Published On: Jul 26, 2022 • Last Updated: Aug 29, 2023 • 4.8 min read •
You need funds to start a business. There are multiple ways of raising funds for your business based on the business structure that you choose. If you move forward with online company registration in India, there are short term and long term modes of raising capital. In companies, the capital is share capital. Further, since the company has a separate legal existence from its owners, the capital requirements, etc of the company fall on the basis of its MOA. The memorandum of association of a company provides for the maximum limit of funds that a company can raise. This is the ‘authorised capital’. Through this article, you can get an idea on what is authorised capital of the company and the inter-relation of authorised and paid up capital.
What is authorised share capital?
The capital clause of memorandum of association contains the capital amount that a company is free to raise in its lifetime. It is the authorised capital, nominal capital or the registered capital. During the company registration process, it is mandatory for the business owners to provide the details of authorised share capital of the company. The most important factor of authorised capital is that the company cannot raise more capital than the authorised limit.
Types of capital in a company
As a business owner you must also understand the other types of capital, which are based on the authorised capital of the company. Let’s take a look at the types of shares:
In simplest terms, it is the maximum amount of capital that company can raise. You need to decide this capital limit while submitting the MOA. With that said, post company incorporation, if you feel the need to increase authorised capital, you can apply for the same on MCA portal.
Now that you know what is authorised capital, you can understand issued capital. It is the part of the capital that company issues to the subscribers and shareholders. 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.
The part of issued capital that the shareholders actually buy is the subscribed share capital of a company. It is not necessary that the shareholders or promoters fully subscribe to the Issued Capital. It is a part of the Issued Capital on which the company receives applications. Hence, it is the capital that the promoters or shareholders subscribe to at the time of incorporation or post incorporation of the company.
Called-up capital is a 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. These all types of the capital are still a part of what is authorised capital of the company. None of these amounts can be higher than that.
A part of called-up capital that the shareholders pay is the Paid-up Capital. It is not necessary that the shareholders pay the entire amount of capital called by the company. Hence, the amount of money that the shareholders actually pay is paid up capital.
Reserve Capital is a portion of a company’s capital that the company can call only during dissolution. A private limited company may decide, by a special resolution, to call up any part of its share capital during dissolution. This type of capital is the reserve capital.
Example of types of share 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. Shareholders subscribe 8,000 shares . 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 subscribers pay is the paid-up capital which is Rs. 61,000 (64,000 – 3000).
Can issued capital exceed authorised capital?
No. The issued capital of a company cannot exceed its authorised share capital. The reason behind this being the fact that the issued capital is a part of the authorised share capital. Besides, not forgetting the fact that the authorised capital is the upper limit for capital in a company.
How do companies increase authorised share capital?
When a private limited company in India starts scaling operations, it will need additional funds. If you find that the amount of funds you require exceed your authorised and paid up share capital, you can apply for the process to increase authorised capital. As a part of this process the company needs to amend its MOA and AOA after passing a resolution of the board and submitting the form SH-7 on MCA portal.
It is understandable that the concept of share capital can be confusing, especially for young entrepreneurs. However, once you have an idea on what is auhtorised and paid up share capital of a company, it becomes easy to understand. LegalWiz.in experts are at your beck and call to help you understand the business economy!
Frequently Asked Questions
Can my authorised capital be more than paid up capital?
Yes, it is ideal that your authorised capital is more or the same as the paid up capital. Your paid up capital can never be more than your authorised capital.
When do I need to increase authorised capital?
You need to increase authorised capital when your capital requirement exceeds your authorised capital. You can do this easily by following the process set by MCA.
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.