What is Paid-Up Capital?
When a company issues shares and investors pay to subscribe to them, that money becomes the company’s paid-up capital. It represents the real amount received from shareholders in exchange for ownership. In simple terms, it is the actual investment that flows into the business from its owners.
Understanding the Meaning of Paid-Up Capital
A company authorizes a number of shares with a face value. When it issues and allots those shares, the amount paid against the called-up amount becomes paid-up share capital. It’s recorded under the “Share Capital” section on the company’s balance sheet. This amount shows how much of the company’s issued capital has been paid for by shareholders.
If a company issues shares worth ₹10 lakh and all shareholders pay their share value in full, then the paid-up capital is ₹10 lakh. If only part of the called-up amount is paid, the amount received is paid-up capital; any called but unpaid amount is called in arrears. Any portion not yet called is an uncalled capital.
Paid-Up Capital and Shareholders’ Equity
Paid-up capital forms part of the company’s equity base. It strengthens the business financially because it’s permanent equity (not debt), unlike loans or borrowings. A higher paid-up capital often means a stronger financial foundation, which can help the company attract more investors or borrow on better terms.
Formation of Paid-Up Capital
- The company issues shares to investors.
- Investors agree to buy those shares.
- The company collects the money and records it in its books.
- The amount received becomes paid-up share capital.
If a share is issued at ₹10 and the shareholder pays ₹8 now, that ₹8 counts as paid-up capital. The unpaid ₹2 can be called later by the company.
No Minimum Requirement Rule
In India, there is no statutory minimum paid-up capital requirement for incorporating a private or public company (as of 2015). Earlier, companies needed a certain threshold to start, but now they can be registered with even a nominal amount. This change makes it easier for smaller firms and startups to begin operations and gradually build their equity base.
Paid-up capital reflects ownership commitment and the company’s ability to self-finance. It gives investors and creditors confidence in the company’s financial health. A solid paid-up base also shows that the promoters have put their own money into the business, which indicates accountability and stability.
Quick Example
Imagine a company issues 1,00,000 shares at ₹10 each. If shareholders pay for all shares, the paid-up capital equals ₹10 lakh. If ₹10 was called and only ₹8 was paid, the unpaid ₹2 is called in arrears. If the company called only ₹8, the remaining ₹2 is uncalled capital (not arrears).
Paid-up capital represents real money already received by a company for its issued shares. It’s a reflection of ownership, trust, and financial strength. Unlike borrowed funds, this capital belongs to the business and stays invested unless the company decides to reduce its capital formally through legal procedures.
What is Authorized Capital?
Every company begins with a plan for how much money it can legally raise by issuing shares. That limit is known as authorized capital. Think of it as the legal ceiling of a company’s capital structure, a line it cannot cross without formal approval. This amount is fixed when the company is incorporated and mentioned in its memorandum of association under what’s called the capital clause.
Authorized Capital Meaning
Authorized share capital is the maximum nominal value of share capital a company is authorized to issue, as stated in its Memorandum of Association (capital clause). It sets a clear boundary between what’s possible and what’s permissible. For instance, if a company states an authorized capital of ₹1 crore divided into ten lakh shares of ₹10 each, that’s the most it can raise through equity unless it officially increases the limit later. The figure is more than a formality; it reflects the company’s growth ambitions and funding potential.
Purpose of Authorized Capital
A company may not need to issue all its authorized shares right away. This structure gives breathing space. The business can raise only what it needs now and reserve the rest for expansion or future investors. It prevents unnecessary paperwork every time more capital is required, while also signaling how far the company is allowed to go financially.
Example
Imagine a firm sets its authorized capital at ₹50 lakh but issues shares worth ₹20 lakh. That means ₹30 lakh still remains available for later use. When the company decides to scale or add new shareholders, it can issue more shares up to that remaining amount. The system keeps growth flexible and regulated at the same time.
Difference Between Authorized and Issued Capital
Authorized capital is the ceiling; issued capital is the portion that’s actually offered to investors. The first represents permission, the second shows action. A company can issue shares only within the authorized limit. If it wants to go beyond that, it must revise the limit through a formal process.
How to Increase Authorized Capital
Raising this limit follows a clear path. The board first passes a resolution proposing the increase. Then, shareholders give their approval through a general meeting. The company amends the MoA (capital clause), obtains shareholders’ approval, and files with the ROC (e.g., Form SH-7). Upon approval, the limit increases. Once the registrar confirms the change, the company gains the right to issue additional shares.
Practical Importance for Businesses
Setting authorized capital wisely is a strategic move. A higher figure gives room to grow but increases registration costs since fees depend on this amount. Startups usually begin with a modest limit, keeping expenses manageable, then increase it when new funding rounds or investors come in. Large corporations, by contrast, may choose a bigger base to avoid frequent amendments later.
