Understanding Share Capital in a Private Limited Company

The share capital of a private limited company is the financial foundation used to:

• Fund the company’s operations

  

  

• Pay for operating expenses

• Invest in new projects and ventures

Shareholders of the company are entitled to:

• A share of the company’s profits in proportion to their shareholding

• Voting rights at shareholder meetings (if applicable)

• Dividends based on their capital contribution

• Other rights and privileges as outlined in the company’s Articles of Association

Types of Share Capital

A company’s capital is typically categorized into Authorized Capital, Issued Capital, and Paid-up Capital. Each of these terms has a specific meaning and legal implication.

1. Authorized Capital

Authorized Capital (also known as registered capital or nominal capital) is the maximum amount of capital that a company is legally permitted to raise through the issuance of shares, as stated in its Articles of Association.

This does not mean the company has issued or received this amount—only that it has the capacity to do so.

2. Issued Capital

Issued Capital is the portion of authorized capital that the company has actually offered to shareholders by issuing shares.

This reflects the total value of shares that the company has issued to raise capital from investors.

3. Paid-up Capital

Paid-up Capital (also referred to as called-up capital) is the actual amount of money received by the company from shareholders for the shares that were issued.

This is the real financial contribution that has entered the company in exchange for ownership in the form of shares.

Example: Authorized, Issued, and Paid-up Capital

Let’s understand the distinction between these three types of capital with an example:

• Authorized Capital: Rs. 10,00,000

  The company is legally allowed to issue shares worth up to Rs. 10,00,000.

• Issued Capital: Rs. 5,00,000

  Out of the authorized amount, the company chooses to issue shares worth Rs. 5,00,000.

• Paid-up Capital: Rs. 4,00,000

  Shareholders have paid Rs. 4,00,000 for the issued shares.

Summary:
The company’s capital structure in this example would be:

• Authorized Capital = Rs. 10,00,000

• Issued Capital = Rs. 5,00,000

• Paid-up Capital = Rs. 4,00,000

Can Paid-up Capital Be More Than Authorized Capital?

No, paid-up capital cannot exceed the authorized capital.

The authorized capital sets the legal limit for how much capital a company can raise through share issuance. If a company receives more funds than its authorized capital, it must first amend its Articles of Association to increase the authorized capital.

 Example of Non-Compliance:

• Authorized Capital = Rs. 5,00,000

• Paid-up Capital = Rs. 6,00,000

This situation is not allowed. The company must increase its authorized capital to at least Rs. 6,00,000 before receiving the excess amount legally.

Summary Table

Rule: Paid-up Capital ≤ Issued Capital ≤ Authorized Capital

Understanding the differences between authorized, issued, and paid-up capital is essential for:

• Maintaining legal compliance

• Proper financial planning

• Transparency with investors and regulators

When structuring or scaling your company, ensure that changes to share capital are legally documented and approved by the concerned authorities, including the Office of the Company Registrar (OCR).