What is Paid-up capital and how does it work

Introduction

A company that needs to issue shares should keep in mind the authorized capital. Now, according to this authorized capital, it needs to issue shares which should always be less than or equal to the authorized share capital. This is called Paid-up capital.

The pumped in money by the investors to run the business is called paid-up/paid in capital.

paid up capital

paid up capital

Sources of Paid up capital

The paid-up capital consists of 2 sources which are:

  • Par value of stock

This is also called the face value of the shares. It is fixed in the Memorandum of Association of the company. It could be Rs.10 or Rs.100 or whatever the case may be.

  • Excess capital/Premium value of stock

Now, let’s say the company issues a share with a value of Rs.15, with a face value of Rs.10, then Rs.5 would be the excess capital for that share. Could the selling price be below Rs.10? Sure, then it would be considered a discount. Let’s say now the selling price is Rs.8, so Rs.2 is the discount and the face value remains the same i.e. Rs.10.

Importance of paid-up capital

  • Paid-up capital represents the money which is not borrowed. A fully paid-up company is the one which has sold all its shares and now cannot issue shares. It could expand its capital by either taking up loans or by raising the limit of authorized share capital.
  • This could be an indicator of the company’s health, which shows its dependence on share capital to fund its operations. This could be compared to the level of debt the company has considering its market standards, prevailing conditions, and business model.

Characteristics of paid-up capital

No need for repayment

It is by far one of the major benefits if you fund your business using paid-up capital. It equals the total amount, an investor has paid during the time of issuance of the shares. And so, there is no need to pay the amount again by the investors. The investors needn’t buy back the shares in future scenarios as well.

Huge costs associated with paid-up capital

This could be referred to as equity capital. Between debt and equity, there is no need for repayment in equity. So, it could be advantageous for the company. But, shareholders expect some return in the form of a dividend or capital gains, so the cost of keeping paid-up capital could be huge.

Now read: Preference shares vs equity shares

Paid-up capital is listed under stockholder’s equity on the balance sheet

There are sub-divisions of paid-up capital into common stock and additional paid-up capital sub-accounts. The share has 2 values, as mentioned before. The amount that is the par-value of the stock is entered under the common stock sub-account. And the premium value of the stock is entered under additional paid-up capital sub-accounts.

Paid-up capital can be used in fundamental analysis.

Companies that have a large amount of equity as compared to debt is considered advantageous for the firm. This indicates a lower debt to equity ratio, which shows that the firm is less dependent on debts. Debts are loans, that needs to be repaid and until its fully repaid, interest is charged. So, a company goes for a lower ratio as it provides an advantage for the firm over its peers.

How to calculate Paid-up capital

  1. Firstly, divide the initial value of the capital with the number of shares held by shareholders to get its par-value. Let’s say the initial capital equals Rs.10,000 and the total number of shares is 10,000. So, we get Rs.1 as the par value. So, Rs.1 is the lowest value at which the shares could be liquidated or sold.
  2. Now, determine the total number of shares the company has issued to the public. You can find this under, “Outstanding shares” of the balance sheet. Let’s take that number to be 1,00,000.
  3. Then, multiply the outstanding shares to the issued price set by the company. This could be found in the stock offering documents used to raise capital for the company. Let’s say this value is Rs.3. Now, multiply 1,00,000 to Rs.3 to get the monetary value of these shares. This is also known as public capital.
  4. Finally, add the public capital value to the initial capital value to calculate the complete paid-up capital. So, it would equal to Rs.3,00,000 (public capital) and Rs.10,000 (issued capital), which calculates to Rs.3,10,000.

Conclusion

Last but not least, a firm that issue shares shall keep in mind the points mentioned above for the smooth functioning and honest dealings in the business world.

 

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2019-04-08T11:57:34+00:00Company Articles|