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 its paid-up capital either in the form of Initial Public Offering (IPO) or an additional issue of shares.
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. 1000.
Example to Understand Authorized Capital and Paid-up Capital
Let’s say XYZ Ltd. has an authorized capital of Rs. 60,00,000 for which it issues 2,00,000 shares at Rs. 10 each. Of these, 20,000 shares are yet to be paid-up.
So in this case, the authorized capital will be Rs. 60,00,000 and paid-up capital will be Rs. 18,00,000.
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. 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 or private placement.
- Authorized capital cannot be used in the calculation of net worth of a company, while paid-up capital is considered for net worth calculation.
M+V’s Corporate Services team can help you with all your capitalization needs.