Authorized capital vs paid up capital

[md_imr]

The ipo markets - part 1 - varsity by zerodha

Here promoter holding is showing as 40% .
which is 40% of authorized capital…

If somebody says he holds 100 % of company , does he means he has 100% of authorized capital.
and it want another investor to join in company , in exchange of 10 % shares. Does he given 10% from his belonging , or he will increase the authorize capital…
(latest show on sony tv Shark tank, many business man says they have 100 % of shares of their company. And want to raise funds of xyz amount for 10 % shares…)

And if someone says he holds 90% of company , does he means 90% of authorized capital or 90 % of issued capital.

Correct me if i am wrong.
Authorized capital is the capital which company decides and pay fees to government
and issued capital is the amount which promoter does initial investment in the company.
lets say , 1 crore as authorized capital by paying fee to government (MCA)
and 20 lakhs as issued capital by investing 20lkhs into company as initially.
Now the promoter has invested 18 lakhs and 2lakhs from investor. So the promoter holds 90% and investor holds 20%,

simply …
if somebody want to start a company with authorized capital of 1 crore, should the promoter along with investor have to fund the company by 1 crore cash ?

How the face value per share of company is decided while starting, can it be any amount 5 / 10 / 100 / 1000 etc., or any procedure to it.

[joyesh]

@md_imr

If somebody says he holds 100 % of company , does he means he has 100% of authorized capital.

no. They hold 100% of the issued capital.

@md_imr

Does he given 10% from his belonging , or he will increase the authorize capital

2 scenarios here. He can give 10% belonging to him as a sale of shares or the company can issue fresh shares. Either the company has sufficient authorised capital then in that case no increase is required and the paid-up capital increases. If there is no sufficient head room for paid-up shares, then authorised share capital needs to be increased and then the paid-up capital will increase when the company issues fresh shares.

@md_imr

And if someone says he holds 90% of company , does he means 90% of authorized capital or 90 % of issued capital.

90% of issued capital.

@md_imr

Authorized capital is the capital which company decides and pay fees to government

correct.

@md_imr

issued capital is the amount which promoter does initial investment in the company.

Could be initial or further investments both.

@md_imr

Now the promoter has invested 18 lakhs and 2lakhs from investor. So the promoter holds 90% and investor holds 20%,

Yes.

@md_imr

if somebody want to start a company with authorized capital of 1 crore, should the promoter along with investor have to fund the company by 1 crore cash ?

Not necessary.

@md_imr

How the face value per share of company is decided while starting, can it be any amount 5 / 10 / 100 / 1000 etc., or any procedure to it.

You mention this in the Articles of Association at the time of incorporation and then subsequent changes can be brought about by way of shareholder approval.

[neha1101]

To setup a company, the prospect shareholders need to have few constitutional documents such as Memorandum of Association and Articles of Association (among the many docs)

In the Memorandum of Association, the prospect shareholders need to decide the maximum amount of capital that the company can issue. This amount is called the Authorized capital. This is a notional number. When setting up a company you really don’t need the entire capital in one go. Hence the shareholders decide to have a portion or part of the authorized capital to be issued. This portion of the capital which the shareholders actually decide to issue is called the Issued capital.
Once the shareholders pay up their share of the capital to the company, it becomes the paid up capital. . This is the physical money that the company actually gets to start its operations.

Now, once the Paid up capital is completely used and if the shareholders need additional capital, then they can get additional capital as the Paid Up capital is still less that the authorized capital. However, the company can issue additional capital only upto the Authorized capital.

If for some reason, they need to exceed the Authorized capital, then the necessary amendment need to be done in the Memorandum of association and then only the company can raise further capital.

With regard to taxation, to the best of my knowledge, tax is paid only when you make income and not on the capital and hence in my view there will not be any tax paid. However, based on the size of the authorized capital, there could be fees and other charges which SEBI or other agencies may charge.

With regard to face value of a share which is being started, it really does not matter at what level you want the face value to be. It can be 5,10,100. The only advantage with a higher value is, once the company is well established and doing really well and if the market value of the shares shoots up, you can split the shares until the face value becomes 1.
Classic example is MRF - the market value of one share is 68,233 with a face value of 10. With such high face value retail investors might not invest in these company in the secondary market which might make the share illiquid. If the company wants, they can split the share from face value from 10 to 1 and thereby reduce the market value to 6,823.3, so that there would be greater participation from all sections of investors.

Disclaimer: Not claiming to be an expert, there could be errors, please do your own research.

[joyesh]

@neha1101

With regard to taxation, to the best of my knowledge, tax is paid only when you make income and not on the capital and hence in my view there will not be any tax paid. However, based on the size of the authorized capital, there could be fees and other charges which SEBI or other agencies may charge.

I belive @md_imr was referring to the stamp duty that is applicable on the Authorised Capital.

[md_imr]

suppose promoter is having 100% at 1 crore capital, what will the be his percentage after company raise additional capital by 50 lakhs… to accommodate new investors.

in tv show (shark tank india) ,
promoters having 100% holding and they are offering 10 percent to shark tank investors,
here promoter is diluting the shares or giving from his percentage…

issue of fresh shares means , issue of additional authorized capital or issued capital

[joyesh]

@md_imr

suppose promoter is having 100% at 1 crore capital, what will the be his percentage after company raise additional capital by 50 lakhs… to accommodate new investors.

Promoter - 66.66% ; Investor - 33.33%

@md_imr

promoters having 100% holding and they are offering 10 percent to shark tank investors,
here promoter is diluting the shares or giving from his percentage

In both cases, the prmoter will end up diluting his stake. Two ways to go about it. 1. By transfer of 10% shares of prmoter to the investor. 2. Issue additional capital such that the final paid up capital structure represents 90%-10%. If the final paid-up capital structure is such that it exceeds the authorised capital, then the authorised capital will need to be increased to atleast such extent that it can accomodate the paid-up capital before those shares are issued.

@md_imr

issue of fresh shares means , issue of additional authorized capital or issued capital

Issue of fresh shares is towards paid-up share capital.

[md_imr]

can you please let me know in what proportion fresh capital issue ratio is calculated…
promoter holding 100% 1crore , fresh capital 50 lakhs…
please explain the calculation

[Private]

you should read pre and post money valuation and how stake in the company change after raising funds. google it.