Sifting Through Distinct Qualities of Paid Up and Authorized Capital
Business is basically an activity that sees money beget money. In short, business requires capital for it to earn profits.
Entrepreneurs are required to use capitals to start-up, operate, and maintain a business formed out of sheer determination to make it grow.
All business companies raise capital for specific purposes. Regardless of its business structure, there is the need to classify its share capital under two fundamental categories in the financial statement.
One is authorized share capital and the other one is called the paid-up share capital.
However, the bigger the business, the more there is a need to define what exactly is required to attain a common target aptly referred to in economics as business growth.
While both categories are deemed to similarly embark on funds as the common denominator, these two are distinctly different.
Interestingly, as the business grows, the more it gets complicated.
Capital: Knowing the Basics
Before identifying these differences, we need to understand the fundamentals of the term “capital” first.
Essentially, every businessman use this term whenever companies issue shares in a bid to raise funds for purposes which include:
- Expansion – The act of diversifying the reach of products or services offered in the market
- Investor Influx – An instance when more entrepreneurs express interest in infusing funds in exchange for company shares
- Debt Service – The need to pay financial obligations incurred by the company from its operations
The proceeds of which are referred to as capital.
Defining Authorized Capital
Web sources define authorized capital as the maximum allowable amount of capital that a company is legally authorized to monetize from issuances of shares to investors. A business company has the option to issue just a fraction of its entire authorized capital in the public subscription in situations they deem as needed and required.
The process requires transparency and as a matter of compliance. Hence, it underscores the need to make full disclosure of authorized capital in its Memorandum of Association (MOA).
Defining Paid-up Share Capital
Paid-up capital is the amount of money paid for company shares issued to its stakeholders. In other words, these are funds received by the company in consideration of the issuance of company shares.
Issuance of shares is usually done during a company’s Initial Public Offering.
Aside from the IPO, business companies also get to raise funds by way of their paid-up capital through an additional issue of shares.
It is also important to take note that paid-up capital should never be bigger than the authorized capital. Once the company has issued its entire share of stocks, the Companies Act of 2013 categorically stipulates companies could no longer make any more issuances.
Companies Act of 2013
The amended Companies Act of 2013 eliminated the requirement for a private and public company to have a minimum paid-up capital. Prior to its amendment, private companies are required to hold 1 lakh, while public companies are bound to have at least 5 lakh.
The amended version gives companies to choose their paid-up capital which could be as low as Rs. 1000.
The Companies Act of 2013 clearly defines the following restrictions surrounding both the authorized and paid-up capital:
- Authorized capital is the maximum VALUE of the shares a company can issue to the shareholders.
- Paid-Up capital is the amount collected from the issuances of shares or stocks to the company shareholders.
- There is no way that paid-up capital can be more than its authorized capital.
- A company can’t issue shares beyond the authorized share capital.
In the event that business companies wish to increase their paid-up capital, they may only do so by way of issue of shares or private placement.
More importantly, authorized capital is not an indicator of the company’s net worth.
If you’re planning to form a company, you need to know how capital and share distribution work. But even with the amended version of the Companies Act, understanding differences between paid up capital and authorized capital seems to be too complex for the ordinary investor. The learning process could be cumbersome at some point.
In this case, you might need to delegate the business complexities to business advisors with a proven track record of excellence.
We at 3E Accounting India would be delighted to help you with our India incorporation services. Contact us and our team would gladly help you.