What are Authorized Capital and Paid-up Capital?

Last Updated at: May 16, 2020
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What are Authorized Capital and Paid-up Capital?
What are Authorised Capital and Paid-up Capital?
The authorized capital of the YES Bank will be at Rs 5,000, and the paid-up capital will be Rs 4,800. As part of a revitalisation scheme announced on Friday by the Reserve Bank of India (RBI), the State Bank of India (SBI) will take up 49% stakes in distressed private lenders YES Bank.

 

Generally, companies issue their shares of stock or equity for fund expansion, return the debts, etc. Share capital is the company raised fund in exchange for the shares issued to the shareholders. The Registrar of Companies (RoC) requires private limited companies, one-person companies, and public limited companies to declare their capital structure at the most times and even when there’s a change. Hence, whatever could also be the corporate size and therefore the sort of business, every company has got to get its share capital classified under various categories within the budget. Authorized capital and Paid capital are the two kinds.

In the company’s Memorandum of Association (MOA), the corporation should mention the number of shares to be issued within the Capital Clause. However, there could also be cases where some portion of the authorized share capital may remain un-issued. The number of share capital which is issued to the investors is understood because of the issued share capital. After the 2015 amendment within the Companies Act, the need for paid-up capital has been removed but the authorized capital still exists. 

What is an Authorized Capital?

The authorized capital is nothing but the maximum amount of capital the shareholders are authorized to invest and hold a position within the company. The maximum permissible limit is mentioned within the Memorandum of Association (MoA) of the Company, under the Capital Clause. However, there are cases where some portion of the authorized share capital may remain un-issued. The number of share capital which is issued to the investors is known as the issued share capital.

It is also a registered capital or nominal capital of the corporate. A corporation doesn’t need to issue all its authorized capital within the public subscription. It may issue according to the needs and demands of the company. The authorized capital mentioned within the MoA is increased or decreased in the future by following the procedure that was laid down under the Companies Act, 2013, such as:

    • Article of Association (AoA) of a company should authorise for increase or decrease in authorized capital and if such provision isn’t there within the AoA, it should be amended as per Section 14 of the Companies Act.
    • For increased or decrease in the authorized capital, a notice of the same should be issued to the Directors, Members and Auditors of the company for calling a meeting with the Board of Directors and a general meeting with the shareholders to obtain their approval.
    • Within 30 days of passing the resolution, the government informs the registrar of the company along with the copy of the resolution, a notice of General Meeting, and amended MOA in Form SH-7.

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What is the meaning of Paid-up Share Capital?

Paid-up share capital is the amount for which shareholders are issued shares. The shareholders then complete their payments. Also, this amount is considered the actual fund that the company receives by being mentioned on the issue of shares. Generally, this amount is raised as Initial Public Offering and forms a part of the company’s finance. However, the paid-up capital of the corporate can never be quite its authorized capital.

Before the 2015 amendment within the Company Act, a private limited company was required to possess a minimum paid-up capital of 1 lakh, and a public company was required to have a minimum paid-up capital of 5 lakh. However, they removed the requirement after the amendment. Also, it’s at the company’s discretion to line up their paid-up capital. It can be as less as Rs 5,000.

To know more about the Paid Up Capital report from the MCA website, click here.

What is the difference between authorized and Paid-up Share Capital?

Paid-up capital forms a portion of the authorized capital. Let us see some of the major differences between the authorized and Paid-up Share Capital. They include:

S.No Authorized Share Capital Paid-up Share Capital
1. It is the maximum value of the shares issued to the shareholders. The amount paid by the shareholders to the company for the company’s financing.
2. The Capital Clause of MoA mentions it. The Capital Clause of MoA mentions it.
3. To increase it, MoA must make the amendment by following the procedure mentioned above Private placement or issuing of shares does it.
4.  All new companies must authorize a minimum amount of capital, which is Rs 1 lakh for Pvt Ltd Companies and Rs 5 lakh for Public Limited Companies. Paid-up capital cannot be quite much as the authorized capital; it can either be often lower or equal to it
5. This is no way means an individual owes such an amount to anyone A company can issue shares and also buy them back, subject to certain terms and conditions.
6. This capital isn’t responsible for the use to calculate the net worth of the company or the business The paid-up capital amount is used for business expenses. Unlike authorized capital, paid-up capital is used in the company’s net worth calculation. Though both authorized and paid-up capital is mentioned within the balance sheet, just one is used for calculating the firm’s net worth.

