Difference Between Authorized Capital and Paid-Up Capital
If you are setting up a company in India, you will encounter the terms "authorized capital" and "paid-up capital" right at the incorporation stage. These two concepts determine how your company's share structure works, how much stamp duty you pay, and how flexibly you can raise capital in the future. Despite being fundamental concepts, they are often confused or misunderstood by first-time founders. This guide explains both in clear, practical terms.
What is Authorized Capital?
Authorized capital is the maximum amount of share capital that a company is permitted to raise by issuing shares to its shareholders. It is declared in the company's Memorandum of Association (MoA) at the time of incorporation and represents the upper ceiling for share issuance.
Key Characteristics
- Maximum limit: The company cannot issue shares beyond the authorized capital without first increasing it
- Declared at incorporation: Specified in the MoA and registered with ROC
- Stamp duty basis: Stamp duty during incorporation is calculated on the authorized capital amount
- Can be increased: By passing a special resolution and filing Form SH-7 with ROC
- Does not represent actual investment: It is only a ceiling, not actual money received by the company
Example: A company with authorized capital of Rs. 10,00,000 divided into 1,00,000 equity shares of Rs. 10 each can issue up to 1,00,000 shares. It cannot issue share number 1,00,001 without first increasing the authorized capital.
What is Paid-Up Capital?
Paid-up capital is the actual amount of money that shareholders have paid to the company for the shares issued to them. It represents real money in the company and is a part of the company's equity on its balance sheet.
Key Characteristics
- Actual investment: Represents real money or consideration received by the company from shareholders
- Always equal to or less than authorized capital: Can never exceed the authorized limit
- Grows as shares are issued: Increases when new shares are allotted and paid for
- Shown in balance sheet: Appears as the equity component in the company's financial statements
- Reflects company credibility: Higher paid-up capital often signals financial stability to banks and creditors
Example: The same company with Rs. 10,00,000 authorized capital issues 10,000 shares at Rs. 10 each to its founders. The paid-up capital is Rs. 1,00,000 (10,000 shares x Rs. 10).
Key Differences Between Authorized and Paid-Up Capital
| Aspect | Authorized Capital | Paid-Up Capital |
|---|---|---|
| Definition | Maximum share capital a company can issue | Actual share capital received from shareholders |
| Nature | Upper ceiling (theoretical limit) | Actual investment (real money) |
| Document | Mentioned in MoA | Shown in Balance Sheet |
| Amount | Always higher or equal to paid-up capital | Always lower or equal to authorized capital |
| Stamp Duty | Calculated on authorized capital | No stamp duty implications |
| Change Process | Requires MoA amendment + Form SH-7 | Changes through share allotment |
| Registration Fee | MCA fee based on authorized capital slab | No separate fee |
How Capital Structure Works: Visual Breakdown
Think of capital structure as a series of nested containers:
- Authorized Capital (outermost): Rs. 10,00,000. This is the total capacity of the company to issue shares
- Issued Capital (middle): Rs. 5,00,000. This is the portion of authorized capital that has actually been offered to shareholders
- Subscribed Capital (inner): Rs. 4,50,000. This is the portion of issued capital that shareholders have agreed to buy
- Paid-Up Capital (innermost): Rs. 4,00,000. This is the amount actually paid by shareholders for the subscribed shares
- Called-Up Capital: The amount the company has asked shareholders to pay (may be less than subscribed if shares are partly paid)
How to Decide Your Authorized Capital
Choosing the right authorized capital at incorporation involves balancing two factors:
Start Lower to Save on Stamp Duty
Stamp duty is calculated on authorized capital and varies by state. Starting with a lower authorized capital (e.g., Rs. 1 lakh to Rs. 10 lakhs) keeps your initial registration costs low.
| Authorized Capital | Approximate Stamp Duty (Delhi) | Approximate Stamp Duty (Maharashtra) |
|---|---|---|
| Rs. 1,00,000 | Rs. 200 | Rs. 1,000 |
| Rs. 5,00,000 | Rs. 750 | Rs. 5,000 |
| Rs. 10,00,000 | Rs. 1,500 | Rs. 10,000 |
| Rs. 50,00,000 | Rs. 7,500 | Rs. 50,000 |
Plan for Future Growth
However, if you expect to raise investment or issue ESOPs soon after incorporation, starting with a higher authorized capital avoids the cost and hassle of increasing it later. Each increase requires a board resolution, shareholder approval, stamp duty payment, and Form SH-7 filing with ROC.
Recommended Approach
- Solo founders or bootstrap startups: Rs. 1 lakh to Rs. 5 lakhs authorized capital
- Startups planning to raise seed funding: Rs. 10 lakhs to Rs. 25 lakhs
- Startups with confirmed investor interest: Rs. 25 lakhs to Rs. 1 crore
- Medium enterprises: Rs. 50 lakhs to Rs. 5 crore based on business requirements
How to Increase Authorized Capital
When your company needs to issue more shares than the current authorized capital allows, follow this process:
- Board resolution: The Board of Directors passes a resolution recommending the increase
- Ordinary resolution: Shareholders approve the increase by ordinary resolution (simple majority) at a general meeting or through postal ballot
- Amend MoA: The capital clause of the MoA is updated to reflect the new authorized capital
- File Form SH-7: File the notice of alteration with ROC within 30 days of the resolution
- Pay fees: Government fee (based on the increase amount) + stamp duty (varies by state)
Costs of Increasing Authorized Capital
- ROC filing fee: Varies based on the amount of increase (check the MCA fee schedule)
- Stamp duty: On the amount of increase (not the total new authorized capital), based on state rates
- Professional fees: Rs. 5,000 to Rs. 15,000 for CS/CA assistance
Paid-Up Capital and Its Implications
For Banking
- Banks consider paid-up capital when assessing loan eligibility and creditworthiness
- Higher paid-up capital may help in getting better credit limits and overdraft facilities
- Some banking products require minimum paid-up capital thresholds
For Investment
- Investors look at paid-up capital to understand the founders' financial commitment
- Pre-money valuation is often discussed relative to the existing paid-up capital
- ESOP pools are created from unissued shares (within authorized capital but above paid-up capital)
For Regulatory Compliance
- Certain business licenses require minimum paid-up capital (e.g., NBFC registration requires Rs. 2 crore)
- Government tenders may specify minimum paid-up capital requirements
- Foreign Direct Investment (FDI) norms may have sector-specific capital requirements
Common Mistakes to Avoid
- Setting authorized capital too high at incorporation: Paying unnecessary stamp duty on capital you will not use for years
- Setting authorized capital too low: Having to go through the increase process (and pay again) before raising investment
- Confusing authorized with paid-up: Thinking that Rs. 10 lakh authorized capital means you need to invest Rs. 10 lakhs immediately
- Issuing shares beyond authorized capital: This is illegal and the allotment will be void
- Not planning for ESOPs: Not factoring in ESOP pool size when deciding authorized capital
Conclusion
Authorized capital and paid-up capital serve different purposes in your company's structure. Authorized capital is the ceiling for share issuance, while paid-up capital is the actual equity invested. Getting the right balance at incorporation saves money on stamp duty while providing enough room for growth. If you are unsure about how much capital to declare, start conservatively and increase when needed.
IncorpX helps founders determine the optimal capital structure during company registration. We calculate the stamp duty implications, plan for future fundraising, and handle the entire incorporation process.
