This blog explains the key difference between authorised capital and paid up capital to help you understand their meaning, purpose and role in the net worth of a company clearly.
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Authorised Capital is the maximum capital a Company can receive as decided by its shareholders. On the other hand, paid up capital is the actual capital a company receives in exchange for the shares it has sold. Both these capitals have their unique purpose in a company’s business operations. Moreover, irrespective of size, type, and nature of business activity, every company must have the limits of authorised and paid up capital fixed before their incorporation. Let’s understand the meaning, purpose and key difference between authorised capital and paid up capital now.
What is Authorised Capital?
Authorised capital, sometimes referred to as registered capital or nominal capital, is the maximum amount of capital a company can receive to ensure its smooth operations. This sum is determined during the incorporation process of the company by its shareholders, and is mentioned in the Memorandum of Association. Since it is the maximum capital limit, a company cannot issue or sell shares worth more than this amount. However, the authorised capital can be raised in the future by passing a resolution to that effect in the general meeting of shareholders.
Let’s understand the importance of authorised capital with the help of an example. Say, a company has an authorised capital worth Rs.20 lakhs. In that case, it is permitted to issue and sell shares up to Rs.20 lakhs only. If it wishes to sell shares worth more than this amount, it will first have to raise the authorised capital through a resolution at the general meeting. Besides limiting the shares sold by a company, authorised capital also determines the ROC fees for company registration and other compliances fees for companies.
What is Paid Up Capital?
Paid Up Capital, also known as net worth, is the actual amount a company receives from its shareholders in exchange of shares they’ve bought. Paid Up capital may be equal to or less that the subscribed capital which is the worth of shares a company has sold. The paid up capital can be less than the subscribed capital if the shareholders fail to deposit the entire amount of their respective share capital to the company at once. This leaves them in dues towards the company which have to be paid later. Note that this due amount determines the individual liabilities of each shareholder in a company.
Additionally, the paid up capital cannot exceed a company’s subscribed and authorised capital under any circumstance.
Let’s understand the importance of paid up capital better with an example. Say a company has an authorised capital of Rs.20 lakhs. From our previous discussion on authorised capital, it is already understood that the company will not be able to sell shares worth more than this amount. Now, suppose the company is able to sell Rs.10 lakhs worth of shares. This becomes its subscribed capital. Paid up capital is that part of subscribed capital which is paid in real time.
So, suppose the shareholders are collectively able to pay Rs.5 lakhs to the company, keeping the other 5 lakhs due for later. So, Rs.5 lakhs paid to the company becomes its paid up capital, and the due amount which is also Rs.5 lakhs becomes the collective liability all shareholders have towards the company. Besides, determining the liability of shareholders, paid up capital is also used to conduct the day-to-day activities of the company.
Note:
- There is no minimum and maximum limits of authorised and paid up capital prescribed to start a company in India. The authorised capital is decided at the will of the shareholders. As far as paid up capital is concerned, it depends on the amount deposited by the shareholders. If they fail to deposit any amount, the company will get incorporated with Nil. paid up capital.
- While starting a company at Nil. Paid Up capital is not forbidden, a company cannot remain without paid up capital beyond 60 days from the date of its incorporation. In fact, if a company operates with Nil. paid up capital for a year after incorporation, the ROC may strike it off and close the company altogether.
Top 5 Key Difference Between Authorised Capital and Paid Up Capital
The authorised capital and paid up capital of a company have distinct purposes. While authorised capital is considered as the target capital or fund that the company wants to raise for its business, it is the paid up capital that is actually used for conducting the day-to-day business activities. The table below highlights the key difference between authorised capital and paid up capital based on several parameters like meaning, purpose, and role in the net worth. It provided a clearer picture and understanding of the two types of capital.
| Parameters | Authorized Capital | Paid-up Capital |
|---|---|---|
|
Definition |
Authorised Capital is the maximum worth of shares a company can issue. |
Paid-up Capital is the actual worth of shares a company receives. |
|
Documentation |
Authorised capital is mentioned in the Memorandum of Association of a company |
Paid Up capital is mentioned in the Balance Sheet of the Company |
|
Role in the Net Worth |
The net worth of a company is not determined by its authorised capital. |
The paid up capital is the net worth of the company. |
|
Minimum value for Setting Up a Company |
No minimum value prescribed under law. Authorised capital is decided at the will of shareholders. |
No minimum value prescribed under law. Companies can be set up at Nil. paid up capital as well. |
|
Restriction in selling shares |
A company is not permitted to issue shares worth more than its authorised capital. |
The paid-up capital places no limits on the sale of shares by the company. |
What is the Minimum Capital Required to Register a Company?
