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Private Limited

How Much Capital is Required to Start a Private Limited Company?

It was mandatory for a private limited company to invest a stipulated amount as capital a few months ago. Thanks to the amendments that followed, the condition has now been struck down much to the delight of the budding entrepreneurs. In this article how much capital is required to start a private limited company.

Introduction

Kickstarting a new Private Limited Company in India is not only exciting but also scary for one main reason – The investment! This is more so the case when an entrepreneur wishes to incorporate the business as a private limited company.  Investment, in any business, is the most pivotal ingredient which decides the fate of the business. More often the investment is raised by issuing shares to the shareholders.

Why a Private Limited Company?

A private limited company is the choice of businesses that aim to make it big and grab greater visibility. In India, the majority of the businesses are registered as private limited companies. A private limited company on India is considered to offer the benefits of both a partnership and a public limited company. The directors and shareholders of a private limited company have greater autonomy to decide the course of the business. The revenue reaped by the company is appropriated as dividends to the shareholders of the company proportional to their shares.

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Prerequisites for a Private Limited Company:


  • Director:

A Private Limited Company must have a minimum of 2 directors and can have a maximum of 15 directors. A private limited company can appoint a foreign director. However, it is mandatory that at least one of the directors shall be an Indian citizen


  • Shareholders:

There should be at least 2 shareholders to incorporate a private limited company, while the company can accommodate a maximum of not more than 200 shareholders


  • Minimum Capital Requirement:

Earlier, the Companies Act, 2013 mandated a minimum capital of ₹100,000 in order to incorporate a private limited company. However, the amendment Act, in 2015 repealed the provision.

Authorised Capital of a Private Limited Company:

Authorised capital marks the maximum share capital out of which shares can be issued in a private limited company. This authorised capital is usually cited in the Memorandum of Association of the company and is mostly fixed as ₹100,000. However, it can be increased with the consent of the shareholders and by paying the required fee to the Registrar of Companies (RoC). The authorised capital denotes the net worth of a company.

For instance, say a company XYZ private limited has an authorised capital of 5 lakhs. This would imply that this company can issue shares, worth up to 5 lakhs to its shareholders. While the company can decide to issue shares lesser than the decided authorised capital, say 3 lakhs, the company cannot exceed the threshold limit of 5 lakhs.

Paid-up capital of a Private Limited Company:

Paid-up capital, on the other hand, is the actual amount of money that is acquired by the company by means of issuing shares to the shareholders. The paid-up capital is always lesser than the authorised capital of the company, as the company cannot issue shares over and beyond the authorised capital. The paid-up capital thus received is often utilised for managing the expenses of the company.

Earlier there was a prerequisite pertaining to the minimum paid-up capital of a private limited company wherein it was mandatory to have a capital of ₹100,000. This would imply that a minimum of ₹100,000 should be used to purchase the shares by the shareholders to commence the business. However, the Companies Amendment Act, 2015 repealed this requisite, thus enabling the entrepreneurs to incorporate private limited companies with no hindrances.

Prior to the amendment, it was mandatory to deposit the stipulated ₹100,000 in the company’s bank account. Now that the provision is repealed it’s merely enough to state the paid capital on the papers. 

With this provision in place, many businesses have started to prefer private limited companies over other corporate structures such as Limited Liability Partnership (LLP) firms, as in the latter raising funds is a huge challenge. A private limited company was always favored for the limited liability, tax efficiency, and credibility it offers amongst the clients. The mandate for the minimum capital being torn down has definitely leveraged the scope of private limited companies and has pushed it a little ahead in the race amongst the corporate entities.

Purpose of an Authorised Capital

Its purpose is to limit the authority of directors in issuing additional shares, potentially influencing the company’s capacity to steer its course. Additionally, it plays a role in upholding equitable profit distribution. Often, a fraction of the authorized capital remains unutilized intentionally, serving as a precautionary reserve for potential future funding needs.

Salient features of an Authorised Capital

The characteristics that distinguish authorized share capital from other types can be briefly discussed as follows:

  • Establishing Trust and Reliability: Companies often opt for listing on the stock market to foster trust among the public, enabling them to generate funds by selling shares. This method stands out as the most reliable and trustworthy means of securing external funding for the business.
  • Persistence with the Company: Authorized share capital remains integral to the company until the point of liquidation, ensuring its continual availability for strategic use.
  • Empowering Shareholders: Acquiring shares in a company grants individuals the authority to participate in selecting the company’s management, offering shareholders a sense of involvement and influence.
  • Dividend Benefits: An advantageous feature of shares lies in their ability to provide investors with a share of the company’s earnings in the form of dividends. The amount of dividends is determined by the shareholder’s investment in the company.

Different Types of Capitals

Here’s a distinct exploration of various capitals, excluding authorized capital:

  • Issued Capital:

  The allotment of shares to shareholders constitutes the “issued capital,” with a clear restriction—this capital cannot surpass the authorized capital of the company.

  • Subscribed Capital:

  The amount that the public commits to when a company issues capital is termed “subscribed capital.” To illustrate, if a company issues 1000 shares at a face value of ₹10 each, and only 500 shares are subscribed, the total subscribed capital would be 500 * 10, equating to ₹5000.

  • Called up Capital:

  When a shareholder possesses a certain share percentage of a company’s capital but only pays the portion summoned by the business, it is referred to as “called up capital.”

  • Paid-up Capital:

  The cost a shareholder incurs to acquire a share in a specific business constitutes the “paid-up capital.”

  • Uncalled Capital:

  The portion of total capital that remains unpaid by the business to its shareholders is denoted as “uncalled capital.”

  • Reserve Capital:

  Reserved capital signifies the amount of capital retained by a business that has yet to undergo liquidation.

Authorised Capital differs from Paid-Up Capital

Here is the information presented in a table format:

Authorized Capital

Paid-up Capital

Authorized capital is the maximum number of shares that a corporation may issue to its shareholders. Paid-up capital is the whole cost of the shares that were issued to the general public.
A firm can increase its authorized capital by getting board’s permission. Authorized capital includes paid-up capital. It can therefore only be raised if the authorized capital is raised.
When determining a company’s net worth, the authorized capital is not taken into account. The paid-up capital is taken into account when determining a company’s net worth.
Never can the authorized capital exceed the paid-up capital. A business may raise as much paid-up capital as is authorized.

How to Alter the Authorised Share Capital of a Company?

To increase the authorized share capital of a company, follow these steps:

  1. Review Articles of Association (AOA):

   Before proceeding, check the AOA for a clause related to increasing authorized share capital. If not, modify the AOA.

  1. Convene a Board Meeting:

   Call a board meeting to obtain approval for the increase in authorized share capital. Set a date for an extraordinary general meeting (EGM) to seek shareholder approval.

  1. EGM Approval:

   Hold the EGM to gain shareholder approval for the increased authorized share capital through an ordinary resolution.

  1. File Form SH7:

   Within 30 days of the EGM, file Form SH7, including required documents like the special general meeting notice, an authorized copy of the resolution, and the amended memorandum of association.

  1. Registrar Approval:

   Following the outlined procedure in the Companies Act, the registrar will approve the filing, updating the authorized share capital on the MCA portal.

  1. Distribution of Shares:

   After increasing the authorized share capital, consider issuing additional equity shares to raise the paid-up share capital of the company.

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