Companies issue their shares of stock or equity to boost capital for various purposes like to fund their expansion, paying off debts, etc. no matter the scale of a corporation or the sort of business, every company has to classify its share capital under various categories within the financial plan.
The capital structure of a corporation is broadly classified into two categories – authorized share capital and paid-up share capital.
What is Authorized Capital?
Authorized capital is the maximum amount of capital a corporation is allowed to lift from its shareholders by issuing shares to them. a corporation doesn’t need to issue its entire authorized capital within the public subscription. it’s going to opt to issue capital at different stages as per the wants and demand.
A company has to mention the number of authorized capital in its Memorandum of Association (MOA) under the Capital Clause.
Why should authorized share capital be increased?
Authorized Share Capital is the maximum amount of share capital that a corporation is allowed to raise. This limit is made public in its constitutional documents and might only be modified with the approval of the shareholders. Before a publicly-traded company can sell the stock, it must specify a particular limit to the quantity of share capital that it’s authorized to raise. A company doesn’t usually issue the complete amount of its authorized share capital. Instead, some are going to be held in reserve by the corporation for possible future use. the number of share capital or equity financing an organization has can change over time. an organization that wishes to lift more equity can obtain authorization to issue and sell additional shares, thereby increasing its share capital.
What is Paid-up Share Capital?
Paid-up capital is the amount paid by the shareholders for the shares held by them within the company. It’s the particular fund that the corporation receives from the difficulty of shares. Typically, an organization raises finance by way of issuing fresh share capital which becomes a part of its paid-up capital.
Why is authorized capital the upper limit on feasible paid-up capital?
Paid-up capital is the amount of cash a corporation has been paid from shareholders in exchange for shares of its stock. Paid-up capital is formed when a corporation sells its shares on the first market, to investors. Paid-up capital is very important because it’s capital that’s not borrowed. an organization that’s fully paid up has sold all available shares and thus cannot increase its capital unless it borrows money by taking up debt. Paid-up capital can never exceed authorized share capital. In other words, the authorized share capital indicates the maximum amount of paid-up capital that can be raised.
As per the amendment within the Companies Act, 2013, there’s no requirement for a personal and public company to carry a minimum paid-up capital which was earlier 1 lac and 5 lac respectively. they’re liberated to choose their paid-up capital which might be as low as ₹20.
Example to know Authorized Capital and Paid-up Capital
Let’s say XYZ Ltd. has an Authorized Capital of ₹60,00,000 that- it issues 2,00,000 shares @ ₹10 each which makes its paid-up capital as ₹20,00,000. Though, it still has the space of ₹40,00,000 paid-up capital by issuing 4,00,000 shares @ ₹10 each.
So during this case,
– the authorized capital is ₹60,00,000, and
– paid-up capital is going to be ₹20,00,000
Difference Between Authorized and Paid-up Capital
- Authorized capital is the utmost value of the shares that a corporation is legally authorized to issue to the shareholders. Whereas, paid-up capital is the number that’s paid by the shareholders to the company.
- At any point, the paid-up capital of an organization can never be quite its authorized capital but it’ll be capable of the authorized capital. On the alternative hand, a company isn’t authorized to issue shares beyond the authorized share capital.
- A corporation can increase its authorized share capital within the long run by following the procedure mentioned within the businesses Act, 2013. Whereas, a company can increase its paid-up capital by way of issue of shares to existing shareholders or by private placement to 3rd parties.
- Authorized capital cannot be utilized within the calculation of the net worth of a company, while paid-up capital is taken into consideration for net worth calculation.
What is the process for increasing authorized capital?
- To increase the authorized capital, the company needs to obtain approval first from its Board of Directors and eventually from its shareholders.
- Furthermore, the company must call a general meeting during which the amount to be increased is about bypassing a typical resolution by shareholders.
- It is also required that the company file Form SH-7 on the MCA’s online portal. This has to be done within 30 days of passing the resolution.
Benefits of rising the Authorized Capital
With the additional funds received by way of stock sales, the company can target its business growth without borrowing loans or obtaining funds from other traditional sources.
Additional funds for Shareholders and Others
With extra cash inflow, the company can give additional compensation to its investors, shareholders, partners, and senior management, employees enrolled in available ownership plans, founders, and owners.
