Q.Explain the Capital Clause of the Memorandum of Association and distinguish between authorised capital and paid-up capital.

The Capital Clause fixes a ceiling, not the amount actually raised — a distinction this question is specifically testing.

For every company having a share capital, the Capital Clause, required by Section 4(1)(e) of the Companies Act, 2013, states the amount of share capital with which the company is to be registered — generally called the authorised or nominal capital — and its division into shares of a fixed face value each. If, for example, a company's Capital Clause states an authorised capital of a given sum divided into a stated number of equity shares of a fixed face value, that figure is the ceiling up to which the company may validly issue shares without first amending this very clause.

This is precisely where the distinction between authorised capital and paid-up capital becomes important, and where students most often go wrong. Authorised capital, as just described, is the registered ceiling stated in the memorandum — the maximum share capital the company is permitted to raise. Issued capital is the portion of that ceiling the company has actually offered to subscribers at a given time, which will ordinarily be equal to or less than the authorised figure. Subscribed capital is the part of the issued capital that investors have actually agreed to take up, and paid-up capital is the amount subscribers have actually paid in cash or its equivalent against the shares they hold, which may itself be less than the subscribed amount if calls on partly paid shares remain outstanding. The Capital Clause of the memorandum records only the first, largest figure — the authorised capital — while the other three figures change over time as the company issues, allots, and receives payment for shares, and are tracked in the company's own books and annual filings rather than in the memorandum itself. …