The share capital of a private limited company is used to fund the company’s operations, pay for expenses, and invest in new projects and ventures. The company’s shareholders are entitled to a share of the company’s profits in proportion to their shareholding, and they may also be entitled to certain other rights and privileges, such as the right to vote at shareholder meetings and the right to receive dividends based on their capital contribution.
Authorized capital, Issued Capital and Paid-up Capital
Authorized capital, also known as registered capital or nominal capital, is the maximum amount of capital that a company is legally authorized to issue, as stated in its articles of association. This is the maximum amount of capital that the company can raise from the issuance of new shares.
Issued capital, on the other hand, is the total number of shares that a company has issued to shareholders. This is the actual amount of capital that the company has raised from the issuance of new shares.
Paid-up capital, also known as called-up capital, is the amount of capital that shareholders have actually paid for their shares. This is the amount of money that the company has received from shareholders for the shares that they have issued.
In summary, authorized capital is the maximum amount of capital that a company can raise, issued capital is the actual amount of capital that the company has raised, and paid-up capital is the amount of capital that the company has received from shareholders.
Example of Authorized, Issued, and Paid-up Capital
Here is an example to illustrate the differences between authorized, issued, and paid-up capital:
Suppose that a company has an authorized capital of Rs. 10,00,000. This means that the company is legally authorized to issue up to Rs. 10,00,000 worth of new shares.
The company then decides to issue Rs. 5,00,000 worth of new shares. This means that the company’s issued capital is now Rs. 5,00,000.
Finally, suppose that shareholders pay for Rs. 4,00,000 worth of the issued shares. This means that the company’s paid-up capital is now Rs. 4,00,000.
In this example, the company’s authorized capital is Rs. 10,00,000, its issued capital is Rs. 5,00,000, and its paid-up capital is Rs. 4,00,000.
Can paid-up capital be more than authorized capital?
No, the paid-up capital of a company cannot be more than its authorized capital. The paid-up capital is the amount of money that the company has actually received from shareholders for the shares that it has issued. Since the authorized capital is the maximum amount of capital that the company is legally allowed to issue, the paid-up capital cannot exceed this amount.
For example, suppose that a company has an authorized capital of Rs. Rs. 5,00,000. This means that the company is legally allowed to issue up to Rs. Rs. 5,00,000 worth of new shares. If the company later receives Rs. Rs. 6,00,000 from shareholders for the shares that it has issued, the paid-up capital would be Rs. Rs. 6,00,000, which is more than the authorized capital of Rs. Rs. 5,00,000. This is not allowed, and the company would need to increase its authorized capital to Rs. Rs. 6,00,000 or more in order to remain in compliance with the law.
Summary
Authorized capital is the maximum amount of capital that a company is legally authorized to issue, as stated in its articles of association. Issued capital is the total number of shares that a company has issued to shareholders, and is the actual amount of capital that the company has raised from the issuance of new shares. Paid-up capital, also known as called-up capital, is the amount of capital that shareholders have actually paid for their shares and is the amount of money that the company has received from shareholders for the shares that it has issued. The paid-up capital of a company cannot be more than its authorized capital, but it can be more than its issued capital if the company receives additional payments from shareholders for their shares at a later date.
