Authorized capital and paid up capital – How do they differ?
You must have heard of the terms authorized capital and paid up capital in the financial parlance. People often use them interchangeably but there is a significant difference between them. But before knowing that, it is important to understand what is capital and how is it divided.
The amount invested in a business with the primary goal of generating revenue is referred to as capital. It is also used for a variety of reasons such as to fund business expansion, paying off debts, etc. This capital is raised from the public by issue of stock and the people who contribute to the share capital are known as shareholders. And every company is obligated to follow SEBI Regulations when issuing shares.
Regardless of the size or type of business, every company must classify its share capital in the financial statement under different categories. A company’s share capital is classified into the following types. Let us understand the meaning of these terms and how they are different from each other.
Authorized capital:
A company estimates its maximum capital requirements prior to incorporation of the company. This amount of capital is specified in the ‘Capital Clause’ of the ‘Memorandum of Association’, which is filed with the Registrar of Companies.
Authorized capital is also referred to as nominal or registered capital. It means the maximum amount of capital a company can issue. It is the maximum number and face/par value, of each class of shares that a corporate entity may issue in accordance with its instrument of incorporation.
It puts a limit on the amount of capital, which a company is authorized to raise during its lifetime and is thus called ‘Authorized Capital’. It is reflected in the balance sheet at face value.
It is not necessary for a company to issue its entire authorized capital through a public subscription. It may choose to issue capital in stages based on the needs and demand.
Issued capital:
Whatever portion of the share capital is issued by the company is referred to as ‘Issued Capital.’ Issued capital is a portion of authorized capital that is offered for subscription to the general public. The term “issued capital” refers to and includes the nominal value of shares issued by the company for:
- Cash
- Consideration other than cash to:
- Promoters of a company; and
- Others
It is also shown in the balance sheet at the nominal value.
The remaining portion of the authorized capital that is not issued in cash or in exchange for consideration is referred to as ‘Un-issued Capital.’ It is not reflected in the balance sheet.
Subscribed Share Capital:
It is the portion of the issued share capital that is subscribed to by the general public, i.e., applied for by the public and allotted by the company. It also includes the face value of the company’s shares issued for consideration other than cash.
Subscribed Capital can be equal to or greater than or less than Issued Capital resulting in 3 situations respectively: Fully Subscribed; Over Subscribed and Under Subscribed.
Called up capital:
In most cases, companies receive the issue price of their shares in installments. Called-up Capital refers to the portion of the issue price of shares that a company has demanded or called from shareholders, while Uncalled Capital refers to the balance that the company has decided to demand in the future.
Paid up capital:
Paid-up capital refers to the money paid by shareholders for the shares held by them in the company. It is the actual fund received by the company from the issuance of shares. Typically, a company raises funds by issuing fresh share capital, which becomes part of the company’s paid-up capital.
In other words, it is the portion of called-up capital that is paid by the shareholders. Whenever a particular amount is called by the company and the shareholder(s) fails to pay the amount fully or partially, it is known as ‘unpaid calls’ or ‘installments (or Calls) in arrears’. Thus, installments in arrears denote the amount that has not been paid despite the fact that it has been demanded by the company as payment towards the issue price of shares. To compute paid-up capital, the amount of installments in arrears is deducted from called-up capital.
Called-up and paid-up capital is shown together on the balance sheet.
Note:
The portion of capital that is yet to be called by the company but has already been paid by shareholders is referred to as call-in-advance.
Paid-up Capital = Called up Capital – Calls in arrears if any + Calls in advance if any
Reserve share capital:
According to Section 65 of the Companies Act, 2013, a company may decide by passing a resolution that a specified portion of its subscribed uncalled capital will not be called up unless the company is wound up. Thus, ‘Reserve Capital’ is a portion of the uncalled capital that a company has decided to call only in the event of the company’s liquidation.