Benefits of Increasing the authorized capital

The company witnesses various benefits by increasing the authorized capital amount as follows:

Growing Businesses:

With the infusion of more cash obtained from the stock sales, the company can focus on growing its business without borrowing any loans or others from traditional sources.

Helps in raising additional funds:

If a firm would like to raise any additional external funds, then again its first need is to increase the authorized capital. 

For example ABC Pvt. Ltd company limited got shares from the authorized capital is also Rs. 3,00,000 (10,000 equity shares of Rs. 30 each) and from paid-up capital of Rs.3,00,000 (10,000 equity shares of Rs. 30 each) . Its intent is to expand the business by raising more funds of about Rs. 8,00,000 by the further issue of 80,000 equity shares of Rs. 30 each. 

As we are aware of already, the company can expand its business only to the authorized capital level. In this case, the company must first increase it by the following method.

Called-up Capital = Existing Paid Up Capital + Additional Paid Up capital

Revised or Called-up Capital = 3,00,000 + 21,00,000 (8,00,000*Rs.30=21,00,000)

Called-up Capital = Rs.24,00,000

The revised paid-up capital is now over the authorized capital. Hence, to increase it,

  1. File form SH-7 to increase it to the proposed value of Rs.24,00,000 from the existing value of Rs.3,00,000.
  2. Once ROC approves, it is increased and the additional 80,000 equity is allowed.
  3. Later, the firm will then receive the share amount from the shareholders on the purchase of the additional equity shares.

Additional compensation to shareholders:

With more cash inflow, the firm can now raise its compensation to its shareholders. owners, partners, etc.

Additional Concepts

There are a few other concepts. Though they have lesser importance, you’ll want to know, too: Issued capital and Called-up capital.

Issued capital: This is often capital issued to shareholders by the corporate, whether or not they have been paid for.

Called-up capital: This refers to issued capital that has not been paid-up.

Another example for you:

A company has an authorized 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:

authorized capital: Rs. 30,00,000

Issued capital: Rs. 10,00,000

Paid-up capital: Rs. 900,000

As a result, Called-up capital: Rs. 100,000

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What are Authorized Capital and Paid-up Capital?

45336
The authorized capital of the YES Bank will be at Rs 5,000, and the paid-up capital will be Rs 4,800. As part of a revitalisation scheme announced on Friday by the Reserve Bank of India (RBI), the State Bank of India (SBI) will take up 49% stakes in distressed private lenders YES Bank.

 

Generally, companies issue their shares of stock or equity for fund expansion, return the debts, etc. Share capital is the company raised fund in exchange for the shares issued to the shareholders. The Registrar of Companies (RoC) requires private limited companies, one-person companies, and public limited companies to declare their capital structure at the most times and even when there’s a change. Hence, whatever could also be the corporate size and therefore the sort of business, every company has got to get its share capital classified under various categories within the budget. Authorized capital and Paid capital are the two kinds.

In the company’s Memorandum of Association (MOA), the corporation should mention the number of shares to be issued within the Capital Clause. However, there could also be cases where some portion of the authorized share capital may remain un-issued. The number of share capital which is issued to the investors is understood because of the issued share capital. After the 2015 amendment within the Companies Act, the need for paid-up capital has been removed but the authorized capital still exists. 

What is an Authorized Capital?

The authorized capital is nothing but the maximum amount of capital the shareholders are authorized to invest and hold a position within the company. The maximum permissible limit is mentioned within the Memorandum of Association (MoA) of the Company, under the Capital Clause. However, there are cases where some portion of the authorized share capital may remain un-issued. The number of share capital which is issued to the investors is known as the issued share capital.

It is also a registered capital or nominal capital of the corporate. A corporation doesn’t need to issue all its authorized capital within the public subscription. It may issue according to the needs and demands of the company. The authorized capital mentioned within the MoA is increased or decreased in the future by following the procedure that was laid down under the Companies Act, 2013, such as:

    • Article of Association (AoA) of a company should authorise for increase or decrease in authorized capital and if such provision isn’t there within the AoA, it should be amended as per Section 14 of the Companies Act.
    • For increased or decrease in the authorized capital, a notice of the same should be issued to the Directors, Members and Auditors of the company for calling a meeting with the Board of Directors and a general meeting with the shareholders to obtain their approval.
    • Within 30 days of passing the resolution, the government informs the registrar of the company along with the copy of the resolution, a notice of General Meeting, and amended MOA in Form SH-7.

