How Does Authorized Share Capital Work?

During the first nine months of the financial year, the number of new companies registered in the country spiked dramatically.  According to the latest Ministry of Corporate Affairs (MCA) data, the number of companies incorporated during April-December 2020 increased by nearly 21%, to over 1.1 lakh, compared to a 5.2% increase during the same period in 2019.

Companies must still have authorised share capital even though the Companies Act, 2015 eliminated the requirement for minimum paid-up capital. Let’s now discuss the difference between authorized capital and paid-up capital, and the requirements for company registration. 

How does the capital structure of a company work?

There are two categories of capital structures for companies:

Capitalization of authorized shares

Shareholders or promoters may issue shares for the maximum amount of authorized share capital. The capital clause in the memorandum of association specifies the authorized share capital of the company. Before incorporation, this is usually decided. The company may, however, increase its authorised share capital by following specific steps in the future.

Suppose ABC Pvt Ltd has an authorised share capital of  ₹20 lakhs and has issued shares worth ₹15 lakhs.In such a case, it would be able to issue shares for ₹5 lakhs without raising or changing its initial authorised share capital.. Before issuing any more shares to its benefactors and shareholders, it must increase its authorized share capital once it exceeds ₹20 lakhs. 

Capitalization of paid-up shares

After shareholders have made the necessary payments to the company, paid-up share capital is issued to shareholders. A company’s paid-up capital must at any given time be less than or equal to its authorised share capital. Additionally, shares cannot be issued beyond the company’s authorised share capital limit. It is also required that the paid-up capital be deposited in the company’s account within 30 days of the allocation of shares. Private limited companies no longer have to meet a minimum capital requirement following the enactment of the Companies Amendment Act 2015. 

Public companies can also be formed with just *1000 as paid-up capital, as there is no minimum paid-up capital. For a company to change its minimum paid-up capital, the RoC must be updated, and the updated data becomes part of the company’s master file.

Amount of capital subscribed

Paid-up capital is the amount of capital that shareholders have agreed to contribute through payments. The shareholders are only responsible for the unpaid amount on the shares subscribed due to partial commitment. 

Is it possible for issued capital to exceed authorized capital?

It is important for investors and promoters to determine the amount of authorised share capital before starting a company, regardless of whether it is private or public. As a result of their investment, they will receive a certain number of shares according to the authorised share capital limit. Shares that are outstanding are those issued by a company to its shareholders. Due to the fact that the authorised capital determines the maximum value of such shares, the paid-up or issued capital can never exceed it.

What is the process for raising authorized share capital?

For a private company seeking a minimum authorised capital of *1 lakh, the Ministry of Corporate Affairs charges a fee of *5000. Additional fees will be charged to shareholders if they wish to add more authorized capital.

What is the process of raising authorized capital for startups?

Nowadays, most startups are bootstrapped and have limited funding. Therefore, they cannot boost their share capital by paying large amounts when incorporated with the MCA. Thus, most promoters end up paying a minimum of 1 lakh in authorised share capital. Their shareholders or founding members receive shares worth only that amount. Furthermore, the remainder of the capital is invested as an unsecured loan or as a share premium. 

In addition, this makes it less necessary for them to raise more share capital in the early stages of their business. The share capital limit will be raised once the company expands and requires debt or equity. As a result, most startups start out with the minimum share capital required for private companies and gradually increase the limit as they require debt or equity financing. 

Read more,

• Easy Ways to Understand the Authorized Share Capital
• Authorised Capital: Advantages & Procedure
• What Is Meant By The Term Authorised Share Capital?