Disclosure of share capital in Balance Sheet
Suppose a company had an authorized capital of Rs. 2,000,000 divided into 200,000 equity shares of Rs. 10 each. It decided to issue 120,000 shares for subscription and received applications for 140,000 shares. It allotted 120,000 shares and rejected the remaining applications. Up to the end of the financial year, it has demanded or called Rs. 9 per share. If all shareholders have duly paid the amount called, except one shareholder, holding 10,000 shares, who has paid only Rs. 7 per share, the disclosure in financial statements will be made as follows:
The table below describes the disclosure of share capital as it appears in the “liabilities column” of a company’s Balance Sheet:
Balance Sheet
As at the end of the financial year
| Particulars | Amount |
| EQUITY AND LIABILITIES Shareholders’ funds Share capital | 10,60,000 |
| Total | 10,60,000 |
Notes to accounts
| Share Capital | Amount |
| Equity share capital Authorized share capital 2,00,000 Equity shares of Rs. 10 each | 20,00,000 |
| Issued share capital 120,000 Equity shares of Rs. 10 each | 12,00,000 |
| Subscribed share capital 120,000 Equity shares of Rs. 10 each | 12,00,000 |
| Called up and Paid up share capital 120,000 Equity shares of Rs. 10 each, Rs. 9 called up | 10,80,000 |
| Less: Calls unpaid on 10,000 shares @ Rs. 2 per share | (20,000) |
| 10,60,000 |
It is clear from the preceding information that details of authorized, issued, and subscribed capital are provided in the Notes to Accounts but are not counted. When totaling the liabilities side of the balance sheet, only the paid-up capital, i.e., the portion of the issued capital subscribed & paid by shareholders, is considered.
Presentation of authorized capital
The authorized capital is considered only as presentation and not considered in the total of the balance sheet.
Is there a minimum requirement for paid up capital?
As per an amendment in the Companies Act, 2013, there is no longer a requirement for private and public companies to hold a minimum paid-up capital, which was previously Rs. 1 lakh and 5 lakhs respectively.
The minimum paid-up share capital requirement of Rs. 100,000 (in case of a Private Company) and Rs. 500,000 (in case of a Public Company) under the Companies Act, 2013 has been repealed by Companies (Amendment) Act, 2015 with effect from 29th May 2015. As a result, no minimum paid-up capital requirements will now apply for forming a private as well as a public company in India. Going forward, they are free to choose their paid-up capital which can even be as little as Rs. 1,000.
Can paid up capital be higher than authorized capital?
At any point in time, the paid-up capital of a company can never be more than its authorized capital, but it can be equal to the authorized capital.
Let’s say XYZ Ltd. has an authorized capital of Rs. 60,00,000 for which it issues 2,00,000 shares at Rs. 10 each which makes its paid-up capital as Rs. 20,00,000. However, it still has the space of Rs. 4000,000 paid-up capital left for issuing 400,000 shares at Rs. 10 each.
Can a company increase its authorized capital?
As explained in the aforesaid paragraph, a company is not authorized to issue shares beyond the authorized share capital.
For instance, in the above example, if XYZ Ltd. has issued shares of an amount of Rs. 65 Lakhs to shareholders with the same authorized capital of Rs. 60 Lakhs, it shall mean that the company has issued in excess of the maximum limit, and hence it is not allowed under the law.
To issue a higher value of shares than the maximum limit of authorized capital, first, XYZ Ltd. has to initiate the procedure of increasing authorized share capital and then issue shares to the shareholders.
According to law, the authorized share capital of a company might be increased in the future by following the procedure outlined in the Companies Act, 2013. This can be done by holding a board meeting, obtaining shareholders’ approval, and paying an additional fee to the Registrar of Companies. The intimation of alteration of share capital has to be made to the ROC in Form SH-7.
Net worth
Authorized capital is not taken into account when calculating a company’s net worth; whereas paid-up capital is taken into account.
Takeaway – Authorized capital and paid up capital
Authorized capital = Larger/ maximum bucket of shares
Paid up capital = A part of authorized capital (a smaller portion)
Authorized capital denotes the largest amount of share capital that a company can issue for raising finance from stakeholders. And paid-up capital is the amount of money for which shares of the company were actually issued to the shareholders and payment in respect thereof was made by the shareholders.
Hope the information provided in this blog proves helpful to you!
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