This article has been written by Mr. Hemant Kumar, a 2nd year LL.B student from Faculty Of Law, Delhi University.
Introduction:
The capital structure of a company is an essential aspect of its overall functioning. Authorized, subscribed, and paid-up capital are three terms that are used to describe the capital structure of a company. These terms have legal implications and are important for investors, creditors, and other stakeholders. In this article, we will discuss the concepts of authorized, subscribed, and paid-up capital and explore recent developments, case laws, and examples related to these concepts.
Capital is the backbone of any business. Without it, a company cannot operate or grow. The authorised, subscribed, and paid-up capital are the three important aspects of the capital structure of a company. The Companies Act, 2013, mandates every company to have a capital structure that defines the amount and types of capital that a company can raise, issue, and maintain. In this article, we will discuss the concept of authorised, subscribed, and paid-up capital, along with the recent developments, case laws, and examples related to them.
Authorized Capital:
Authorized capital refers to the maximum amount of capital that a company can raise by issuing shares. It is also known as authorized share capital or registered capital. This capital is mentioned in the company’s memorandum of association, which is a legal document that outlines the company’s objectives and governing rules.
The authorized capital of a company can be increased or decreased by passing a resolution at a general meeting of the shareholders. The company must also file the necessary documents with the registrar of companies to reflect the change in authorized capital.
Importance of Authorized Capital:
Authorized capital is important because it gives investors an idea of the potential size of the company. It also enables the company to raise funds in the future by issuing new shares without having to amend its memorandum of association. Companies may choose to keep a high authorized capital to provide flexibility in raising funds in the future. However, companies need to be careful about keeping their authorized capital too high as it may give the impression that the company is larger than it actually is.
Subscribed Capital:
Subscribed capital refers to the portion of the authorized capital that has been subscribed or allocated to shareholders. This means that the shareholders have agreed to purchase a certain
number of shares at a certain price. The amount of subscribed capital can be less than or equal to the authorized capital.
If the subscribed capital is less than the authorized capital, the company can issue more shares in the future to raise additional capital. On the other hand, if the subscribed capital is equal to the authorized capital, the company cannot issue any more shares without increasing its authorized capital.
Paid-up Capital:
Paid-up capital refers to the portion of the subscribed capital that has been paid by the shareholders. This means that the shareholders have actually paid the money for the shares they have subscribed to. The paid-up capital can be less than or equal to the subscribed capital.
If the paid-up capital is less than the subscribed capital, the company can ask the shareholders to pay the remaining amount in the future. However, if the paid-up capital is equal to the subscribed capital, the company cannot ask the shareholders to pay any more money.
Recent Developments:
In recent years, there have been several developments related to authorized, subscribed, and paid-up capital. Here are some of the important developments:
Securities and Exchange Board of India (SEBI) has made it mandatory for companies to disclose their shareholding pattern on a quarterly basis. This has increased transparency and accountability in the capital structure of companies.
The Companies Act, 2013 has introduced several provisions related to the capital structure of companies. For example, it has made it mandatory for companies to have a minimum paid-up capital of Rs. 1 lakh.
The Reserve Bank of India (RBI) has made it easier for companies to raise capital by issuing shares to foreign investors. It has also allowed Indian companies to invest abroad by subscribing to the capital of foreign companies.The MCA has introduced new rules to simplify the process of issuing shares by a company. Companies can now issue shares to their shareholders electronically through the demat account. This has reduced the time and cost involved in issuing physical share certificates. The MCA has also introduced new rules to allow companies to issue shares at a discount to their face value, subject to certain conditions.
Case Laws:
There have been several case laws related to authorized, subscribed, and paid-up capital. Here are some of the important case laws:
In the case of Delhi High Court in Essar Power Ltd. vs. NTT Docomo Inc., the court held that the authorized capital of a company cannot be used to determine the fair market value of shares. The fair market value should be determined based on the actual subscribed and paid-up capital.
In the case of Securities and Exchange Board of India (SEBI) vs. Jindal Steel and Power Ltd., the company was penalized for not disclosing the change in its shareholding pattern on a timely basis. This case highlights the importance of timely and accurate disclosure of shareholding pattern.
Examples:
To understand how authorized, subscribed, and paid-up capital work in practice, consider the following examples:
Example 1: ABC Ltd has an authorized capital of $1,000,000 divided into 10,000 shares of $100 each. The company has issued 5,000 shares at a price of $50 each. The subscribed capital of the company is $250,000 (5,000 x $50) and the paid-up capital is also $250,000 (5,000 x $50).
Example 2: XYZ Ltd has an authorized capital of $1,000,000 divided into 10,000 shares of $100 each. The company has issued 8,000 shares at a price of $50 each. The subscribed capital of the company is $400,000 (8,000 x $50) but the paid-up capital is only $300,000 (6,000 x $50). This means that the company has received payment for only 6,000 shares and the remaining 2,000 shares are still unpaid.
Conclusion:
In conclusion, authorized, subscribed, and paid-up capital are important concepts in corporate finance. Companies must maintain accurate records of their authorized, subscribed, and paid-up capital to ensure compliance with regulations and to avoid legal issues. Recent developments in regulations related to authorized, subscribed, and paid-up capital highlight the importance of these concepts. Companies must also be aware of case laws related to authorized, subscribed, and paid-up capital to avoid legal issues. By understanding these concepts and maintaining accurate records, companies can ensure the smooth functioning of their businesses.
REFERENCES:
- www.mca.gov.in
- www.consultaxx.com
- www.indiacode.nic.in
- www.setindiabiz.com