In India, a Private Limited Company is one of the most prevalent commercial entities, representing over 90% of registered businesses. Regulated by the Ministry of Corporate Affairs under section 2 (68) of the Companies Act, 2013, this form offers a middle ground between a Public Ltd. company and a partnership, hence attracting entrepreneurs aiming for the benefits of both. The flexibility in operation allows the directors and shareholders to enhance the company’s reputation as per their preferences. Profits are distributed as dividends among the company’s shareholders. In this blog, we shall look into the requirement of minimum paid up capital for Private Limited company.
Eligibility Criteria for Private Limited Company Registration in India
The eligibility conditions for private limited company registration in India is as follows:
Number of Directors
To set up a Private Limited Company in India, specific eligibility criteria must be satisfied. i.e., the company has to have a min. 2 directors and a max. of 15 directors only.
Shareholders
Also, a Private Limited Company must have min. 2 shareholders and can have a maximum of 200 shareholders. Note that a single person can assume the roles of both a director and a shareholder in this case.
Citizenship Requirements
To maintain compliance with Indian regulations, at least one of the directors of the Private Limited Company must be an Indian citizen. While foreign directors can be appointed, this condition ensures a local presence within the company’s leadership.
No Minimum Capital Requirement
In the past, establishing a Private Limited Company in India necessitated a minimum capital requirement of Rs 1,00,000. However, this prerequisite was abolished by the Companies (Amendment) Act of 2015. Consequently, entrepreneurs are no longer bound by a prescribed capital threshold, simplifying the process of forming Private Limited Companies and relieving them from any financial burdens associated with meeting a specific capital amount.
Significance of Minimum Paid Up Capital for Private Limited Company
Paid up capital plays a crucial role in the financial structure and health of a Private Limited Company. The significance of minimum paid up capital for Private Limited company can be understood in the following key aspects:
1. Debt Reliance vs. Equity Investment
The amount of paid up capital reflects the extent to which a company relies on equity investment rather than debt financing. When a Private Limited Company has a substantial paid up capital, it indicates a lower reliance on external borrowing or debt to fund its operations and growth. This can be advantageous as it reduces the financial risks associated with servicing debt, such as interest payments and repayment obligations.
2. Growth Potential
A company that has completely issued all its shares and achieved full paid up capital status has the flexibility to raise additional capital. This can be done by either exceeding the approved capital limit or by borrowing money. This demonstrates the company’s capacity for expansion and investment in new projects, product development, or market expansion.
3. Market Health Indicator
The amount of paid up capital listed on a company’s balance sheet serves as an important indicator of its financial health in the eyes of investors and stakeholders. A higher paid up capital generally suggests a strong financial foundation and greater investor confidence. It signifies that the company has successfully attracted capital from shareholders, which can be interpreted as a vote of confidence in its business prospects.
4. Equity vs. Debt Comparison
The equity-to-debt ratio in a company’s financial structure is a pivotal metric for evaluating its financial stability. A higher ratio of equity (represented by paid-up capital) to debt signifies a more robust financial state. It indicates lower financial leverage and a reduced risk of insolvency, portraying a healthier financial position. On the contrary, a company with a higher debt-to-equity ratio might face increased financial risks, potentially leading to financial instability.
Classification of Capital in a Company
To understand the minimum paid up capital for Private Limited company, it is essential to know that capital can be classified into 3 types. These classifications include:
1. Authorized Capital for Private Limited Company
Authorized capital, also known as authorized shares, refers to the maximum number of shares that a company is legally permitted to issue to its shareholders. During the process of incorporation, a private limited company is required to specify its authorized capital in its Memorandum of Association. It sets the upper limit for the total value of shares the company can issue over its lifetime.
2. Paid-Up Capital for Private Limited Company
Paid-up capital for a private limited company represents the portion of the authorized capital that the company has actually issued and sold to its shareholders. It signifies the amount of capital that shareholders have contributed by purchasing shares. For example, if a company’s authorized capital is Rs. 8 lakhs, but it has only sold and received Rs. 3 lakhs from its shares, its paid-up capital is Rs. 3 lakhs. The minimum paid up capital for Private Limited company and the overall paid up capital can be seen as the real financial commitment made by shareholders to the company.
3. Subscribed Capital
Subscribed capital is the portion of the authorized capital that shareholders have agreed to purchase or subscribe to. It is the amount of shares that shareholders have committed to buying from the company but may not have paid for in full yet. Subscribed capital is an important indicator of investor interest and commitment, as it represents the potential infusion of funds into the company once payment is completed.
Various Sources of Paid-Up Capital for a Private Limited Company
As already discussed, the minimum paid up capital for Private Limited company is a crucial component of a Private Limited Company’s financial structure, and it can be sourced through different means. The primary sources of minimum paid up capital for Private Limited company are as follows:
1. Par Value of the Shares
The par value of shares represents the nominal or face value of a company’s shares as specified in its Memorandum of Association. It is the basic value assigned to each share, and shares are issued at this par value when raising capital. The par value is set at the time of incorporation and can be modified through changes to the MOA.
2. Premium/Discount Value of the Stock
Private Limited Companies in India have the flexibility to generate capital by issuing shares at either a premium or a discount to their par value. These scenarios include:
Premium Shares:
Premium shares are shares issued by a company at a price higher than their par value. For instance, if a business offers shares with a par value of Rs. 10 at a price of Rs. 18 per share, these shares are termed premium shares. Typically, companies opt to issue premium shares when they are financially robust and experience high demand for their shares in the market.
Discounted Shares:
Conversely, discounted shares are shares offered by a company at a price lower than their par value. For example, if a business sells shares with a par value of Rs. 10 at a price of Rs. 4 per share, these shares are labelled as discounted shares. Companies may choose to issue discounted shares when they urgently need capital infusion or are facing financial challenges.
Therefore, minimum paid up capital for Private Limited company can be sourced from the par value of shares and through the issuance of shares at premium or discounted values. These options provide companies with flexibility in raising capital based on their financial circumstances and market conditions.
What is the Requirement of Minimum Paid Up Capital for Private Limited Company?
Historically, the minimum paid up capital for Private Limited company was Rs. 1 lakh, as per the provisions of the Companies Act of 2013. However, there have been significant changes in company law through subsequent amendments.
The Companies (Amendments) Act of 2015 brought about a crucial change in this regard. According to this amendment, there is no longer a requirement for minimum paid up capital for Private Limited company in India. In other words, entrepreneurs can now establish a Private Limited Company without the burden of meeting a specific minimum capital threshold.
Despite the removal of the minimum paid-up capital requirement, it’s important to note that an authorized capital of Rs. 1 lakh is still a requirement for forming a Private Limited Company.
So, as of 2015, there is no longer a minimum paid up capital for Private Limited company in India. However, an authorized capital of Rs. 1 lakh is still a prerequisite for the formation of such a company. This change has made it more accessible for entrepreneurs to initiate Private Limited Company registration without the financial obligation of a minimum paid up capital for Private Limited company.
Final Thoughts
The evolution of capital requirements for Private Limited Companies in India reflects a progressive approach to corporate regulation. With the Companies (Amendments) Act of 2015, the country abolished the minimum paid up capital for Private Limited company, significantly reducing the financial barriers for entrepreneurs looking to establish Private Limited Companies. This change promotes ease of doing business and encourages innovation and entrepreneurship by eliminating the need for a substantial upfront capital infusion.However, it’s essential to distinguish between paid-up capital and authorized capital, as an authorized capital of Rs. 1 lakh is still mandatory. While this authorized capital sets an upper limit on potential capitalization, it doesn’t necessitate immediate full payment.