In Simple Terms
Authorized capital is the legal boundary for how much a company can raise. Paid-up capital is the actual money received from shareholders. One represents potential; the other shows commitment. Together, they define a company’s financial capacity and credibility in the eyes of investors, lenders, and regulators.
What is Subscribed Capital?
When a company issues shares, investors show how much trust they have in it by agreeing to buy a portion of those shares. The total value of what they agree to take up is called subscribed capital. It’s like a mirror reflecting how much of the company’s offered capital has actually been accepted by investors.
Subscribed Capital Meaning
Think of it this way. A company might issue shares worth ₹10 lakh, but investors commit to buying shares worth ₹8 lakh. That ₹8 lakh becomes the subscribed capital. The balance of ₹2 lakh stays unclaimed until new investors come forward. This number tells a quiet story about investor confidence and the market’s interest in the company’s growth.
Relationship with Paid-Up Capital
Once shareholders pay for their subscribed shares, the amount received becomes paid-up capital. Until then, subscribed capital remains a promise waiting to be fulfilled. This distinction is important because it separates investor intent from actual inflow of funds. It shows how much money the company has raised versus how much is still pending.
Example
Imagine a company that issues 1,00,000 shares valued at ₹10 each. Investors subscribe to 80,000 shares, giving the business ₹8 lakh in subscribed capital. If ₹8 per share was called and paid, the paid-up is ₹6.4 lakh; the remaining ₹1.6 lakh is uncalled (if not yet demanded) or calls in arrears (if called but unpaid).
What is the Difference Between Paid-Up Capital and Authorized Capital?
The table below shows a complete view of how paid-up capital and authorized capital differ across every key aspect. It covers their meaning, purpose, legal base, accounting treatment, and business relevance, everything you need to understand both terms clearly.
Aspect |
Paid-Up Capital |
Authorized Capital |
Meaning |
The actual amount of money received by a company from shareholders for the shares that have been issued and fully or partly paid for. |
The maximum amount of share capital a company is legally allowed to issue, as stated in its memorandum of association. |
Nature |
Represents real funds already invested into the company by its owners. |
Represents the legal ceiling for how much share capital the company can raise. |
Legal Reference |
Shown under the ‘Share Capital’ section in the balance sheet and governed by provisions related to share capital in company law. |
Defined in the memorandum of association (capital clause) and forms part of the company’s constitution. |
Stage of Capital Formation |
Exists after shareholders pay for issued shares. |
Exists from incorporation and defines the outer limit for share issues. |
Accounting Treatment |
Reflected as shareholders’ equity in financial statements; part of total paid-in capital. |
Not presented as an amount on the face of the balance sheet; typically disclosed in the notes/share-capital disclosure |
Changeability |
Increases when the company issues new shares and receives payment. Can also decrease in case of capital reduction. |
Can be increased or decreased only through shareholder approval and amendment to the memorandum of association. |
Dependency |
Must always be less than or equal to the authorized capital. |
Sets the upper limit for how much paid-up capital the company can have. |
Impact on Fees and Compliance |
No direct impact on registration fees. Changes require ROC filings if new shares are issued. |
Higher authorized capital means higher registration and government filing fees. |
Purpose |
Represents the actual funds that strengthen a company’s equity base and show investor commitment. |
Provides flexibility for future fundraising and expansion without needing immediate changes. |
Example |
A company issues shares worth ₹60 lakh and receives full payment — paid-up capital is ₹60 lakh. |
The same company’s authorized capital may be ₹1 crore, allowing it to issue more shares later if needed. |
Financial Importance |
Indicates the company’s financial strength and stability, showing how much capital has actually been raised. |
Indicates potential capacity for raising future capital and planning long-term growth. |
Relevance for Investors and Regulators |
Shows how much capital has been realized and how much of the company is owned by shareholders. |
Helps regulators and investors understand the maximum funding potential within legal limits. |
Paid-Up Capital Formula
The calculation of paid-up capital is straightforward. It depends on how many shares a company has issued and how much money it has actually received from shareholders.
Formula:
Paid-Up Capital = Number of Shares Issued × Amount Paid per Share
If the shares are issued at a premium, the formula becomes:
Paid-Up Share Capital = Face Value × Shares Paid For
For example, if a company issues 50,000 shares with a face value of ₹10 each and shareholders pay the full amount, the paid-up capital equals ₹5 lakh. If the same shares carry a ₹5 premium, the total funds received would be ₹7.5 lakh. This figure directly represents real shareholder investment and forms a vital part of the company’s equity.
Account Treatments
In a company’s books, paid-up capital represents the real money that shareholders have put into the business. It sits under “Share Capital” in the balance sheet, forming a part of the owner’s equity. This amount isn’t a loan or temporary advance; it’s the company’s permanent capital, reflecting the true stake of its investors.
When a company receives payment for its shares, the accountant records it through a simple journal entry. The money received is debited to the bank account, while the share capital account is credited for the same value. It’s a clear record that ownership funds have entered the company.
