Know the Difference Between Authorized Capital and Paid-Up Capital
- October 10, 2019
- Registrationwala
- Home
- /
- Knowledge Base
- /
- Business Registrations
- /
- Private Limited Company
- /
- Know the Difference Between Authorized Capital and Paid-Up Capital
Know the Difference Between Authorized Capital and Paid-Up Capital
Both authorized capital and paid-up capital are funds owned by a company. However, they represent completely different things. Authorized share capital is the maximum amount of money that a company can raise by issuing shares. Paid up capital is the amount of money a company has raised from issuing shares. In other words, paid up capital refers to the actual amount of funds that shareholders have invested in the corporation.
There is no minimum paid up capital requirement since the 2015 amendment to the Companies Act 2013. However, authorized capital’s minimum requirement exists, and must be fulfilled by all the companies. In this blog post, we will learn about the difference between authorized capital and paid-up capital.
What is Authorized Capital?
Authorized Capital refers to the highest amount of share capital which can be issued by a company. It is also referred to as nominal capital. At the time of the formation of a company, this amount is agreed upon by all the shareholders. It is possible for the company to increase this amount in future if the shareholders feel like there’s a need to do so.
Authorized capital is stated in the Memorandum of Association and Articles of Association of a company. To increase authorized capital, the MoA and AoA must be amended.
Under the Companies Act 2013, the companies must fulfill the minimum authorized share capital. In case of a private limited company, the minimum authorized capital requirement is Rs. 1 lakh. In case of one person companies, the minimum requirement is Rs. 1 lakh as well. However, in case of public limited companies, this amount should be at least Rs. 5 lakh.
Features of Authorized Capital
The following are the features of the authorized share capital:
-
The authorized share capital is mentioned in the capital clause of Memorandum of Association (MoA).
-
Without approval of shareholders, a company cannot increase or decrease its authorized capital.
-
Authorized share capital is either higher than paid up share capital or equal to it.
-
Generally, companies do not issue the total amount of their authorized capital shares. They hold back some of the shares for future use.
What is Paid up Share Capital?
The Paid Up Share Capital refers to the amount of capital against which the payments have been received from the shareholders. A company generates this amount when its stocks are sold.
As a general rule, the paid up capital will always be less than or equal to the nominal capital. This is because no company can issue shares in excess of its authorized capital.
There is no minimum paid up capital requirement for companies. Before the Companies (Amendment) Act 2015 was passed, the companies were required to maintain a paid up share capital of Rs. 1 lakh. However, the 2015 amendment removed this condition.
Issuance of additional shares is the most common way to raise paid up capital. To do this, existing shareholders can be offered new shares through a rights issue. Alternatively, new investors can be issued new shares through a public offering.
Features of Paid Up Capital
The following are the features of the paid up capital:
-
Regardless of the business model type, there is no minimum paid up capital requirement.
-
Paid up capital is also known as equity capital. This is because the paid up capital comes under stockholder's equity on the balance sheet.
-
Paid up capital cannot be more than the authorized capital at any point in time.
-
The capital clause of MoA states the paid up capital.
Now, let’s check out the difference between authorized capital and paid up share capital in the following section.
Authorized Capital and Paid up Share Capital: Key Differences
The table below shows how authorized capital and paid up share capital differ from each other.
|
Authorized Capital |
Paid up Share Capital |
|
Authorized Capital is regarded as the highest value of shares that can be distributed to shareholders within a company. |
Paid Up Capital is regarded as the sum paid by the shareholders to the company for its funding. |
|
To raise the authorized capital, MoA must be amended. For this, the shareholders must give their consent. |
It is raised through issuance of shares or private placement. The consent of shareholders must be obtained beforehand. |
It does not directly contribute to the calculation of a company's net worth. |
The paid up capital’s quantity is utilized for covering business costs. It is utilized in the net worth calculation of the company. |
|
Companies Act 2013 mandates companies to have a minimum authorized capital. For private limited companies and one person companies, the minimum authorized capital amount required is Rs. 1 lakh. In case of public limited companies, Rs. 5 lakh is the minimum requirement. |
There is no minimum paid up capital requirement according to the Companies Act. However, the paid up cannot be more than the authorized capital. |
Conclusion
The company’s share capital includes both authorized share capital (a.k.a nominal capital) and paid up capital (a.k.a equity capital). The difference between authorized capital and paid up capital is that the former capital is the total amount of shares which can be issued by a corporation to the shareholders and the latter capital refers to the total amount of shares which have been actually issued to the corporation’s shareholders.
If you want to amend your authorized capital limit, connect with Registrationwala. Our CAs and experienced consultants will assist you in increasing the authorized capital in the Memorandum of Association and also file the required notice for the capital change with the Registrar of Companies (RoC) on your behalf.
Last Modified: 28-09-2024
- 3307 views