What is Paid-Up Share Capital? Characteristics of Paid-Up Capital

What is Paid-Up Share Capital? Characteristics of Paid-Up Capital
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What is Paid-Up Share Capital of a Company? An Overview

Paid-up capital meaning is the sum of money a company gets from shareholders when it sells shares to them. Paid-up capital is received by the company at the time of IPO (Initial public offering) when investors directly buy shares in the primary market. When these shares are traded in the secondary market, no paid-up capital is received by the company as it goes to the sellers who are selling the shares. In this article, we are going to learn about what is paid-up capital, paid-up equity capital, paid-up value of shares, their features, and the importance of paid-up share capital. 

What is Paid-Up share capital?

Paid-up shares capital is also called contributed capital and is achieved from 2 sources: excess capital (premium value of the stock) and the par value of the stock (Face value of the shares).  Each share of a company is issued with a base price (par value). Generally, this value is low and any sum of money paid by shareholders that surpass the par value is regarded as additional paid-up capital. The par value of issued shares is listed as preferred stock under the section on the balance sheet. The company has to issue shares within 60 days of its incorporation and the paid-up capital amount is decided during incorporation. The amount received can be used to spend on the operating costs of the company. 

When a company wants to go public, it has to request permission from the Securities Exchange Board of India (SEBI) for issuing public shares. The business can come with an IPO for the issue of its shares only after approval is given by SEBI. 

There is another term called authorized capital which you need to know while learning paid-up capital. The authorized capital is the maximum amount of shares a company can sell to raise capital. Generally, company requests for the authorized capital are much higher than its current requirement. If the company's need for further equity arises, it can sell additional shares. As mentioned in the memorandum of association of the company, the starting authorized capital of the company is usually Rs. 1 lakh. At any time, the company can increase the capital with shareholders' approval or by paying an extra fee to the register of companies. A company will not be able to issue shares more than authorized capital because paid-up capital should be lower than authorized capital. 

Paid-Up Capital vs. Authorized Capital

Paid-up share capital is the amount of money a company has spent on its common stock.

Authorized capital is the amount of money a company has the right to spend on its common stock.

The distinction between the two becomes essential when analyzing financial statements and comparing companies' capitalization ratios. A company's paid-up share capital represents actual cash outlays for shares. In contrast, authorized capital does not necessarily have any such connection since it doesn't represent anything more than what managers are allowed to use for investments or loans if necessary (which means that it could be less than what they did).

Financial statements do not always distinguish between paid-up share capital and authorized capital. However, investors need to understand how the two terms are used in calculating ratios, such as the price/book value ratio. If a company's balance sheet lists its paid-up share capital as $1 million. Still, its authorized capital is only $500,000, and its price/book value ratio would be calculated using only half of its spending on shares.

Key takeaways:

  • Paid-up capital definition is the sum of money a company gets from selling stocks of a company to investors. 
  • Paid-up capital is paid by investors which are generally above the par value of a stock. 
  • Paid-up capital can only be received in the primary market which is through an initial public offering. 
  • Financing for paid-up capital is possible from two sources: excess capital and the par value of a stock 

What is the Importance of Paid-up Capital?

Paid-up capital is defined as the money that is not borrowed. A fully paid-up company has already sold all the available shares and hence, it can not increase its capital unless it takes debt or loan. Also, they have the option to get permission to receive authorization to sell shares by increasing the limit. 

Paid-up capital shows a company's health, which indicates its need for share capital to fund its operations. 

It represents the common stock or equity that companies issue to shareholders.

Paid-Up Share Capital is the amount invested by shareholders. It's the company's common stock or equity. A corporation raised $10 million from stockholders and issued 1 million $1 shares. $10 million divided by 1 million shares is paid-up capital (or 10 cents per share).

The balance statement also lists the company's indebtedness. Payables include accounts, taxes, and long-term debt.

The balance sheet comprises shareholders' equity and the difference between assets and liabilities. This is the difference between a company's debts and assets.
 

A paid-up share capital account appears on the balance sheet under the Shareholders' Equity section.

The paid-up share capital account appears on the balance sheet under the Shareholders' Equity section. It's also referred to as Common Stock (C), Paid-Up Capital (UPC), and Paid-in Capital in Common Stock (C). The following image shows how it looks:

The formula for calculating paid-up capital is Total Assets – Total Liabilities = Shareholders' Equity. In other words, if a company has assets of $100,000, liabilities of $50,000, and shareholders' equity of $50,000 at year-end, its total assets will equal 100 + 50 or 150 million dollars. At the same time, its total liabilities will equal 50 + 0 or 50 million dollars. Therefore the value of its shareholder's equity would be 150 - 50, which equals 100 million dollars.

The paid-up share capital account is one of the most critical to determining how a company is performing.

Paid-up capital is a crucial indicator of a company's health. It reveals how much a company's shareholders have invested and if it has enough money to function. It's under Shareholders' Equity on the balance sheet.

Authorized capital is the amount a company may issue against paid-up share capital. Paid-up capital comes from shareholders.

Paid-up capital reflects shareholder money, but authorized capital does not. The latter is corporation money.

Paid-up share capital shows how much capital a company has raised from its shareholders.

Paid-up capital is the number of money shareholders has invested in the company. It can be calculated as follows:

(TSR - LT Debt) + LT Equity = Paid-up Capital, where TSR refers to total shareholder's funds and LT Debt refers to long-term debt. A high paid-up share capital indicates a company's financial strength because it shows how much capital has been raised from shareholders.

It also indicates how much its shareholders have invested in the company. A high paid-up share capital shows that investors have confidence in a company's financial strength and can help prevent it from going bankrupt.

Characteristics of Paid-up Capital

  • No repayment: If you plan to fund your business, paid-up capital is suitable to offer you major benefits such as It doesn't need to be repaid. Investors have paid for shares at the time of initial issuance which does not include any amount that the investors need to pay to buy shares. 
  • High costs: Paid-up capital is often regarded as equity capital and is associated with high costs because shareholders are given some return on their investment in the form of capital gains or dividends. So, It is beneficial for the corporation. 
  • It is listed below as shareholder's equity on the balance sheet: This category has subdivision into additional paid-up capital sub-accounts and common stock. The share of stock is categorized into two values: the par value of the stock and the additional premium value of the stock which is more than the par value. 
  • It can be used in the fundamental analysis: Companies that use a large amount of equity tend to have low debt as compared to the companies that do not. A company having a debt-to-equity ratio that is less than the industry's average is considered to be ideal for investing. Investors tend to invest in those companies that have low debt as they are less likely to dissolve. 

To conclude, Paid up capital enables a firm to emphasize its business expansion without taking loans or debt. Also, it can reward its shareholders, partners, employees, and investors enrolled in equity ownership plans. The company’s net worth increases when more share capital gets added. 

  • What is meant by paid-up capital?

  • What is paid-up equity share capital?

  • What is the variation between paid-up capital and share capital?

  • What is the formula to calculate paid-in capital?

  • How can we withdraw paid-up capital?

  • What is Paid-Up Share Capital?

  • How do you calculate paid-up share capital?

  • What are some incentives for shareholders to pay up their shares?

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