If shares are sold at a premium, the excess amount goes into a separate account called the “Securities Premium Reserve.” Any unpaid share value is reflected as “Calls in Arrears.” If shares get forfeited and reissued later, the adjustments are made accordingly to maintain an honest financial picture.
Importance of Paid-Up Capital
Paid-up capital is more than an entry on a balance sheet. It reflects ownership, commitment, and the real strength of a company’s financial foundation. This capital tells the story of how much money has actually been invested by shareholders and how stable the business truly is.
For Companies
A strong paid-up base gives a company greater financial credibility. It shows that owners have contributed real money, reducing dependence on borrowed funds. Lenders and suppliers often view this as a sign of stability before extending credit or entering into contracts.
For Investors
Investors look at paid-up capital to understand how committed the promoters are. When founders or major shareholders invest a significant amount, it signals trust and long-term intent. It also helps new investors evaluate ownership dilution before subscribing to new shares.
For Compliance and Regulation
Accurate disclosure of paid-up capital ensures transparency with regulators. It affects filings, reporting, and eligibility for various tenders or contracts. A company with higher paid-up capital usually meets financial criteria more easily.
For Future Growth
As the company expands, paid-up capital provides a solid foundation for raising funds or attracting partners. It represents financial discipline and trustworthiness, two qualities that investors and regulators value deeply.
Conclusion
Paid-up capital is the real measure of how much faith shareholders have placed in a company. It shows the actual money invested, the amount that built the business from the ground up. When viewed alongside authorized capital, it tells a complete story: what a company is allowed to raise and what it has already received.
A sound, paid-up base builds trust. Investors see commitment. Lenders see stability. Regulators see compliance. Every rupee reflected here carries weight because it is permanent capital, not borrowed or temporary.
As a company grows, this figure becomes more than an accounting term. It turns into proof of ownership, a foundation for raising new funds, and a quiet reminder of responsibility. Paid-up capital anchors confidence, credibility, and the company’s financial character.
FAQs
1. Can a company change its paid-up capital after incorporation?
Yes, a company can change its paid-up capital by issuing new shares, receiving pending payments from shareholders, or through capital reduction under legal procedures. Any increase or decrease must be recorded in the company’s financial statements and reported to the registrar through the prescribed forms for compliance and transparency.
2. Is the share premium part of paid-up capital?
The share premium, or the amount received above the face value of shares, is not technically part of paid-up share capital. It is recorded separately in a “Securities Premium Reserve.” While both reflect shareholder investment, the premium can be used only for specific purposes defined under company law, such as issuing bonus shares or writing off expenses.
3. What happens if a company issues shares beyond its authorized capital?
A company cannot legally issue shares beyond its authorized capital. It must first increase the authorized capital (shareholders’ approval, MoA amendment, ROC filing) before issuing additional shares. To correct this, it must pass a shareholder resolution, amend its memorandum of association, and file updated documents with the registrar before the new shares can be legally recognized.
4. How is paid-up capital different from net worth?
Paid-up capital represents the amount invested by shareholders, while net worth includes paid-up capital, reserves, retained earnings, and other components of equity. Paid-up capital is a part of net worth but not its entirety. Net worth offers a broader view of the company’s financial strength and accumulated value over time.
5. Why do startups usually begin with low paid-up capital?
Startups prefer keeping paid-up capital low at the beginning to minimize costs and administrative charges. As the business grows or attracts investors, it can increase its paid-up capital by issuing new shares. This approach gives flexibility and avoids locking large sums during the early, uncertain stages of business.
6. What is the role of authorized capital in fundraising?
Authorized capital sets the maximum limit for how much a company can raise through equity. It gives the company flexibility to issue additional shares in the future. Before seeking large investments or launching an IPO, a company usually increases its authorized capital to create enough space for issuing new shares.
7. Can a company have zero paid-up capital?
No, a company cannot have zero paid-up capital because incorporation requires at least some ownership contribution. Even after the removal of minimum capital requirements, there must be at least nominal capital paid by shareholders to validate ownership and legal existence. A zero figure would mean no actual investment has been made.
8. How does increasing authorized capital affect the company?
When a company increases its authorized capital, it gains the ability to issue more shares in the future. This move does not bring in immediate money but prepares the company for upcoming fundraising. However, it also increases the government filing fees and requires formal approval from shareholders and the registrar.
9. What is the difference between issued capital and paid-up capital?
Issued capital refers to the portion of authorized capital that a company has offered to investors. Paid-up capital represents the amount shareholders have actually paid for those shares. If some investors have not paid in full, the difference remains as unpaid capital or calls in arrears in the company’s records.
10. Does higher paid-up capital mean better financial health?
A high paid-up capital indicates that a company has received substantial investment, but it does not always mean it is financially sound. Profitability, debt levels, and asset quality also play major roles. Still, a larger paid-up capital usually suggests greater investor trust and long-term stability in the company’s foundation.
