Companies issue their shares to raise 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 is broadly classified into two categories – authorized share capital and paid-up share capital. Let us understand the meaning of these two terms and how they are different from each other.
What is an 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 paid by the shareholders for the shares held by them 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 issuing fresh share capital which becomes part of its paid-up capital.
As per the amendment in the Companies Act, 2013, there is no requirement for a private and public company to hold a minimum paid-up capital which was earlier 1 lakh and 5 lakh respectively. They are free to choose their paid-up capital which can be as low as Rs. 20.
Example to Understand Authorized Capital and Paid-up Capital
Let’s say XYZ Ltd. has an authorized capital of INR 60,00,000 for which it issues 2,00,000 shares at INR 10 each which makes its paid-up capital as INR 20,00,000 However, it still has the space of INR 40,00,000 paid-up capital by for issuing 4,00,000 shares at INR 10 each.
So in this case, the authorized capital will be INR 60,00,000 and paid-up capital will be INR20,00,000.
Difference Between Authorized 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 but it can be equal to the authorised captial. On the other hand, a company is not authorized to 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 to existing shareholders or by private placement to third parties.
- Authorized capital cannot be used in the calculation of net worth of a company, while paid-up capital is considered for net worth calculation.
What is the Procedure to Increase the Authorized Capital?
In order to increase the authorized capital, the company needs to obtain approval first from its Board of Directors and finally from its shareholders. Furthermore, the company needs to call a general meeting in which the amount to be increased is decided by passing an ordinary resolution by shareholders. In addition, the company is required to file Form SH-7 on the online portal of the Ministry of Corporate Affairs (MCA). This needs to be done within 30 days of passing the resolution.
Benefits of Increasing the Authorized Capital
With the additional funds received by way of stock sales, the company can concentrate on its business growth without borrowing loans or obtaining funds from other traditional sources.
- Additional funds for Shareholders and Others
With more cash inflow, the company can offer additional compensation to its investors, shareholders, partners, senior management, employees enrolled in stock ownership plans, founders and owners.
- Enhances Borrowing Capacity
With additional share capital, the overall net worth of the company also increases. This, in turn, helps the company in enhancing its borrowing capacity.
It is only via authorized capital that a company can raise its share capital beyond what it is prescribed in its MOA. Thus, increasing authorized capital boosts the overall share capital of the company.
M+V’s Corporate Services team can help you with all your capitalization needs.