The Registrar of Companies (RoC) requires private limited companies, one-person companies, and public limited companies to declare their capital structure at all times. Any time there is any change, the RoC needs to know.
Now, what defines the capital structure? It is defined mainly by the authorised and paid-up capital. As you’d guess, the authorised capital is the maximum amount of capital the shareholders are authorised to invest in the company, while the paid-up capital is the amount actually invested. Let’s examine this in greater detail:
1. All new companies must authorise a minimum amount of capital, which:
a. For private limited companies and OPCs is Rs. 1 lakh;
b. and for public limited companies is Rs. 5 lakh.
2. Such capital is first decided at the beginning of the firm’s incorporation.
3. As the amount of authorized capital increases, so will the ROC fee.
4. Even after the incorporation of the company, the authorized capital can be changed at any point of time.
5. This is no way means that a person owes such an amount to anyone.
6. This capital is not liable for use to calculate the net worth of the company.
7. As mentioned earlier, it is the limit to which a firm can issue shares. One can issue shares less than the authorized capital too. You can check the fee related to such a capital at the MCA portal.
Start-ups tend to register their companies with the minimum authorised capital, as the fees for incorporation are tied to the amount authorised. But some companies do incorporate with authorised capital much larger than current requirements so that they don’t have to inform the RoC when they want to raise more money. However, even if there is an increase in paid-up capital, the RoC must be informed.
1. Until the Companies (Amendments) Bill 2015, in effect May 26, 2015, companies had to have paid-up capital worth at least the minimum authorised capital. But the amendment has removed this requirement. This means that you can now choose to have paid-up capital of as little as Rs. 5,000 (this is the amount you actually need to invest toward the business).
2. Paid up capital cannot be more than authorized capital; it can be lower or equal to it.
3. The company has to issue shares of the amount that has been decided as paid up capital during the time of incorporation. This needs to be done within 60 days of incorporation of the company.
4. A company can issue shares and also buy them back, subject to certain terms and conditions.
5. The amount that a firm receives as paid up capital can be used for business expenses of the company.
6. Unlike authorized capital, paid up capital is liable to be considered for calculation of the company’s net worth. It is, however, imperative to add that both authorized and paid up capital are mentioned in the balance sheet but only one is used for calculating the firm’s net worth.
There are a couple of other concepts, though less important, you may want to understand, too: issued capital and called-up capital.
Issued capital: This is capital issued to shareholders by the company, whether or not they have been paid for.
Called-up capital: This refers to issued capital that has not been paid-up.
Let’s end this with an example:
A company has an authorised capital of Rs. 30,00,000, for which it issues 100,000 shares at Rs. 10 each. Of this, 1000 shares are yet to be paid-up. Therefore, in this case:
Authorised capital: Rs. 30,00,000
Issued capital: Rs. 10,00,000
Paid-up capital: Rs. 900,000
Called-up capital: Rs. 100,000