How Do Share Capital and Paid-Up Capital Differ?

Capital forms the backbone of every business enterprise, providing the necessary funds for the operation, expansion, and sustaining of a business enterprise. Companies raise capital primarily in India through share capital. The amount of money that can be raised by issuing shares to its shareholders is referred to as total share capital. Not all the authorized capital that has been created gets issued. That which gets actually received from the shareholders is referred to as paid-up capital.

Share capital and paid-up capital are concepts that are highly important for entrepreneurs, investors, and financial analysts since they have a direct bearing on the financial strength of a company, its valuation, and compliance requirements.

This blog will describe the difference between share capital and paid-up capital, their importance under Indian corporate law, and their place in the financial structure of a company.

Introduction

Every company needs capital to function, and one of the primary ways is by raising funds by issuing shares. Share capital and paid-up capital are terms often confused but distinct from each other in corporate finance.

Share capital refers to the total amount of money a company is authorized to raise by issuing shares according to its Memorandum of Association (MoA).

The amount of money that actually reaches the company’s hands from the shareholders in return for shares is termed paid-up capital.

In India, companies have to follow the rules and regulations of the Companies Act 2013, which provides guidelines for how companies issue shares, maintain capital, and meet their compliance requirements.

What is Share Capital?

Share capital is the amount of capital that a company can raise by issuing shares to investors. It is the maximum amount of funds that a company can raise from the shareholders, and it is mentioned in the Memorandum of Association of the company under the clause Authorized Capital.

Types of Share Capital in India

Under the Companies Act 2013, share capital is classified into different types-

• Authorized Share Capital- The maximum amount of capital a company is legally allowed to issue. The Companies can increase authorized capital by altering their MoA and obtaining approval from the Registrar of Companies.
• Issued Share Capital- The portion of authorized capital issued to investors by the company. A company can issue all or a part of its authorized capital according to the company’s requirement
• Subscribed Share Capital- The portion of the issued capital that investors agreed to buy. It is the promise given by the shareholder to purchase shares.
• Called-Up Share Capital- When companies issue shares, they may request payment in installments. The amount that shareholders are called to pay is known as called-up capital.
• Paid-Up Share Capital- The actual amount raised from the shareholders after applying the calls on issued share capital. It is a component of the share capital and a reflection of the actual fund flow into the business.

What is Paid-Up Capital?

Paid-up capital is the sum of money actually received by a company from shareholders in exchange for issued shares. Paid-up capital differs from share capital, which is the company’s potential to raise funds, as it indicates the actual contribution of money from investors.

Key Features of Paid-Up Capital

• It is real money that the company can use for its operations and growth.
• Once paid, shareholders do not have to pay any more unless new shares are issued.
• According to the Companies Act 2013, there is no minimum paid-up capital for private limited or public companies in India.

Illustration of Paid-Up Capital

Suppose a REBOOT Ltd. company is incorporated with an authorized share capital of Rs 50 lakh. The company decides to issue Rs 30 lakh worth of shares to the investors. In this, Rs 25 lakh is actually paid by the shareholders.

In this example, The Authorized Share Capital is Rs 50 lakh, the Issued Share Capital is Rs 30 lakh, and the Paid-Up Capital is Rs 25 lakh.

In this case, paid-up capital is less than issued capital as not all shares were fully paid for.

Differences Between Share Capital and Paid-Up Capital

Although both terms are related to a company’s capital structure, they have distinct differences.

Conclusion

Capital, paid-up, and share are both essential concepts in the capital structure of any company. On the one hand, share capital serves as the theoretical amount of potential capital a firm can raise at its IPOs. On the other hand, paid-up represents the actual inflow of capital from shareholders.

A better understanding of both these concepts leads to informed judgments on company valuations, investments, and also financial planning in general.

The evolving regulations under the Companies Act 2013 have made Indian businesses capable of more flexibility in capital management and fund utilization along with regulatory compliances. Understanding these financial fundamentals is required for sustainable growth.

Effectiveness in share capital and paid-up capital management allows businesses to maximize potential yield from fundraising as well as robust financial stability for long-term success in the tough Indian corporate landscape.

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References 

The Companies Act, 2013 (Act No. 18 of 2013)

https://www.mca.gov.in/

https://www.icsi.edu/home/