Authorised vs Paid-up Capital: What the Numbers Mean

Authorised capital is the maximum share capital a company is permitted to issue to its shareholders, as stated in its Memorandum of Association. Paid-up capital is the actual amount of money shareholders have paid for the shares issued to them. While authorised capital sets the upper limit, paid-up capital reflects the funds actually brought into the company for its operations. Understanding this distinction is crucial for compliance and financial planning.

What is Authorised Capital?

Authorised capital, also known as nominal capital or registered capital, is the maximum amount of share capital that a company is authorised to issue to its shareholders. This figure is declared in the 'Capital Clause' of the company's Memorandum of Association (MoA) at the time of incorporation.

Sec. 2(8) of the Companies Act, 2013 defines "authorised capital" or "nominal capital" as "such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company." It represents the ceiling up to which a company can raise funds by issuing shares without amending its MoA. This amount is decided by the founders based on their initial funding requirements and future expansion plans.

What is Paid-up Capital?

Paid-up capital is the actual amount of money or consideration received by the company from its shareholders in exchange for the shares allotted to them. It represents the portion of the authorised capital that has been subscribed and paid for by the investors.

Sec. 2(64) of the Companies Act, 2013 defines "paid-up share capital" or "share capital paid-up" as "such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called." This is the working capital that the company has at its disposal for its operations, investments, and growth.

What is the difference between Authorised Capital and Paid-up Capital?

The primary difference lies in their nature: authorised capital is a limit, while paid-up capital is an actual amount received. Authorised capital is a theoretical maximum, whereas paid-up capital is the practical capital deployed in the business.

| Feature | Authorised Capital Furthermore to the above, the following are some of the other key features of the Authorised Capital:

• Registration Fees: The amount of authorised capital directly impacts the registration fees payable to the Registrar of Companies (RoC) during incorporation or when increasing the authorised capital.
• No Minimum/Maximum Limit (Generally): The Companies Act, 2013, does not prescribe a minimum or maximum limit for authorised capital for private or public companies, although there used to be such limits in the past. The amount is determined by the company's promoters.
• Flexibility: While it sets a limit, it also provides flexibility. A company doesn't have to issue all its authorised capital at once. It can issue shares in tranches as and when needed.

How to change the Capital Clause in MoA?

To change the Capital Clause in the Memorandum of Association (MoA) to increase the authorised capital, a company must follow the procedure outlined in Sec. 61 and Sec. 64 of the Companies Act, 2013. This involves obtaining shareholder approval and filing the necessary forms with the Registrar of Companies (RoC).

The steps are:

1. Board Meeting: Convene a Board Meeting to approve the proposal for increasing authorised capital and to fix the date, time, and venue for an Extra-ordinary General Meeting (EGM) to pass an Ordinary Resolution.
2. Shareholder Approval: Hold an EGM and pass an Ordinary Resolution for the alteration of the Capital Clause of the MoA. The Articles of Association (AoA) must permit such an increase; if not, the AoA must first be altered.
3. Filing Form SH-7: Within 30 days of passing the Ordinary Resolution, file Form SH-7 (Notice of alteration of share capital) with the RoC. This form is for "Alteration of Share Capital."
   • Attachments to SH-7:
     • Ordinary Resolution for increasing authorised capital.
     • Altered Memorandum of Association.
     • Altered Articles of Association (if applicable).
     • Copy of the Board Resolution.
4. Stamp Duty: Pay the requisite stamp duty on the increased authorised capital, which varies from state to state. This is typically paid online through the MCA portal during the filing of Form SH-7.
5. RoC Approval: Upon successful filing and payment, the RoC will register the increase in authorised capital, and the company's MoA will be deemed amended.

What is Form SH-7 for Authorised Capital?

Form SH-7 is a statutory form prescribed under the Companies Act, 2013, used for notifying the Registrar of Companies (RoC) about any alteration in the company's share capital, specifically an increase in authorised capital.

Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014, mandates the filing of Form SH-7. It is crucial for updating the official records of the company's maximum share issuance capacity. Without filing SH-7, the increase in authorised capital is not legally recognised, and the company cannot proceed to issue shares beyond its previous authorised limit.

What is Form PAS-3 for Allotment?

Form PAS-3 is a statutory form prescribed under the Companies Act, 2013, used for reporting the allotment of shares by a company to its shareholders. This form is filed after shares have been issued and paid for, thereby increasing the company's paid-up capital.

Sec. 39(4) of the Companies Act, 2013, read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, mandates the filing of Form PAS-3. It must be filed within 30 days of the allotment of shares. This form provides details of the shares allotted, the consideration received, and the particulars of the allottees. Filing PAS-3 is essential for the legal recognition of the issued shares and the accurate reflection of the company's paid-up capital in RoC records.

How does Stamp Duty apply to Authorised and Paid-up Capital?

Stamp duty is primarily levied on the authorised capital of a company, not directly on paid-up capital. It is a state-specific tax payable at the time of incorporation and whenever the authorised capital is increased.

The stamp duty on authorised capital is governed by the Indian Stamp Act, 1899, and the respective State Stamp Acts. The rates vary significantly from state to state. For instance, Maharashtra has different rates compared to Karnataka or Delhi. This duty is paid to the state government where the company's registered office is located. When increasing authorised capital, the stamp duty is calculated on the incremental amount of capital. For paid-up capital, stamp duty is generally not directly applicable, though stamp duty might be levied on share certificates issued to shareholders, which is a separate matter.

How SP & SC helps

SP & SC Legal and Taxation Services assists businesses with comprehensive compliance management, including annual filings, alterations to capital clauses, and other regulatory submissions. Our expertise ensures your company remains compliant with the Companies Act, 2013, and other relevant statutes, helping you navigate complex legal and tax requirements efficiently. Explore our services at /services/compliance/annual-filings.

Frequently asked questions

What is the minimum authorised capital for a private limited company?

There is no minimum authorised capital requirement for a private limited company under the Companies Act, 2013. Companies can be incorporated with any amount of authorised capital, even as low as INR 1.

Can a company issue shares exceeding its authorised capital?

No, a company cannot issue shares exceeding its authorised capital. To issue more shares than its current authorised capital, the company must first increase its authorised capital by amending its Memorandum of Association and filing Form SH-7 with the RoC.

Is it mandatory for the paid-up capital to be equal to the authorised capital?

No, it is not mandatory for the paid-up capital to be equal to the authorised capital. Paid-up capital can be less than or equal to the authorised capital. The authorised capital is the maximum limit, and the company can issue shares up to this limit over time.

What happens if a company does not file Form PAS-3 after allotting shares?

Failure to file Form PAS-3 within 30 days of allotment can result in penalties for the company and its officers in default. The allotment may also be deemed irregular, potentially leading to legal complications and issues with the validity of the shares issued.

How is stamp duty calculated on authorised capital?

Stamp duty on authorised capital is calculated as a percentage of the authorised capital amount, as per the rates specified in the Stamp Act of the state where the company's registered office is located. The rates vary by state and are typically progressive, meaning higher capital amounts may attract higher duty.

Can authorised capital be reduced?

Yes, authorised capital can be reduced, but this is a more complex process than increasing it. It typically involves a special resolution, confirmation by the National Company Law Tribunal (NCLT), and compliance with specific provisions of the Companies Act, 2013, particularly Sec. 66.