Easy Ways to Understand The Authorized Share Capital Under Companies Act 2013

Every company limited by shares should have a share capital. A company’s share capital is the amount invested in the company to allow it to operate. Certain requirements must be met before the share capital may be altered or raised. The share capital of a company can be divided into small shares of various classes. The types of share capital and the associated rights are different.

What is the Authorized Share Capital of a company?

According to Section 2(8) of the Paid-up Capital Companies Act 2013, authorized Capital or nominal Capital denotes the maximum amount of share capital authorized by a company’s (MOA) memorandum of association.

However, a company’s authorized capital, also known as nominal Capital, can be changed through certain procedures governed by Sections 61-64 of the Companies Act, as well as Sections 13 and 14 of the act, which govern changes to the Chartered Documents, according to the Memorandum Of Association (MOA) and Articles Of Association (AOA) of the company.

Understanding Authorized Share Capital

For instance, If ABC Pvt. Ltd. has an authorized share capital of Rs. 50 lakhs, of which Rs. 30 lakhs shares have been issued to shareholders. It shows that ABC Pvt. Ltd has not issued all of its shares.

In other words, the minimum authorized capital for a private limited company under the Companies Act, 2013 is Rs. 20 lakhs, and they issue shares without appealing for an increase in the Authorized Share Capital. The private company’s maximum Capital is 50 lakhs.

However, if ABC Pvt. Ltd wants to issue Rs. 60 Lakhs shares to shareholders having a maximum authorized share capital of Rs 50 Lakhs. Then it is not possible; nevertheless, in order to do so, the company must follow the procedure for increasing the authorized share capital. After such a rise, the company may issue shares to shareholders.

Types of Share Capital

There are several types of share capital accessible on the market. The total nominal value of a company’s shares is referred to as its share capital. In the context of companies, the terms “capital” and “share capital” have been considered interchangeable.

Companies can declare a variety of share capital. These terms include authorized share capital, issued capital, called-up capital, subscribed capital, and paid-up capital.

Issued Capital

The portion of Authorized Share Capital that has been issued to the public for subscription is known as Issued Share Capital. This act of issuing shares is referred to as issuance, allocation, or allotment. To put it simply, Issued Share Capital is the subset of Authorized Share Capital. A subscriber becomes a shareholder after receiving shares.

Called-up Capital

Called-up Capital is the portion of Subscribed Capital that includes the shareholder’s payment. The complete amount of Capital is not given to the company at once. It draws on a portion of the subscribed capital as needed in installments. The remaining amount of the Subscribed Capital is known as Uncalled Capital.

Subscribed Capital

Subscribed Capital is the share of issued capital sold to the public. The general public does not have to completely subscribe to the issued capital. It is the share of the issued capital for which the corporation has received an application. For example, if a company offers 16000 shares of 100 rupees each and only 12000 are applied for, the issued capital is Rs 16 lac, and the subscribed capital is Rs 12 lac. The total number of issued shares equals the total number of outstanding and treasury shares.

Paid-up Capital

Paid-up Capital refers to the portion of Called-up Capital paid by the shareholder. The shareholder is not required to pay the amount requested by the company. The shareholder may pay half of the called-up Capital, which is referred to as Reserved Capital where the term reserve means, reserving funds in the company’s treasury. This is very beneficial in the event that the company is dissolved.

The Companies Amendment Act of 2015 altered the need for a minimum paid-up capital in the company. That means, for the time being, the business can be established with as little as Rs.1000 in paid-up Capital. The paid-up capital must always be less than or equal to the authorized share capital at all times, and the company is not allowed to issue shares exceeding the authorized share capital.

Why do companies issue shares to the general public?

Companies sell shares to the general public in order to obtain cash, finance business operations, develop the company, and satisfy other financial demands. After the approval of shares by the company, the applicant becomes a shareholder in the company and has the ability to vote on matters of company policy.

Growth and Stability

Startups and new enterprises sell shares to outside investors to generate capital for growth. Because equity does not have to be repaid, the company’s stress level is minimized. In addition, the company issues shares to pay off existing liabilities or debts.

Gaining Startup Capital

Funding is needed for a variety of reasons, including infrastructure expenditures, rent, security deposits, insurance, marketing, business trips, equipment, and furnishings. This can be accomplished by issuing public shares.

Why do investors purchase the company’s share?

You have probably heard that stocks are the finest long-term investments for individuals. However, there is some risk involved. Investors who purchase stock in companies create wealth for themselves through the return on their investment. The return on these assets comes through dividend payouts, which raise the share value.

Final Words

Companies issue shares to raise capital by reducing the ownership interest of the original shareholders. Share prices may fluctuate from time to time. As a result, it is preferable to invest wisely in the stock market. Similarly, many people are confused between shares and share Capital. Share capital refers to the funds obtained by a firm via the sale of equity to investors, whereas Share refers to the proportion of the amount paid by a shareholder in the company.

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