A minimum prescribed limit for authorised capital and paid-up capital of a company was eliminated by the Companies (Amendment) Act of 2015. The funding of the company, as of now, should be sufficient to support its business operations, especially, in the initial stages of its operations. Note that a company can only finance its operations through equity investment received from its shareholders. The basis of determining a company’s capital rests on its business activities and scale of operations. We advise you to create a small budget for prospective business activities aside, and then determine the appropriate capital requirements for your company.
How to Raise the Authorised Capital and Paid Up Capital of a Company?
The authorised and paid up capital of a company can be raised to expand or upscale its investment limits. The raised capital will allow the company to issue more shares to new and existing shareholders. Raising authorised capital would mean that the company is permitted to issue and sell more shares, whereas raising paid up capital would mean the company has already sold more shares than its current worth. However, raising both these capital limits would require the shareholders approval and an intimation to the Registrar of Companies in the prescribed forms. Here’s a detailed process of doing so.
Step 1: Check AOA of the Company for Procedure
The procedure for raising Authorised capital and Paid Up capital must be mentioned in the AOA (Articles of Association) of the company. If not mentioned, the AOA must be amended to include the procedure.
Step 2: Pass a Board Resolution
After ensuring that the AOA contains the procedure for raising the company’s capital limits, a meeting of the Board of Directors must be organised. In this meeting, the directors would pass two resolutions. The first one would approve the decision to raise the capital of the company. The second one would approve the date, time, and venue for holding the Shareholders general meeting.
Step 3: Amend the MOA
Before the Shareholders meeting, the company’s MOA (Memorandum of Association) needs to be amended to mention the new capital limits.
Step 4: Pass a Shareholders Resolution at the General Meeting & Adopt Altered MOA
The final step is to organise the EGM (Extraordinary General Meeting) of shareholders. In this meeting the shareholders will approve the new capital limits through an ordinary resolution and adopt the amended MOA. After the shareholders approve the new capital limits, the change of authorised capital and paid up capital will be confirmed.
Step 5: Inform the ROC
The new capital limits and amended MOA have to be intimated to the ROC (Registrar of Companies). For intimating change of paid up capital, form PAS-3 is submitted. For intimating change of authorised capital, form SH-7 is filed. The documents attached with these applications include the notice of EGM, shareholders resolution in MGT-14, amended MOA, list of new shareholders, and valuation report of the newly allotted shares.
Conclusion
Understanding the difference between authorised capital and paid up capital is essential for a nuanced analysis of a company’s financial health and growth prospects. While authorised capital signifies the maximum amount a company can raise through share issuance, paid-up capital represents the shares actually subscribed by shareholders and fully paid for. This distinction plays a pivotal role in determining the company’s financial status, investor perception, and regulatory obligations. By understanding the difference between authorised capital and paid up capital, both investors and entrepreneurs can make informed decisions that align with their strategic objectives, ensuring a solid foundation for sustainable business endeavours.
FAQs
Q1: What is the difference between authorised capital and paid up capital of a company?
The main difference between authorised capital and paid up capital is that authorised capital is the maximum amount of capital a company is legally permitted to raise by selling its shares, whereas paid up capital is the actual amount a company has received after selling its shares.
Q2: Why is the difference between authorised capital and paid up capital significant?
Understanding this difference between authorised capital and paid up capital is crucial as it directly impacts a company’s financial capacity and regulatory obligations. Authorised capital establishes the upper limit for fund-raising, while paid-up capital reflects the tangible financial investment by shareholders, influencing investor confidence and overall financial health of the company.
Q3: Can a company's paid up capital exceed its authorised capital?
No. The paid up capital of a company can never exceed its authorised capital. Authorised capital is the maximum limit of capital a company can acquire.
Q4: Is authorised capital the net worth of a company?
No. Authorised capital is the maximum equity investment that a company can acquire. Net worth is the actual equity capital a company has acquired from its shareholders. Precisely, we can say that the net worth of a company is determined by its paid up capital.
Q5: What is authorised capital and paid up capital used for?
Authorised capital limits the number of shares a company can sell. Also, it is used to determine the Government or ROC fees for various compliances of a company, including its Registration or incorporation fees. On the other hand, paid up capital is used to conduct the day to day operations of a business. Also, it is used to determine the collective and individual liabilities of the shareholders towards the company.