does not require alteration of the Memorandum unless the new amount exceeds the authorized capital. |
| Relationship with Each Other | Authorized capital is always equal to or greater than the paid-up capital. | Paid-up capital must always be within the limit of authorized capital and cannot exceed it under any circumstances. |
| Amendment Process | It requires an ordinary resolution in a general meeting and filing of Form SH-7 with the Registrar of Companies. | It requires the passing of resolutions and the sharing of allotment procedures, typically filed through Form PAS-3. |
| Statutory Restriction | It sets a legal boundary for the total amount of share capital the company can issue. | It cannot exceed the amount set as authorized capital under any circumstances. |
| Filing Disclosure | Must be declared during incorporation and updated with ROC filings during the increase. | Disclosed through share allotment forms and annual filings, such as Form MGT-7. |
Procedure to Increase Authorized Capital
- Check the Articles of Association (AoA) to ensure it allows an increase in the authorised capital of the company.
- Hold a board meeting to propose the increase in authorized capital and to approve the notice of the Extraordinary General Meeting (EGM).
- Send notices to all shareholders, stating the date, time, venue, and agenda of the EGM.
- Conduct the EGM and pass an Ordinary Resolution (unless AoA requires a Special Resolution) to approve the increase in authorized capital and alteration of the Memorandum of Association (MoA).
- Modify Clause V (Capital Clause) of the MoA to reflect the new amount of authorized capital.
- Submit Form SH-7 along with the prescribed government fee, a copy of the resolution passed, and the altered MoA within 30 days of passing the resolution
- Pass the Shareholders’ Resolution and obtain approval via an ordinary resolution.
- Pay the applicable stamp duty and filing fees as per the amount of increased capital and the state-specific stamp duty laws.
- Once the RoC verifies and approves the filing, the company’s Master Data will be updated
Procedure to Increase Paid-Up Capital
To increase Paid-Up Capital, companies can:
- Conduct a board meeting to approve the proposal for increasing the paid-up capital by issuing new shares and to fix the date for the Extraordinary General Meeting (if required).
- Choose the method for raising paid-up capital, such as:
- Rights Issue (to existing shareholders),
- Private Placement,
- Bonus Issue (from free reserves), or
- ESOPs (for employees).
- Obtain shareholders’ approval through an Ordinary or Special Resolution.
- Collect the share application money in the company’s bank account
- Conduct a board meeting to approve the allotment of shares to the subscribers after receipt of the application money.
- File Form PAS-3 (Return of Allotment) with the Registrar of Companies within 15 days of allotment, along with:
- Board resolution,
- List of allottees,
- Valuation report (if applicable), and
- Share subscription forms or offer letters.
- Issue duly stamped and signed share certificates to the shareholders within 2 months of allotment of shares.
- Update the Register of Members, the Register of Share Allotments, and the Balance Sheet.
Conclusion
Paid-up capital and Authorised Capital are different but connected. Paid-up capital is the actual expression of shareholder commitment, whereas Authorised Capital serves as the theoretical cap for increasing capital. Assessing the company’s capital strategy, financial health, and regulatory compliance requires an understanding of the distinction between the two.
Understanding how these capitals operate inside the Indian corporate system enables you to make wise judgements.
