Companies issue shares for many purpose like for expansion of their business, for paying off liabilities of company. And all the companies who issue share for raising funds needs to show capital structure and classify the share capital structure in their financial statements. Many people have confusion and not able to differentiate the term authorized capital and paid up capital. But these two terms are different from each other. And in this article we will understand the concept of share capital and these two terms in detail and how they both are different from beach other.
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What is share capital?
Before starting a business, company is in need of funds to carry out its activities and functions. However, company do not have enough money to invest, so the company raise the funds from public by issuing shares and debentures. Hence , basically the amount collected by company by issuing shares is known as “Share Capital”.
Different types of share capital:
The types of share capital are:
- Authorised share capital
- Paid up capital
- Issued share capital
- Subscribed capital
However, in this article we will be discussing about Authorized capital and Paid up capital
What is Authorized Capital?
Authorized capital is the maximum amount of capital which is authorized by legal documents to issue to shareholders. This authorized capital can be changed by the shareholder’s approval. Company is required to mention authorized capital in their Memorandum of Association (MOA) under the head “capital Clause”.
Example: PQR Ltd. Has authorized capital Rs. 1000000. Company can issue shares worth up to Rs. 1000000 and cannot issue beyond it. It depends on PQR Ltd. Whether to use full authorized capital to issue the shares or some part of it.
What is Paid up Share capital?
It is the part of called up capital paid by the shareholders. Called up capital is the amount called from the shareholders against the shares issued to them. As per the Companies Amendment Act 2015, there is no such minimum requirement of paid up capital. Paid up capital can be equal to or less than equal to authorized capital.
Example: PQR Ltd. Has authorized capital Rs. 1000000 where value of each share is Rs. 10. Company issue shares of all authorized capital i.e. 100000 shares of Rs. 10 each. And company called Rs. 8 on 100000 shares from the shareholders. And shareholders paid all called up amount i.e. 8×100000= 800000. Rest part of authorized capital Rs. 200000 can be called by the company at any time when it requires.
Examples for Types of Share Capital
Pink Ltd. was registered with the Registra of companies with an authorised capital of Rs 1,00,00,000, of Rs 10 per share.
In response to the advertisements issued by the company to subscribe to shares, the actual share applications received were for 5, 00,000 shares. However, the company issued shares for only 3,00,000 at a share price of Rs 8 per share.
Further, all the calls have been duly met except for two shareholders, who still need to pay for their 10000 shares in total.
Solution:
1.Authorised capital= Rs. 10000000
2.Subscribed capital= 5,00,000 shares *Rs.10=Rs.50,00,000
4.Called up capital=300000 shares * Rs. 8=Rs.2400000
5.Paid up capital= Rs. 2400000-(10000*8)=Rs.23,20,000
Difference between Authorized and Paid up share capital:
- Authorized capital is the maximum value of shares company is authorized to issue shares. Whereas paid up capital is amount actually paid by the shareholders.
- Authorized capital cannot be used in the calculation if net worth whereas paid up share capital is used while calculating net worth.
- Authorized capital can be increased whenever company wants by applying the procedure mentioned in the Companies Act 2013 whereas paid up capital can be increased by issuing new shares.
- Paid up capital can be equal to authorized capital and can never be more than authorized capital. And company is also not authorized to issue shares beyond its authorized capital.
Conclusion:
It is concluded that, Authorised Share Capital shows the maximum amount of capital that a company can raise from its shareholders by issuing shares. On the other hand, paid up Capital means the amount of share price paid by the shareholders for the shares held by them. In addition to this, the members need to decide the amount of Authorised Share Capital and Paid up Capital at the time of registration itself, as they need to get the same recorded in the MOA of the company.
