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