Authorized Capital vs Paid-up Capital always creates confusion for banking aspirants. These are basic terms and you must be aware of them. These terms are sometimes also asked in interviews other than the exams. So let’s demystify them in a lucid manner. Ready? Then, let’s go to unscrew it!
It represents the maximum amount of shares that can be issued by a company to its shareholders. The initial Authorized capital of a company is always mentioned in the Memorandum of Association (MoA) of the company. Once set, the authorized capital can be increased later with the approval of shareholders. For this, a company needs to approach the Registrar of Companies.
Recently, the Government of India increased the Authorized Capital of NABARD from Rs. 5,000 crores to Rs. 30,000 crores. It means NABARD can issue shares of up to 30,000 crore rupees to shareholders to raise capital.
It represents the actual amount of shares issued by a company irrespective of its capacity or authorized capital. Paid-up Capital is always less than or equal to the Authorized capital. A company is not eligible to issue shares more than its authorized capital.
Till the Companies Act, 2013 all the Private Limited companies were required to have at least 1 lakh rupees of paid-up capital to start a company. But, Companies Amendment Act, 2015 relaxed the norms of minimum paid-up capital requirement. Now, to start a private company it is not mandatory to have any minimum paid-up capital.
An analogy to understand the difference
Let’s assume there is a company which has Authorized Capital of 1,000 crore rupees. It has issued shares of 500 crores to its shareholders to raise some money. It means the company can raise 500 crore rupees more from the market by issuing shares because it has not reached its Authorized Capital limit. It means for the authorized capital of 1,000 crore rupees, the paid-up can be anything between 0 to 1,000 crore rupees but not more than this.
It is similar to a water tank which can hold a maximum of 1,000-litre water. We can keep it empty or can store any amount of water up to 1,000 litres but not more than this. As 1,000 litre is the maximum capacity for the tank just like the Authorized capital of the company.