Published On: Jul 26, 2022 • Last Updated: Jul 28, 2022 • 5.1 min read •
When a company is registered, it needs funds to run the business. There can be short-term or long-term sources for raising funds. One of the long-term sources of funds is share capital. The funds raised by a company through issuing shares are share capital. It is the money invested by shareholders in exchange for ownership of the business. The total amount of share capital a company is authorised to issue is the Authorised Share Capital. Read this blog to learn all about authorised capital.
What is Authorised Share Capital?
The Memorandum of Association aka MOA contains the capital a company is authorised to raise by issuing shares to the shareholders. It is known as Authorised Capital, Registered Capital or Nominal Capital. The limit of Authorised Capital has to be mentioned in the Memorandum of Association under the Capital Clause. The company may take appropriate measures to increase the authorised share capital to issue more shares. However, they can not issue shares exceeding the limit of authorised capital. Other types of capital can be categorised based on the Authorised Share Capital of the company.
Types of Capital in a company-
Below are the different types of capital in a private limited company.
1. Authorised Capital
The Authorised Capital is the capital authorised by the company’s memorandum as the maximum amount of the company’s share capital. It is the value of the number of shares a company can issue to its shareholders. In a nutshell, it is the total share capital a company can raise unless it increases it.
2. Issued Capital
The part of Authorised Share Capital issued to the shareholders is called the Issued Share Capital. Generally, a company does not issue the entire amount of authorised capital at once. In such cases, issued capital will be less than the authorised capital. If a company issues all the shares, the authorised capital and issued capital are the same.
3. Subscribed Capital
The Issued Capital that has been bought by the shareholders is known as Subscribed Capital. It is not necessary that the shareholders or promoters fully subscribe to the Issued Capital. It is a part of the Issued Capital for which an application has been received. Hence, subscribed capital is the capital subscribed by the promoters or shareholders at the time of Incorporation or post incorporation of the company.
4. Called-up Capital
Called-up Capital is the part of the Subscribed Capital that the company calls up. The company does not call the entire subscribed capital at once. It calls the subscribed capital in instalments as and when needed. For example, if a company issues shares with a face value of Rs. 10, it may call up Rs. 6 first. The amount remaining of the Subscribed Capital is called Uncalled Capital. Thus, called-up capital is the fraction of the face value of shares that the shareholders are supposed to pay.
5. Paid-up Capital
The part of Called-up Capital paid by the shareholder is called Paid-up Capital. The money called up by the company may not be paid by the shareholders. Shareholders may not pay the entire amount or some instalments. Thus, Paid-up capital is the amount of money actually paid by the shareholdersin exchange for shares.
The Companies Amendment Act of 2015 amended the requirement for a minimum paid-up capital in the company. That means that the business can be formed with as little as Rs.1000 for paid-up capital. The paid-up capital must always be less than or equal to the authorised capital, and the company is not permitted to issue shares in excess of the authorised share capital. To find out more about theminimum share capital requirement for a company, check out our blog.
6. Reserve Capital
Reserve Capital is that portion of a company’s uncalled capital that can be called only during its dissolution. A private limited company may decide, by a Special Resolution, to call up any part of its share capital that has not yet been called up during dissolution. This type of capital is referred to as Reserve Capital.
Let us take an example to understand all types of capital:
A company has a nominal capital of Rs. 2,00,000 divided into 20,000 equity shares of Rs. 10 each. Here, Rs. 2,00,000 is the Authorised Capital. It issued 10,000 shares for subscription. Thus, 1,00,000 is the Issued Capital. 8,000 shares were subscribed. The Subscribed Capital is Rs. 80,000. The terms were Rs. 2 on application, Rs. 3 on allotment, Rs. 3 on first call, and Rs. 2 on final call. The company called-up Rs. 8 per share. Here, Rs. 64,000 is the Called up Capital. A shareholder holding 1,000 shares did not pay the amount due on the first call. The amount actually paid is paid up. The paid-up capital is Rs. 61,000 (64,000 – 3000).
Can Issued Capital Exceed Authorised Capital?
Since Issued Capital is a part of Authorised Capital, it can never be more than Authorised Capital. If a company issues the entire amount of the Authorised Capital, it can be equal to the Issued capital. But it can not exceed the authorised share capital.
How do Companies Increase Authorised Capital?
When the private limited company begins scaling up operations and needs debt or equity, it can increase its authorised capital and issue additional shares. Therefore, startups may start their operations with an authorised share capital of Rs.1 lakh and then increase the authorised share capital as the necessity arises.
A company can increase its authorised share capital by altering its MoA and AoA after passing the Ordinary Resolution. The company needs to hold a Board Meeting, and a General Meeting, file e-Form SH-7 and attach the required documents. Stamp duty and MoA Registration Fees are paid through the MCA portal. You can read about the process of increase in authorised share capital in detail.
We hope after reading this you are able to understand what is authorised share capital in a company. If you’re looking to increase Authorised Share Capital of your companyin India, look no further. LegalWiz.in has served thousands of clients and worked with many brilliant start-ups and growing businesses. Give us a call at 1800 313 4151 or contact us at firstname.lastname@example.org and give us a chance to help you.
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About the Author
Miloni Shah is a 2nd year Computer Science student pursuing her summer internship at LegalWiz.in with a keen interest in all things tech. She intends to make a positive impact through content research and writing.