The word ‘Capital’ has different meanings in different professions and contexts. If a company is limited by shares, then the term capital means share capital. Let us see the various classifications of capital like nominal capital. paid up capital etc.
In simple words, the total contributions made by people to the common stock of the company is the capital of the company. Further, a share is the proportion of the capital to which each member has entitlement. Remember, a share is not an amount of money. It is an interest including different rights in the contract.
In this article, we will look at five ways in which the term capital is used in Company Law: nominal capital, issued capital, subscribed capital, called up capital and paid up capital.
Nominal or Authorized or Registered Capital
Section 2(8) of the Companies Act, 2013, defines Nominal Capital as the amount of capital that the Memorandum of the company authorizes as the share capital of the company. Hence, it is the registered amount authorized that can be raised by issuing shares.
The company also pays stamp duty in this amount. Typically, you can calculate nominal capital by taking into consideration the working and reserve capital needs of the company.
Issued capital is a part of the Authorized capital, offered by the company for the subscription. This includes the allotment of shares. Section 2(50) of the Companies Act, 2013, offers this definition. Further, it is mandatory for companies to disclose its issued capital in the balance sheet (Schedule III of the Act).
Section 2(86) of the Companies Act, 2013, defines Subscribed capital as the part of the capital being subscribed by the members of the company. It is the number of shares that the public takes.
Further, if the company states Authorized Capital in any communication like notice, advertisement, official/business letter, etc., then it has to also specify subscribed and paid up capital in equally conspicuous characters.
Also, Section 60 of the Act specifies that defaulters in this regard, the company and all officers who default, will be fined around Rs. 10,000 and Rs. 5,000 respectively.
Called up Capital
According to Section 2(15) of the Companies Act, 2013, Called up Capital is the part of the capital which the company calls for payment. This is the total amount that the company calls-up on the issued shares.
Paid Up capital
Paid up capital is the part of called up capital actually paid or credited by shareholders on the issued shares. Mathematically, Paid up capital = Called up capital – Calls in Arrears.
Paid up capital represents the money that the company has not borrowed. Also, it is the total amount of money that the company receives from shareholders in exchange for shares of stock.
Learn Section 8 Company here in detail.
Solved Example on Classification of Capital
Q1. The public subscribes for 10,000 shares of a company of Rs. 100 each. The company calls up Rs. 50 per share but receives the payment only from 9,000 subscribers. Calculate:
- Subscribed capital
- Called up capital
- Paid up Capital
Since the subscription is for 10,000 shares at Rs. 100 per share, the subscribed capital is: 10,000 x 100 = Rs. 100,000.
Further, the company calls up Rs. 50 per share. Hence, the called up capital is: 10,000 x 50 = Rs. 50,000.
However, only 9,000 subscribers pay. This means that 1,000 subscribers default. Hence,
Arrears = 1,000 x 50 = Rs. 5,000.
Therefore, the paid up capital is:
Called up capital – Arrears = 50,000 – 5,000 = Rs. 45,000.