When you register a company, one important thing to think about is the company registration capital. This capital is the money that helps your business start and run properly. It is very important to understand the difference between authorized capital and paid-up capital. Knowing this helps you follow legal rules and manage your money in a better way.

Starting a new company includes many legal and financial steps. One of the most important parts is the capital required for company registration. If you do not clearly understand authorized capital and paid-up capital, it can create legal problems and financial issues later. This article explains these terms in simple words. It mainly focuses on the capital requirements of a private limited company and helps you understand them easily.

What Is Authorized Share Capital?

Authorized capital, also called nominal capital, is the maximum share capital that a private limited company can issue to its shareholders. It is the highest limit of money the company can raise by selling shares.

This amount is written in the company’s Memorandum of Association (MOA). The MOA is an important document that explains what work or business the company can do.

Authorized share capital is not the same as issued capital, subscribed capital, and paid-up capital. These are the shares that are actually given to people and paid for. If a company plans to increase its authorized share capital, it generally requires approval from its shareholders.

This system helps new companies raise money later. It also helps old companies plan their money and growth properly.

What Is Paid-up Capital?

Paid-up capital is the actual money that the company receives from shareholders for the shares they buy. It is the share of authorized capital that the company has issued and for which full payment has been made.

• Shows Real Investment: It represents the real amount of money received from shareholders.
• No Minimum Requirement: After the amendment made in 2015 under the Companies Act, 2013, there is no fixed minimum paid-up capital required to start a company.
• Improves Company Image: A higher paid-up capital can increase the company’s credibility and trust among creditors and investors.

In simple words, paid-up capital is the actual money the company has in hand from its shareholders.

How is Authorized Capital Defined in the MOA?

In the MOA, authorized capital is defined under the Capital Clause. It tells the maximum amount of money the company can raise by selling shares. This amount is fixed at the time of company registration.

Authorized capital in the MOA means:

• The highest amount of share capital the company can issue.
• The total value of shares the company can give to shareholders.
• The capital amount mentioned at the time of company formation.
• The number of shares into which the capital is divided.
• The face value (price) of each share.

Types of Capital in a Private Limited Company

Authorized share capital is also called authorized stock, authorized shares, or authorized capital stock. To understand it clearly, you should compare it with paid-up capital, subscribed capital, and issued capital. All these terms are connected, but they do not mean the same thing.

1) Authorized Share Capital

Authorized capital means the maximum number of shares a company can offer to its shareholders. This amount is written in the Memorandum of Association (MOA).

A company cannot issue shares more than this limit. If the company wants to raise more money than the authorized capital, it must first increase the limit. To do this, the shareholders must pass a resolution in a general meeting, and the MOA must be updated.

After the authorized capital is increased, the company can issue more shares and raise more funds.

2) Issued Share Capital

Issued capital means the amount of shares a company has already offered to its shareholders. It must always be within the limit of the authorized capital mentioned in the Memorandum of Association (MOA). The issued share capital can be equal to or less than the authorized capital, but it can never be more than that limit. Issued capital is also known as called-up capital.

3) Subscribed Share Capital

Subscribed capital is the amount of shares that people agree to buy from the company. It increases when members apply for and accept the company’s shares. Subscribed capital can be the same as issued capital or less than it, but it can never be higher than the issued capital.

The shares that people do not buy are known as unsubscribed capital.

4) Paid-Up Share Capital

Paid-up share capital is the money that the company has actually received from shareholders for the shares given to them. It is the amount that shareholders have already paid.

If some shareholders have not paid the full amount for their shares, that unpaid amount is called unpaid share capital or calls in arrears. Paid-up capital is the subscribed capital minus the unpaid amount. Paid-up capital is the actual money the company has received from its shareholders.

What is the minimum authorized share capital for a private limited company?

Authorized capital is the maximum value of shares that a private limited company can legally issue. According to the Companies Act, 2013, there is no fixed maximum limit for authorized capital. However, the law has removed the requirement of maintaining a minimum authorized capital.