Enhances Borrowing Capacity
The company’s overall net worth improves when more share capital is added. As a result, the company’s borrowing capacity increases.
Increases Share Capital
It is only via authorized capital that a corporation can raise its share capital beyond what it’s prescribed in its MOA. Thus, increasing authorized capital boosts the share capital of the company.
Features of an authorized Capital
- Authorized capital is about the Formation and incorporation of the company.
- because the number of authorized capital increases, ROC fees will increase. Authorized Capital is mentioned within the Memorandum of Association and Articles of Association of the company.
- The authorized share capital denotes the number of share capital that the company can have and set because of the face value of each share.
- it’ll be changed at any point in time after the incorporation of the company.
- Authorized capital cannot be used within the calculation of the net worth of the company.
- it is not required for a corporation to issue shares up to authorized capital, the company can issue shares of less value than authorized capital.
Features of Paid-Up Capital
- It falls within the category of Called-up capital which has been paid by the shareholders and received by the company.
- The company must issue shares within 60 days of incorporation of the company, the amount decided as paid-up capital during incorporation.
- Paid-up capital can’t be over authorized capital.
- The quantity received as a paid-up capital is employed for meeting the business expenses of the company.
- Paid-up capital is included within the calculation of the net worth of the company.
Characteristics of Paid-Up Capital
- Paid-up capital mustn’t be repaid, which can be a significant advantage of funding business operations during this fashion. Also called paid-in capital, equity capital, or contributed capital, paid-up capital is solely the general amount of money shareholders have acquired shares at the initial issuance. It doesn’t include any amount that investors later pay to shop for shares on the open market.
- Paid-up capital may have costs associated with it. In capital budgeting, paid-up capital is most often stated as equity capital. Within the nice debate on the relative benefits of debt versus equity, the absence of required repayment is among equity’s main advantages.
- However, shareholders expect a selected amount of return on their investments within the sort of capital gains and dividends. While the business isn’t required to return shareholder investment, the value of equity capital can still be quite high.
- Paid-up capital is listed under the stockholder’s equity on the record.
- This category is further subdivided into the standard shares:- additional paid-up capital & sub-accounts
- The price of a share of stock consists of two parts:- the face value and so the extra premium paid that’s above the face value.
- The complete face value of all shares sold is entered under stock, while the remainder is assigned to the additional paid-up capital account.
- Paid-up capital is used in fundamental analysis. Companies that rely heavily on equity capital may have less debt than those that do not. A company with a debt to equity ratio that’s common for its industry is additionally an honest candidate for investing because it indicates prudent financial practices and a decreased debt burden relative to its peers.
Comparison Between Authorized and Paid-up Capital
|Basis||Authorized Capital||Paid-up Capital|
|Scope of capital||It could be a wider term if compared to the paid-up capital of the corporation.||Paid-up Capital is within the range of or appreciates the Company’s authorized capital.|
|Nature of capital||The maximum amount of cash that a corporation can raise through the issuance of shares.||the complete amount of cash raised by a company through the issuing of stock to shareholders.|
|Increase in Capital||The company can increase the authorized share capital. However, this is often possible on the condition that the articles permit it. In addition, for a rise in Authorized Share Capital, the firm must adopt a normal resolution in an exceedingly general meeting.||The company can increase the paid-up capital. However, the paid-up capital cannot exceed the authorized capital.|
|Alteration of Capital||Any alteration during this amount also requires an amendment within the Memorandum of Association and spending of the resolution within the general meeting of the members of the corporate.||No such alterations are needed.|
|Which forms to file?||The form that must be filed in the event of a rise in ASC is SH-7.||PAS 3 is the form to be filed in the event of a rise in Paid-up Capital.|
In a nutshell, Authorized Share Capital denotes the utmost amount of capital that a corporation can raise from its shareholders by issuing shares to them reciprocally. Paid-up Capital, on the other hand, refers to the amount of share price paid by shareholders for the shares owned by them.
Further, the members must decide the quantity of Authorized Share Capital and Paid-up Capital at the time of registration itself, as they need to induce the identical records within the MOA of the company.