Companies issue their shares in the share market to execute various purposes. These goals can be raising funds, decreasing debt, or meeting any other need to expand. Thus, as an investor or trader, you need to know about its management and fund level. Hence you check out their financial statements or other information they provide. But out of those, authorized capital and paid-up capital are two important things. And that you might be willing to know as a trader in the Indian stock market.
In this article, we will learn about authorized capital, paid-up capital, and some significant differences.
What is Share Capital?
Share capital refers to the funds raised by the company in the stock exchange by issuing equity or preference shares. The company’s share capital keeps changing over time because the company can issue more shares if it needs. And the increase in the number of issued shares increases the share capital. Thus, share capital is the company’s fund raised in the stock exchange by issuing shares. Also, this capital can change when a company issues additional shares in the exchange.
What is Authorized Capital?
Authorized share capital means the amount of the share capital at which the company is authorized to raise. It is mentioned in the MOA of the company and can only be changed with its shareholders. It simply represents the maximum number of shares that can be issued in exchange for raising funds. Also, before the company starts selling its share in the open market, it needs to mention its authorized capital first in MOA.
In most cases, the company does not issue all the authorized capital. And a significant portion of it they keep for the future to use in issuing additional shares. However, if the company issues additional shares in the future then it will increase the authorized capital.
What is Issued Share Capital?
Before we learn about paid-up capital, it is essential to understand the issued share capital. The issued share capital means the number of shares that are chosen to sell in the market. In simple words, issued share capital is the company’s capital, which is collected by issuing the portion of the total share capital.
However, when the company issues the shares, there are chances that not all the shares sell out. And hence the par value of the shares can not cross the value of authorized share capital. And the par value at which the shares sell in the stock market is called the paid share capital. And most of the traders assume paid share capital as the share capital. Thus, issued share capital is only the portion of the share in the company’s stock for sale.
What is Paid Up Capital?
Paid-up share capital or paid-up capital is the amount that the company receives. The company makes its paid-up share capital by selling the shares in the primary market, which is NSE and BSE. It is an essential term for the company perspective as they do not borrow but invite investors to invest in their company. After getting fully paid up shares, the company can not raise its funds unless it opts for a debt fund. Thus, the paid-up capital of a company does not cross the aggregate amount of authorized share capital.
Now we have learned what authorized capital is and paid up capital in detail. Thus, let’s compare it on some fundamental basis to understand both a bit more.
Authorised Capital vs Paid Up Capital
| Basis | Authorized Capital | Paid Up Capital |
| Meaning | Authorized capital or authorized share capital represents the most significant number of the shares (either preference or equity) to the company’s shareholders. | Paid-up capital or paid-up share capital of the company shows the amount paid by the shareholders on the purchase of issued shares by the company. |
| Amendment Act 2015 | As per this act, the company need not set up the minimum amount of its authorized capital. Thus, whether the company is the public or private limited may or may not set their minimum amount of authorized capital. | According to the amendment act 2015, the company’s paid-up capital can not exceed the balance of authorized capital. Hence either it has to be less than or equal to the authorized capital. |
| How To Increase Authorized And Paid Up Capital | To increase the amount of the authorized capital of the company needs to take the help of directors. Those directors can amend the MOA with the help of the shareholders of the company. | However, the company can increase its paid-up capital amount by issuing IPO and private placement. |
| Buy Back And Issuance | A company is not eligible to any portion of the authorized capital to its shareholders. | However, the company has the right to buy back and issue such a share in some additional circumstances. |
| MOA/ Memorandum Of Association | The amount of the company’s authorized share capital is already defined in the MOA under the capital clause. | Also, the company’s paid-up capital can be found under the capital clause of the company’s MOA. |
| Net Worth | Authorized capital does not count to calculate the company’s net worth in any financial year. | But the paid-up capital is used in various cases, such as calculating net worth and fulfilling the business’s operating expenses. |
| Permission Of Shareholders | A company must ask or discuss with its shareholders to take permission to increase the authorized capital. | However, the company is not required to ask the shareholders to increase the paid-up capital. |
| Broad Vs. Narrow Term | Paid-up capital is already included in the amount of authorized share capital. | The amount of the paid-up share capital is not included in the amount of paid-up capital. |
Conclusion
Thus, authorized capital is the capital of the company, which can not be included in calculating the company’s net worth. And it means the most significant amount of capital available to the company to raise the fund issuing shares. The paid-up capital is the amount of the shares a company receives when the shareholders buy the issued shares.
Hence in this article, we learned about authorized capital, paid-up capital, and some significant differences. And I hope now all these things are clear and you are ready to dig into other similar concepts.