Minimum Authorized Capital: A Private limited company needs a minimum authorized capital of ₹1,00,000 to start. But this rule was removed in 2015 under the Companies Act, 2013. Now, there is no minimum capital required to start a private limited company.

For example, if ABC Private Limited has an authorized capital of ₹5 lakh, it can issue shares up to ₹5 lakh. It can issue less, like ₹3 lakh, but it cannot issue more than ₹5 lakh unless it increases its authorized capital first.

Differences Between Authorized Capital and Paid-up Capital

Authorized capital and paid-up capital are important parts of a company’s financial structure. However, they are different from each other in meaning and use. Below is a simple comparison between the two:

Why Is Authorised Capital Important?

Authorized capital is the highest value of shares that a private limited company is allowed to issue to its shareholders. Below is a simple explanation of how it is used and why it is important:

• Authorized capital decides the maximum amount of money a company can raise at the beginning of its business. This capital is divided into shares and offered to investors. People who buy these shares become shareholders of the company and get part ownership in it.
• Buying shares means buying a part of the company. If one person owns all the shares, they have full ownership and control of the company.
• If the authorized capital crosses ₹50 lakhs, the company may have to complete extra formalities with the RoC before starting business. These limits and rules can change from time to time depending on legal amendments and different regional laws.
• When investors buy shares, they can pay through cash, bank draft, or cheque. If the payment is made by cheque, the cheque must be cleared, and the money must be received by the company before it can continue with registration or any other formal process.

Why Is Paid-Up Capital Important?

Paid-up capital is important because it is the real money that shareholders have invested in the company. This money helps the company start its work, manage daily expenses, and grow the business. It also shows that the owners are serious and financially committed to the company. A higher paid-up capital can increase trust among customers, investors, and banks. Key Reasons Why Paid-Up Capital Is Important:

• It provides funds to run daily business activities.
• It shows the financial strength of the company.
• It builds trust with banks and investors.
• It helps in getting loans or credit facilities.
• It proves the commitment of shareholders.

Benefits and Effects of Authorised Capital

Uses of Authorised Capital:

• It sets the maximum limit of shares a company can issue.
• It helps the company raise money in the future.
• It shows the company’s growth plans.
• It allows the company to issue more shares when needed.

Effects of Authorised Capital:

• The company cannot issue shares more than this limit.
• To increase it, shareholder approval is required.
• Higher authorised capital may increase registration fees.
• It affects how much funding a company can raise.

Benefits and Effects of Paid-Up Capital

Uses of Paid-Up Capital:

• It is the actual money received from shareholders.
• It helps the company start and run daily operations.
• It is used to buy assets, pay expenses, and grow the business.
• It shows the financial strength of the company.

Implications of Paid-Up Capital:

• It reflects how much shareholders have invested.
• It affects the company’s credibility and trust.
• It may impact loan approvals from banks.
• Changes in paid-up capital must follow legal rules.

Capital Structure of a Private Limited Company

Below is a simple example to understand the capital structure of a private limited company:

In simple words, the company can issue shares up to ₹10,00,000. Out of this, ₹1,00,000 has already been invested by shareholders, and ₹9,00,000 is still available to be issued later.

Process of Deciding Capital Amount

When deciding your company’s capital structure, you should follow these basic steps:

• Understand Financial Needs: First, calculate how much money you need to start and run the business, including expenses, assets, and emergency funds.
• Fix Authorized Capital: Choose an authorized capital amount that gives you flexibility to raise more funds in the future.
• Decide Paid-Up Capital: Set the paid-up capital according to your current financial needs and the amount shareholders are ready to invest.
• Check Compliance Costs: Remember that a higher authorized capital may lead to higher registration fees and legal costs.
• Take Expert Advice: It is always better to consult a financial advisor or chartered accountant before making a final decision.