Ask for Free Legal Advice

What is the meaning of Paid-up Share Capital?

Paid-up share capital is the amount for which shareholders are issued shares. The shareholders then complete their payments. Also, this amount is considered the actual fund that the company receives by being mentioned on the issue of shares. Generally, this amount is raised as Initial Public Offering and forms a part of the company’s finance. However, the paid-up capital of the corporate can never be quite its authorized capital.

Before the 2015 amendment within the Company Act, a private limited company was required to possess a minimum paid-up capital of 1 lakh, and a public company was required to have a minimum paid-up capital of 5 lakh. However, they removed the requirement after the amendment. Also, it’s at the company’s discretion to line up their paid-up capital. It can be as less as Rs 5,000.

To know more about the Paid Up Capital report from the MCA website, click here.

What is the difference between authorized and Paid-up Share Capital?

Paid-up capital forms a portion of the authorized capital. Let us see some of the major differences between the authorized and Paid-up Share Capital. They include:

S.No Authorized Share Capital Paid-up Share Capital
1. It is the maximum value of the shares issued to the shareholders. The amount paid by the shareholders to the company for the company’s financing.
2. The Capital Clause of MoA mentions it. The Capital Clause of MoA mentions it.
3. To increase it, MoA must make the amendment by following the procedure mentioned above Private placement or issuing of shares does it.
4.  All new companies must authorize a minimum amount of capital, which is Rs 1 lakh for Pvt Ltd Companies and Rs 5 lakh for Public Limited Companies. Paid-up capital cannot be quite much as the authorized capital; it can either be often lower or equal to it
5. This is no way means an individual owes such an amount to anyone A company can issue shares and also buy them back, subject to certain terms and conditions.
6. This capital isn’t responsible for the use to calculate the net worth of the company or the business The paid-up capital amount is used for business expenses. Unlike authorized capital, paid-up capital is used in the company’s net worth calculation. Though both authorized and paid-up capital is mentioned within the balance sheet, just one is used for calculating the firm’s net worth.

Benefits of Increasing the authorized capital

The company witnesses various benefits by increasing the authorized capital amount as follows:

Growing Businesses:

With the infusion of more cash obtained from the stock sales, the company can focus on growing its business without borrowing any loans or others from traditional sources.

Helps in raising additional funds:

If a firm would like to raise any additional external funds, then again its first need is to increase the authorized capital. 

For example ABC Pvt. Ltd company limited got shares from the authorized capital is also Rs. 3,00,000 (10,000 equity shares of Rs. 30 each) and from paid-up capital of Rs.3,00,000 (10,000 equity shares of Rs. 30 each) . Its intent is to expand the business by raising more funds of about Rs. 8,00,000 by the further issue of 80,000 equity shares of Rs. 30 each. 

As we are aware of already, the company can expand its business only to the authorized capital level. In this case, the company must first increase it by the following method.

Called-up Capital = Existing Paid Up Capital + Additional Paid Up capital

Revised or Called-up Capital = 3,00,000 + 21,00,000 (8,00,000*Rs.30=21,00,000)

Called-up Capital = Rs.24,00,000

The revised paid-up capital is now over the authorized capital. Hence, to increase it,

  1. File form SH-7 to increase it to the proposed value of Rs.24,00,000 from the existing value of Rs.3,00,000.
  2. Once ROC approves, it is increased and the additional 80,000 equity is allowed.
  3. Later, the firm will then receive the share amount from the shareholders on the purchase of the additional equity shares.

Additional compensation to shareholders:

With more cash inflow, the firm can now raise its compensation to its shareholders. owners, partners, etc.

Additional Concepts

There are a few other concepts. Though they have lesser importance, you’ll want to know, too: Issued capital and Called-up capital.

Issued capital: This is often capital issued to shareholders by the corporate, whether or not they have been paid for.

Called-up capital: This refers to issued capital that has not been paid-up.

Another example for you:

A company has an authorized 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:

authorized capital: Rs. 30,00,000

Issued capital: Rs. 10,00,000

Paid-up capital: Rs. 900,000

As a result, Called-up capital: Rs. 100,000

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