BAJAJ BROKING
March 03, 2025
6 mins read
The investment market is a vast one full of various concepts and different tricks of the trade that can help new entrants invest mindfully and trade better. One of these concepts that every newbie should be aware of is paid-up capital.
In simpler terms, paid-up capital is the funds that corporations or companies receive from their shareholders in exchange for the shares. This concept is a strong indicator of how a company’s financial health, stability, and overall value are faring.
To understand this concept better, here is a deeper dive into it.
Think of the company as a piggy bank and the paid-up capital as the money that is added into the piggy bank. So essentially, paid-up capital is a section of a company’s authorised capital received from shareholders in exchange for shares. Thus, when shareholders buy shares directly, they end up putting real money into the company, which can then be used by the company to fund its growth.
To generate this paid-up capital, a company sells its shares in the primary market, usually in the form of an IPO or Initial Public Offering. Once bought by investors, who then become the company’s shareholders, these shares can further be sold in the secondary market or stock exchanges. When this happens, the company does not receive any additional funds as the buying and selling of these shares happens between the investors, not with the company itself.
The formula to calculate the paid-up capital is given below:
Par Value of Shares + Additional Paid-in Capital = Paid-up Capital
When investors and traders are better able to understand the concept of paid-up capital, they can analyse a company's financial strength and investment potential better.
What investors and traders need to understand is that the paid-up capital is the money generated or collected by a company when it sells its shares and is not borrowed funds. This means that when a company is fully paid up, it has been able to sell all its available shares. As a result, it cannot raise any more capital unless it goes down the debt route. The good thing here is that, in the future, the company can still get approval to issue more shares.
Paid-up capital is significant because it is an indication of how reliant a company is on the money that it receives from its shareholders, also known as equity financing when compared to borrowing funds or debt financing. When investors compare these two ways of raising capital, they can gauge whether a company is financially healthy or not.
There are two main sources of paid-up capital:
Through Par Value or Face Value of Shares – the par value or the face value of a share is its base value, i.e. the minimum amount a company should get when investors buy they buy shares.
Additional Paid-In Capital – Also known as the premium, the additional paid-in capital is the extra money that investors pay over the par value.
Here’s an example to help you understand the working better.
Let us suppose a company issues 100 shares having a face value or par value of ₹10 each.
If investors end up buying them for ₹15 per share, then:
Total amount raised = 100 shares × ₹15 each = ₹1,500
Par value portion = 100 shares × ₹10 each = ₹1,000
Additional paid-in capital = ₹5 extra per share × 100 shares = ₹500
The elements of paid-up capital refer to the key components or building blocks that define how a company's paid-up capital is structured. These elements represent the different aspects of how capital is issued, subscribed, and paid by shareholders.
1. Issued Share Capital
This refers to the total number of shares a company has issued to investors out of its authorized share capital.
2. Subscribed Share Capital
The portion of the issued share capital that investors have agreed to purchase.
3. Paid-Up Share Capital
The actual amount of capital paid by shareholders for the shares they hold. It can be equal to or less than subscribed capital if some shares are only partially paid.
4. Partly Paid-Up Capital (if applicable)
If a company allows investors to pay for shares in installments, the unpaid portion is yet to be called-up, and only the paid portion contributes to the paid-up capital.
5. Share Premium (if applicable)
If shares are issued at a price higher than the face value, the excess amount (premium) is recorded separately in the Securities Premium Account but is still part of shareholders’ contributions.
6. Bonus Shares (if applicable)
Shares issued to existing shareholders from retained earnings or reserves, increasing the paid-up capital without fresh inflows of cash.
7. Calls-in-Arrears (if applicable)
If any shareholder has not fully paid the amount due on their shares, that unpaid amount is deducted from the paid-up capital.
What investors need to understand first is that companies are not allowed to sell their shares freely. They require approval from relevant regulatory bodies in their country to do so. This is where the concept of authorised capital comes into play.
Authorised capital is the maximum funds a company is permitted to raise by selling shares.
A lot of companies might request a higher authorised capital than needed so that they can look into issuing more shares in the future if the need arises.
The paid-up capital raised from selling shares by a company cannot exceed the company’s authorised capital.
Essentially, the paid-up capital raised is governed by the authorised capital.
Represents Actual Funds Received – It is the portion of issued capital that shareholders have fully paid, reflecting the real capital inflow into the company.
Non-Repayable to Shareholders – Paid-up capital is permanent and cannot be returned to shareholders unless through legal capital reduction or liquidation.
Shown in the Balance Sheet – It is recorded under the Shareholders’ Equity section, indicating the company's stable financial base.
No Additional Liability – Unlike debt, it does not create repayment obligations or interest costs for the company.
Can Be Increased But Not Directly Decreased – Companies can increase paid-up capital by issuing new shares or bonus shares, but reducing it requires legal compliance.
The concept of paid-up capital for a company plays a crucial role in supporting a company’s financial structure. It is the fund raised by the company by selling its shares to investors who invest real money into buying the shares and become shareholders. The funds raised as a part of paid-up capital stay invested in the company and help it fund its growth and development.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Authorised capital is the maximum funds a company is permitted to raise by selling shares. The paid-up capital raised from selling shares by a company cannot exceed the company’s authorised capital. Essentially, the paid-up capital raised is governed by the authorised capital.
The formula to calculate the paid-up capital is given below:
Par Value of Shares + Additional Paid-in Capital = Paid-up Capital
Paid-up capital is significant because it is an indication of how reliant a company is on the money that it receives from its shareholders, also known as equity financing when compared to borrowing funds or debt financing. It also helps fund the company’s development in the long run.
Yes. It can raise more funds by selling more shares in the future.
The paid-up capital is a strong indicator of how a company’s financial health, stability, and overall value are faring. This helps investors make informed investment decisions when it comes to a particular company.
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