Process to Change Authorized and Paid-Up Capital

Process of Increasing Authorized Capital

• Hold a Board Meeting: The first step is to arrange a board meeting to review and approve the plan to increase the authorized capital.
• Get Shareholders’ Approval: Pass an ordinary resolution in the general meeting of shareholders.
• Amend MOA and AOA: Make necessary changes in the MOA and Articles of Association (AOA).
• File Form with ROC: Submit Form SH-7 to the Registrar of Companies (ROC) within 30 days of passing the resolution.
• Pay Required Fees: Pay the applicable government fees and stamp duty based on the increased capital amount.

The company must take approval, update its documents, file the required form, and pay fees to increase authorized capital.

Process of Raising Paid-Up Capital Through Share Issue

Process of Issuing Additional Shares

• Pass a Board Resolution: The board of directors must approve the issue of new shares by passing a resolution.
• Offer Shares to Existing Shareholders: Section 62(1)(a) of the Companies Act, 2013 requires the company to offer additional shares to present shareholders first.
• Allot the Shares: After shareholders accept the offer, the company allots the shares and issues share certificates.
• File Return of Allotment: The company has to file Form PAS-3 with the ROC within 30 days of allotting the shares.

The company must take board approval, offer shares to current shareholders, allot the shares, and file the required form with the ROC.

Conclusion

Understanding company registration capital is very important for entrepreneurs who are starting a new company. It is essential to know the difference between authorized capital and paid-up capital, as this helps in proper legal compliance and financial planning.

For private limited companies, there is flexibility in deciding the capital structure according to business needs. When business owners clearly understand capital requirements, they can plan their finances better, follow legal rules properly, and prepare their company for future growth.

Proper knowledge of capital structure helps a company stay compliant, manage money wisely, and grow successfully.

Frequently Asked Questions (FAQs)

1) Difference Between Authorized and Paid-Up Share Capital

Authorized capital shows the maximum share limit of a company. Paid-up capital shows the real amount of money collected from shareholders.

2) Is there any minimum capital required to start a private limited company in India?

No. After the amendment under the Companies Act, 2013 in 2015, there is no minimum authorized capital or minimum paid-up capital required to register a private limited company in India. You can start a company with any amount of capital based on your business needs.

3) Can paid-up capital be more than authorized capital?

No. Paid-up capital can never be more than authorized capital.

Paid-up capital must always remain within the maximum limit set by the authorized capital.

4) Can a company increase its authorized capital later?

Yes. A company can increase its authorized capital at any time after registration.

To do this, the company must:

• Hold a board meeting
• Get shareholder approval
• Amend the MOA
• File Form SH-7 with the ROC
• Pay the required government fees

After completing these steps, the company can issue more shares.

5) Why is authorized capital important for a private limited company?

Authorized capital is important because:

• It decides how much money a company can raise through shares.
• It gives flexibility for future expansion.
• It helps in planning long-term financial growth.
• It sets a legal limit for issuing shares.

Without sufficient authorized capital, a company cannot raise additional funds through share issuance.

6) Why is paid-up capital important?

Paid-up capital is important because:

• It shows the real investment made by shareholders.
• It helps in running daily business operations.
• It builds trust among banks, investors, and customers.
• It reflects the financial strength of the company.

Higher paid-up capital can improve the company’s credibility.

7) What happens if shareholders do not pay the full amount for their shares?

If shareholders do not pay the full amount, the unpaid portion is called “calls in arrears” or unpaid share capital. Paid-up capital is calculated after subtracting this unpaid amount from the subscribed capital.

8) Does higher authorized capital increase government fees?

Yes. Government registration fees and stamp duty are often based on the amount of authorized capital. Higher authorized capital may lead to higher filing and registration costs.

9) Can a company change its paid-up capital?

Yes. A company can increase its paid-up capital by issuing new shares.

The company must:

• Pass a board resolution
• Offer shares to existing shareholders (in most cases)
• Allot shares
• File Form PAS-3 with the ROC

All legal formalities must be followed while increasing paid-up capital.

10) Which capital affects the company’s net worth?

Paid-up capital increases the company’s net worth since it is the actual amount of money collected. Authorized capital does not affect net worth because it is just a legal limit.