In the last few years, there has been a stupendous rise in the number of new companies incorporated in the country. According to the data from the Ministry of Corporate Affairs, more than 1.67 lakh companies were registered in FY 2022 – the highest in the last three years.
In addition to taking care of the day-to-day operations, raising money is one of the most important tasks a company has in its hands. Entrepreneurs who plan to start a new company should know the difference between paid-up capital and authorised capital. Knowing these differences is vital to incorporating a company as well as raising money.
In this article, we will talk in detail about the meaning of authorised capital and paid-up capital, their usage, and their importance.
Different types of share capital
Businesses raise capital by issuing company shares, also known as share capital. There are different types of share capitals, which are as follows:
- Authorised share capital
- Issued share capital
- Unissued share capital
- Subscribed capital
- Called-up capital
- Paid-up capital
- Uncalled share capital
- Reserve share capital
- Fixed and circulating share capital
Of these, authorised capital and paid-up capital are two of the most important share capitals.
What is authorised capital?
The meaning of authorised capital can be defined as the largest amount of capital that a company can issue to its shareholders. The authorised capital is also known as registered capital or nominal capital.
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At the time of incorporation, companies decide the total authorised capital they can issue. The details regarding authorised capital are mentioned under the “Capital Clause” section of the Memorandum of Association.
Why do companies have authorised capital?
Having a fixed authorised capital allows companies to limit directors from allotting themselves new shares and eventually take control of the company. One of the other functions of authorised capital is to keep a check on the balance of profit distribution.
Companies usually don’t issue all the authorised share capital to the public. A part of it is reserved to raise capital if the company needs it in the future. This is also known as unissued share capital.
Features of authorised capital
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What is paid-up capital?
Paid-up capital can be defined as the amount a company receives from shareholders by selling its shares. A company can not issue paid-up share capital more than the authorised share capital.
It is to be noted that the Companies Amendment Act, 2015, has removed the minimum requirement of paid-up capital a private limited company can issue to its shareholders. Earlier, a company has to have a minimum of Rs 1 lakh as paid-up capital to start a company.
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The paid-up capital collected from the shareholders must be deposited in the company’s account within 30 days of the share allotment. However, in case a company wants to change its minimum paid-up capital, it has to notify the Registrar of Companies and update the data on the latter’s website.
Features of paid-up capital
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Difference between authorised capital and paid-up capital
| Authorised Capital | Paid-up Capital |
| The maximum value of shares that a company can issue to its shareholders is authorised capital. | The total value of the shares issued to the public is called paid-up capital. |
| A company can increase its authorised capital by taking approvals from the board members. | Paid-up capital is part of the authorised capital. Hence, it can only be increased if the authorised capital is increased. |
| The authorised capital is not calculated while assessing a company’s net worth. | Paid-up capital is considered while assessing a company’s net worth. |
| The authorised capital can never go beyond the paid-up capital. | A company can issue paid-up capital equal to the authorised capital. |
Frequently Asked Questions
How can a company increase its authorised capital?
Usually, the Articles of Association (AoA) has a clause that allows the company to increase its authorised capital when needed. If that clause is not mentioned, the company will have to amend its AoA to include this.
Once it’s done, the company has to pass a resolution in a general board meeting to increase the authorised capital.
Is there any fee to be paid to increase the authorised capital?
Yes, the Ministry of Corporate Affairs charges Rs 4,000 per lakh if the company wants to increase authorised capital anywhere between Rs 1 lakh to Rs 5 lakh. The fee decreases with the rise of the authorised capital.
What is the par value of stocks?
When a company issues its shares, it has a base price attached to them, which is called the par value of a stock. Usually, it has a nominal value like Re 1 or Rs 5. When investors pay more than the par value to buy the share, it’s called additional paid-up capital.
What is uncalled share capital?
When a company’s issued shares are not claimed by individual investors, they are known as uncalled share capital.
What is the difference between capital reserve and reserve capital?
Capital reserve is a part of a company’s profit, which it reserves for a specific purpose, such as business expansion, writing off capital expenses, etc.
On the other hand, reserve capital is a part of the authorised share capital. It can only be used when a company files for bankruptcy. A special resolution by board members with more than three-fourth of the votes in favour is needed to utilise Reserve Capital.
