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/ Authorized Capital vs. Paid-up Capital: Share Capital Requirements for Foreign Companies in India

What is the difference between Authorized and Paid up Capital?

Share capital represents the funds raised by a company through the issuance of shares. Companies need share capital for various purposes such as to fund their expansion, paying off debts, etc.

Irrespective of the size of a company or the type of business, every company needs to classify its share capital under various categories in the financial statement. The capital structure of a company broadly comprises of two categories – authorized share capital and paid-up share capital.

Companies looking to establish business must understand the meaning of these two terms and how they are different from each other.

This article explains the broad concepts and then gives examples for foreign companies looking to incorporate a subsidiary in India. Understanding share capital requirements can help ensure business success in India.

What is Authorized Capital?

Authorized capital is the maximum amount of capital a company is authorized to raise from its shareholders by issuing shares to them. It is not mandatory for a company to issue its entire authorized capital in the public subscription. It may choose to issue capital at different stages as per the needs and demand.

A company needs to mention the amount of authorized capital in its Memorandum of Association (MOA).

What is Paid-up Share Capital?

Paid-up capital is the amount that the shareholders pay for the shares they hold in the company. It is the actual fund that the company receives from the issue of shares. Typically, a company raises finance by way of its paid-up capital. It can either be in the form of an Initial Public Offering (IPO) or an additional issue of shares.

There is no minimum paid-up capital requirement for a company.

Example to Understand Authorized Capital and Paid-up Capital in India

Let’s say XYZ Ltd. has an authorized capital of Rs. 60,00,000 (€ 66279 approx.) as defined by its MOA constituted by 6,00,000 shares of Rs 10 each. Out of this it issues 2,00,000 shares at Rs. 10 each for subscription.

In this case, the authorized capital will be Rs. 60,00,000 (€ 66279 approx.) and paid-up capital will be Rs. 20,00,000 (€ 22093 approx.)

Difference Between Authorized Capital and Paid-up Capital

  • Authorized capital is the maximum value of the shares that a company is legally authorized to issue to the shareholders. Whereas, paid-up capital is the amount that is actually paid by the shareholders to the company.
  • At any point, the paid-up capital of a company can never be more than its authorized capital. On the other hand, a company cannot legally issue shares beyond the authorized share capital.
  • A company can increase its authorized share capital in the future by following the procedure mentioned in the Companies Act, 2013. Whereas, a company can increase its paid-up capital by way of issue of shares or private placement.
  • While calculating the net worth of a company, you do not consider the authorized capital. However, you use paid-up capital for net worth calculation.
Looking for support with share capital in another country? Our partner Altios teams can help you across the world

Share Capital Infusion by Foreign Companies in India

When setting up an Indian subsidiary, foreign companies must carefully consider the share capital requirements. The amount of capital to be injected into Indian operations during incorporation is determined by the company’s operational needs. This can be increased in the future by issuing additional shares. However, both the initial infusion and any subsequent increases must comply with legal procedures, such as shareholder approvals and filing documents with the Registrar of Companies (RoC).

Share Capital Requirements for Foreign Companies in India

While incorporating a business in India, foreign companies often ponder upon this question – what is the minimum capital requirement for foreign companies in India? Let us answer this question for you!

In India, the capital infusion process has undergone changes regarding the minimum capital requirements.

  • Old Scenario

Earlier the minimum paid-up capital requirements for private and public companies were Rs. 1 lakh (€ 1105 approx.) and Rs. 5 lakh (€ 5523 approx.) respectively. This meant that shareholders had to invest at least Rs. 1 lakh (€ 1105 approx.) in the company by way of shares issue to commence operations.

  • Latest Scenario

However, as per the amendment in the Companies Act, 2013, there is no minimum paid-up capital requirement to start a private limited company. Now foreign companies in India are relaxed from the requirement of minimum capital investment. In fact, they are free to incorporate with a nominal paid-up capital which can be as low as Rs. 1000 (€ 11 approx.). And, if there are any subsequent financial needs of the company, they can be met through various debt financing options.

The lenient capital requirements in India present a stark contrast to the regulations in major European countries such as Germany, Switzerland, and Austria. In these countries, the minimum capital requirements for closely held companies, often referred to as Private Limited, typically range from € 5,000 to € 25,000. Similar requirements can be observed in other regions around the world.

How Relaxed Capital Infusion Norms Benefit Foreign Companies in the Indian Market

The business-friendly environment in India, with its relaxed capital infusion regulations, appears particularly attractive and accommodating to foreign companies. Foreign companies can leverage the relaxed capital infusion norms in India to their advantage by setting up subsidiaries in the country.

With the elimination of minimum capital requirements, foreign companies can establish their presence in India with a nominal capital amount as per their free wish, reducing the financial burden of initial investments.

This flexibility allows foreign companies to allocate their resources strategically, potentially directing more funds towards operational activities, marketing, and business expansion, thereby maximizing their growth potential in the Indian market.

Additionally, the accommodating regulations enable foreign companies to quickly enter the market and establish a local presence, facilitating faster business development and market penetration.

The Bottom Line

While the minimum share capital infusion requirements in India are relaxed, it is essential to consider various operational aspects before investing. In this regard, conducting an objective assessment of capital adequacy becomes crucial for foreign companies planning to invest in India. By aligning financial requirements with business goals, foreign companies can ensure they have the necessary capital to support their operations and achieve sustainable growth in the Indian market.

With the help of the right business partner, foreign companies can navigate the complexities of the Indian market, gain valuable insights and expertise, comply with regulatory requirements, and effectively manage operational challenges.

If you are planning to build your presence in India, M+V Altios can be the right business partner for you! We have over 23 years’ experience helping companies from all over the world with all aspects of their business and administration in India. Our corporate services team can help you with all your capitalization needs and ensure proper guidance and a successful start in India. We will help you optimise your capital allocation so that you can prosper in the Indian market.

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