Authorised Capital vs Paid-Up Capital: Startup Shareholding & Form SH-7 Guide
A practical founder's guide to corporate capital in India: authorized vs paid-up distinctions, cap table math, state stamp duty, and Form SH-7 capital expansion.
Authorised Capital vs Paid-Up Capital: Startup Shareholding & Form SH-7 Guide
When structuring a new Private Limited Company in India, founders frequently encounter terms like Authorised Capital, Issued Capital, Subscribed Capital, and Paid-Up Capital.
Because these concepts sound similar, first-time entrepreneurs often conflate them:
- Some founders believe setting an authorized capital of ₹10,00,000 requires them to immediately deposit ₹10,00,000 in cash into their newly opened corporate bank account.
- Other founders initialize their company with a tiny authorized capital of ₹10,000, only to discover 6 months later that they cannot issue shares to an incoming angel investor without undertaking an expensive, formal legal process to increase their capital ceiling.
Understanding how corporate share capital operates—and mastering the procedure to increase your capital ceiling via Form SH-7 on MCA V3—is essential for every venture builder.
The Four Tiers of Company Capital
To understand company shareholding, visualize capital as an inverted pyramid of legal thresholds:
1. AUTHORISED CAPITAL
| The legal ceiling defined in Clause V of the MoA. |
|---|
| (e.g., ₹15,00,000 divided into 1,50,000 shares of ₹10 each) |
| 2. ISSUED CAPITAL |
| The portion of authorised capital offered to shareholders. |
| (e.g., ₹5,00,000 divided into 50,000 shares of ₹10 each) |
| 3. SUBSCRIBED CAPITAL |
| The portion of issued capital that shareholders agreed to take. |
| (e.g., ₹5,00,000 agreed to be purchased by Founders & Investors) |
| 4. PAID-UP CAPITAL |
| The actual cash deposited by subscribers into the company bank a/c. |
| (e.g., ₹5,00,000 fully credited and verified via Form INC-20A) |
Authorised Capital vs Paid-Up Capital: Core Differences
| Statutory Dimension | Authorised Share Capital | Paid-Up Share Capital |
|---|---|---|
| Legal Definition | The maximum nominal value of shares the company is legally authorized to issue. | The actual money received by the company from shareholders for allotted shares. |
| Documentary Anchor | Embedded in Clause V of the Memorandum of Association (MoA). | Reflected in the company balance sheet and Form INC-20A / PAS-3. |
| Relation to Bank Balance | Has zero connection to bank balance; it is purely a legal ceiling. | Represents actual cash injected into the corporate bank account. |
| Alteration Procedure | Requires EGM shareholder vote, altering MoA, and filing Form SH-7. | Increases automatically when new shares are allotted via Form PAS-3. |
| Statutory Stamp Duty | Attracts state government stamp duty and ROC registration fees upon creation/increase. | No direct MCA fee; shares are stamped via state share certificate stamp duty. |
How Much Initial Capital Should a Startup Set?
When incorporating via SPICe+ on MCA V3, the Central Government provides a major incentive:
- ₹0 MCA ROC Fee on Authorized Capital up to ₹15,00,000 for new company incorporations (only state stamp duty applies).
- The Recommended Setup:
- Authorised Capital: Set at ₹10,00,000 or ₹15,00,000 (e.g., 1,00,000 shares of ₹10 face value).
- Paid-Up Capital: Initialize at ₹10,000 to ₹1,00,000 (e.g., Founders inject ₹50,000 each).
Why This Structure Is Optimal:
- Low Initial Cash Outlay: Founders only need to deposit ₹10,000 or ₹1,00,000 from their personal bank accounts into the company bank account to clear Form INC-20A.
- Room for Growth: The company has unissued headroom of ₹9,00,000 to ₹14,00,000 in authorized capital, allowing them to issue shares to incoming angel investors, grant ESOPs, or bring in co-founders without paying to file Form SH-7.
