Is 1 lakh Authorised Capital required?

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vakilsearch
Published at : 27 Oct 2020
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The Registrar of Companies (RoC) requires #privatelimitedcompanies, one-person companies, and public limited companies to declare their capital structure at all times. Any time there is any change, the RoC needs to know.

Now, what defines the capital structure? It is defined mainly by the authorised and paid-up capital. As you’d guess, the authorised capital is the maximum amount of #capital the #shareholders are authorised to invest in the company, while the paid-up capital is the amount actually invested. Let’s examine this in greater detail:

Authorised Capital
1. All new companies must authorise a minimum amount of capital, which:

a. For private limited companies and OPCs is Rs. 1 lakh;

b. and for public limited companies is Rs. 5 lakh.

2. Such capital is first decided at the beginning of the firm’s incorporation.

3. As the amount of authorized capital increases, so will the ROC fee.

4. Even after the incorporation of the company, the authorized capital can be changed at any point of time.

5. This is no way means that a person owes such an amount to anyone.

6. This capital is not liable for use to calculate the net worth of the company.

7. As mentioned earlier, it is the limit to which a firm can issue shares. One can issue shares less than the authorized capital too. You can check the fee related to such a capital at the MCA portal.

Start-ups tend to register their companies with the minimum authorised capital, as the fees for incorporation are tied to the amount authorised. But some companies do incorporate with authorised capital much larger than current requirements so that they don’t have to inform the RoC when they want to raise more money. However, even if there is an increase in paid-up capital, the RoC must be informed.

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What is the authorized capital?

Authorized capital is a term, which confuses a lot of people. Most people think that authorized capital is the investment of the amount of money that they are investing in the business. Nothing could be further from the truth. To begin with, let me clarify that authorized capital is not equal to the amount of money you invest in a business.

Example:

A company like Tata Motors, for example, could have an authorized capital of hundred crores but the investment in the business could be 10000 crores. So the difference between authorized capital and what you invest in the business is typically very large.

Most companies in India have an authorized capital of just one lakh rupees but the amount of money that is invested by the people who run the business into the company is typically more than 30 or 40 or hundred times the authorized capital amount. So to begin with let's clarify authorized capital is not equal to the amount of money that you have invested in the business.

Is Rs 1 lakh authorized capital required initially?

So then the second point is if the authorized capital is one lakh rupees do I need to put one lakh rupees into the business on the first day when I start. Once again the answer is No.

Even if the authorized capital is one lakh rupees you do not need to have one lakh rupees in cash on the first day when you start a business. This is a very important point which most entrepreneurs get confused by. So we must clarify this point at the outset.

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