What Makes Up a Company’s Capital Structure?

All companies, irrespective of their organisational structure and size, will have a specific share capital. These are a part of the various financial statements that the company has to process and file annually.

There is a massive spurt in the number of Private Company Registration in the country during the first nine months of the financial year. 

The latest data available with the Ministry of Corporate Affairs (MCA) showed that the number of companies incorporated during April-December 2020 went up by nearly 21% to over 1.1 lakhs, compared to a 5.2% increase witnessed during the corresponding nine-month period in 2019.The capital structure of a company can affect its ability to access funding, its cost of capital, and the risk profile of the company. 

What Makes Up a Company’s Capital Structure?

A company’s capital structure is the way in which it finances its operations through a combination of debt and equity. A company’s capital structure can be divided into two categories:

Company’s capital is the maximum portion of the capital for which the company may issue shares to its shareholders or promoters. The authorized capital structure of business incorporation is a part of its memorandum of association under the capital clause. This is usually decided before incorporation. However, companies do have the option of raising their capital in the future by following specific steps.

For instance, imagine a company named ABC Pvt Ltd has an company’s capital amounting to ₹20 lakhs and has issued shares for ₹15 lakhs. Likewise, in such a case, it can issue shares for ₹5 lakhs without raising. However, once it exceeds ₹20 lakhs, it will have to increase its authorized  capital before it issues any more shares to its benefactors and shareholders. 

While the Companies Act, 2015 removed the requirement for minimum paid-up capital, they still have to have the required Company’s Capital for company registration. Further, let us now take a look at the authorized capital requirements for company registration, and the difference between capital authorised and paid-up capital. 

Paid-up Share Capital

Paid-up share capital is the amount for which the company issued shares to shareholders after they made the necessary payment to the company. Moreover, for any company at any given time, the paid-up capital must either be less than or equal to its capital. Also, the company cannot issue shares beyond its capital limit.

Additionally, the paid-up capital must be deposited in the company’s account within 30 days of allotment of the shares. Due to the enactment of the Companies Amendment Act 2015, there is no longer a minimum capital requirement for a private limited company. 

Similarly, there is no minimum paid-up capital of a public company either, as they may be formed with even ₹1000 as paid-up capital. Further, to change the minimum paid-up capital for a company, the ROC must be updated, and the data regarding the update becomes a part of the company’s master data.

Subscribed Capital

Subscribed capital is a part of the paid-up capital or issued capital that the shareholders have agreed to contribute through payment. As a result of partial commitment, the shareholders are only liable for the unpaid amount on the shares subscribed. 

Can Issued Capital Exceed Authorized Capital?

Before starting any company, private or public, the investors and promoters need to decide on its company’s capital amount. This is because the Share capital authorised limit establishes how many shares they will receive as a result of their investment in the company.

Further, Issued or outstanding shares are the shares that have been issued by a company to its shareholders. Therefore, since the authorised sets the limit for the value of such shares, the paid-up or issued capital can never exceed the company’s capital.

How Can Company’s Capital Be Raised?

The Ministry of Corporate Affairs charges a fee amounting to ₹5000 to allot a minimum capital of ₹1 lakh to a Incorporation of a company. To further add more authorized capital, the shareholders will have to pay an additional fee as mentioned below.

In What Ways Do Startups Raise Authorized Capital?

Most of the startups that mushroom nowadays are bootstrapped and are short on cash. Hence, they cannot pay large amounts to boost their Share capital authorised during incorporation with the MCA. Hence, as a result, most promoters end up paying the minimum required of ₹1 lakh.

Therefore, they issue shares worth only that amount to their shareholders or founding members. Additionally, the rest of the capital invested is in the form of either an unsecured loan or as a share premium. 

Further, this helps them reduce the need to increase share capital during the early stages of their company. However, once the company expands and requires debt or equity, they raise the share capital limit to issue more shares. Hence, most startups begin operations with the Minimum Share capital for private companies, and slowly raise the limit as and when they start needing debt or equity funding. 

Share Capital Authorised Registration Fees

Authorized Capital and the Company’s Name

The use of specific terms results in additional charges to authorised. Here’s a short rundown of the fees for using different terms in the company’s name: https://www.mca.gov.in/mcafoportal/showCheckCompanyName.do

Read More:-

•  How To Determine Authorized Share Capital?
• Authorized Share Capital Registration
• Advantages and Disadvantages of Share Capital