State Stamp Duty on Authorised Capital: A State-by-State Overview
While MCA ROC fees are waived up to ₹15 lakh, State Stamp Duty is mandatory under state stamp acts and varies depending on where your registered office is situated:
| State of Registered Office | Stamp Duty on Initial Capital (Up to ₹10–15 Lakh) | Incremental Duty on Increasing Capital |
|---|---|---|
| Delhi | Nominal slab (~₹1,000 to ₹2,000) | 0.15% to 0.5% on incremental capital |
| Maharashtra | ₹1,000 for every ₹5,00,000 capital (subject to cap) | Slab-based incremental duty |
| Karnataka | 0.5% of authorized share capital | 0.5% on incremental capital |
| Telangana / AP | Slab-based percentage duty | Percentage duty on increased amount |
Step-by-Step Procedure to Increase Authorised Capital via Form SH-7
When your company negotiates an investment round that requires issuing shares exceeding your current authorized capital ceiling, you must increase authorized capital under Section 61 read with Section 64:
- Board Meeting: Approve Capital Increase & Convene EGM
- Extraordinary General Meeting (EGM): Shareholders Pass Ordinary Resolution
- Alter Clause V of Memorandum of Association (MoA)
- File Form SH-7 on MCA V3 within 30 Days of EGM with State Stamp Duty
- ROC Approves Capital Expansion -> Ready to Allot Shares via Form PAS-3
Mandatory Attachments for Form SH-7
- Certified true copy of the Ordinary Resolution passed at the EGM.
- Altered copy of the Memorandum of Association (MoA) showing the expanded capital figure in Clause V.
- Notice of the EGM along with the explanatory statement under Section 102.
Cap Table Dilution Math: Expanding the Pie for Investors
Consider two founders, Aman and Neha, who incorporate Apex Analytics Pvt Ltd with:
- Authorized Capital: ₹1,00,000 (10,000 shares of ₹10 each).
- Paid-Up Capital: ₹1,00,000 (Aman owns 5,000 shares; Neha owns 5,000 shares; 50/50 split).
An angel investor offers to invest ₹25,00,000 for a 20% equity stake:
Step 1: Calculate New Share Allotment
- To give the investor 20%, the founders’ 10,000 shares must represent 80% of the post-money company.
- Post-money total shares = $\frac{10,000}{0.80} = 12,500 \text{ shares}$.
- New shares to be issued to investor = 2,500 shares.
- Premium per share = $\frac{₹25,00,000}{2,500} = ₹1,000$ per share (₹10 face value + ₹990 securities premium).
Step 2: The Capital Bottleneck
- Total post-money shares = 12,500 shares of ₹10 = ₹1,25,000 nominal capital.
- The existing authorized capital is only ₹1,00,000.
- Action Required: Before the company can legally accept the funds and file Form PAS-3, it must convene an EGM, file Form SH-7, and increase authorized capital to at least ₹2,00,000 (or ₹10,00,000 to allow future rounds).
Frequently Asked Questions
Can a startup be incorporated with ₹10,000 paid-up capital and ₹10,00,000 authorised capital?
Yes. In fact, this is standard startup best practice. Setting authorized capital at ₹10,00,000 (or ₹15,00,000 where ROC fees are concessional) while injecting only ₹10,00,000 as paid-up capital allows founders to start lean without paying high capital upfront.
What is the consequence of issuing shares exceeding authorized capital?
Under the Companies Act 2013, any allotment of shares beyond the authorized share capital specified in the MoA is null and void (ultra vires). The company and defaulting officers face substantial penalties, and the allotment cannot be registered on the MCA portal.
How much stamp duty is payable when increasing authorized capital?
Stamp duty is governed by state stamp acts and varies widely. In Maharashtra, stamp duty on capital is slab-based; in Delhi and Karnataka, distinct percentage tariffs apply to the incremental capital amount.
What is the statutory deadline to file Form SH-7 after increasing capital?
Under Section 64(1) of the Companies Act 2013, Form SH-7 must be filed with the Registrar of Companies within 30 days from the date of passing the shareholder resolution at the Extraordinary General Meeting (EGM).
Official References
- The Companies Act, 2013 (Section 61 & Section 64 - Alteration of Share Capital) — Ministry of Corporate Affairs (MCA), Government of India
- MCA V3 Form SH-7 User Manual — Ministry of Corporate Affairs
- State Stamp Acts and Share Capital Duties — Ministry of Corporate Affairs