Issue of Shares

Every company requires capital in order to finance its activities. The company raises this capital by issue of shares. The capital so raised by issue of shares is called ‘Share Capital’.        

Types of Share Capital

The share capital of a company is divided into the following categories:

1. Authorised Capital: It is the maximum amount of capital that a company can raise by issue of shares. This capital is mentioned by the company in its ‘Memorandum of Association’ at the time of    registration. Authorised Capital is also known as ‘Registered Capital’ or ‘Nominal Capital’.
2. Issued Capital: It is that part of Authorised Capital which is actually offered to the public for subscription.
3. Subscribed Capital: It is that part of issued capital which is actually subscribed for by the public.
4. Called up Capital: It is that part of subscribed capital which is actually called up by the directors of a company from its shareholders.
5. Paid up Capital: It is that part of called up capital which is actually paid up by the shareholders.

Paid up Capital = Called up Capital - Calls in arrears

Reserve Capital: A company may decide by special resolution that certain portion of its uncalled capital shall not be available for being called up except in the event, and for the purpose of liquidation. Such a portion is called ‘Reserve Capital’.

Preferential allotment of shares means issue of shares on a preferential basis to a select group of persons at a pre-determined price.

Minimum subscription refers to the minimum amount of capital that should be subscribed for by the public before a company can proceed with allotment of shares. According to SEBI guidelines, minimum subscription is 90% of the issued capital.

Following are the two implications, if the company does not receive minimum subscription:

1. Cancellation of public issue; and
2. Refund of entire application money to the applicants.

Issue of Shares for Consideration other than Cash:

A company may purchase assets from the vendors and instead of paying the vendors in cash, may settle the purchase price by issuing fully paid shares of the company. This type of issue of shares to the vendors is called ‘Issue of shares for consideration other than cash’. Such shares may be issued to the vendors either (i) at par or (ii) at a premium or (iii) at a discount.

Accounting Entries:

1. When assets are purchased from the vendor:

Assets A/c                                                         Dr.

To Vendor’s A/c

1. When fully paid shares are issued to vendors:

Vendor’s A/c                                           Dr.

Discount on issue of shares A/c   Dr.       (if shares are issued at a discount)

To Share Capital A/c      

To Securities Premium A/c                                  (if shares are issued at a premium)

When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus, the excess of issue price over the face value is the amount of premium. E.g., if a share of Rs.10/- is issued at Rs. 12/-, Rs.2 (12 - 10) is the amount of securities premium.

Legal Provisions regarding issue of shares at a premium:

1. As per guidelines issued by SEBI, a new company set up by the entrepreneurs without a track record of profitability cannot issue shares to the public at a premium.
2. The power to issue shares at premium need not be given in the Articles of Association.
3. Section 78 of the Companies Act provides that where a company issues shares at a premium, a sum equal to the aggregate amount of the premium collected on shares must be credited to a separate account called “Securities Premium Account".
4. Securities Premium Account must be shown as a separate item on the ‘Equity and Liabilities’ side of the Balance Sheet under the sub-heading ‘Reserves and Surplus’ of the main heading ‘Shareholders’ Funds’.

Purposes for which Securities Premium money can be utilized:

According to Section 78 of the Companies Act, 1956 the amount of Securities Premium can be utilized by the company for the following purposes:""

1. To issue fully paid bonus shares to the existing shareholders;
2. To write off the preliminary expenses of the company;
3. To write off discount allowed on any issue of shares or debentures;
4. To write off the expenses of or the commission paid on any issue of shares or  debentures;
5. To provide for the premium payable on redemption of preference shares or debentures of the company.

In addition, Section 77A of the Companies Act, 1956 allows the use of Securities Premium for buying back of its own shares or other specified securities.

Accounting Treatment:

When shares are issued at a premium, the premium amount is credited to a separate account called ‘Securities Premium Account’. Securities Premium is a gain of capital nature to the company.

When shares are issued at a premium, the following Journal Entries are as passed:

Issue of Shares at a Discount:

When the shares of a company are issued at a price less than its face value, they are said to be issued at a discount. For Example, if a share of the face value of Rs.10 is issued at Rs.9, then it is said to have been issued at a discount of 10%.

Legal Provisions regarding Issue of Shares at a Discount (Section 79):

According to Section 79 of the Companies Act, 1956, a Company can issue shares at a discount, if the following conditions are satisfied:

1. The shares issued at a discount must belong to a class already issued. In other words, a new company cannot issue shares at a discount.
2. The issue of shares at a discount is authorized by a resolution passed by the company in its general meeting and sanctioned by the Company Law Board.
3. The rate of discount must not exceed 10%.
4. The shares must be issued within 2 months from the date of receiving the sanction of the Company Law Board.

At least one year has elapsed since the date on which the company was entitled to commence business.

Accounting Treatment:

When shares are issued at a discount, the amount of discount must be recorded in the books at the time of allotment by debiting to ‘Discount on issue of shares A/c’.

The entry for discount on issue of shares will be as follows:

Share Allotment A/c                              Dr.                                      * * *

Discount on issue of Shares A/c            Dr.                                       * * *

To Share Capital A/c

‘Discount on Issue of Shares’ is a fictitious asset and hence must be amortized over period of benefit. The Old Schedule VI required the unamortized portion of ‘Discount on Issue of Shares’ to be shown on the assets side of the Balance Sheet under the heading “Miscellaneous Expenditure.” The Revised Schedule VI, however, does not contain any specific disclosure requirement for the unamortized portion of such items. Further, such items are excluded from the scope of AS - 26 Intangible Assets. The Revised Schedule VI, however, is clear that additional line items can be added on the face of the Balance Sheet or in the notes to accounts. Keeping this in view, the draft guidance note issued by ICAI suggests that, the companies can disclose the unamortized portion of such expenses as “Unamortized Expenses”, under the head “Other Current / Non-current Assets”, depending on whether the amount will be amortized in the next 12 months or thereafter.

On receipt of application money

Bank A/c                                                                                   Dr.

To Share Application A/c

For transferring share application money to share capital account (April 1998)

Share Application A/c                                                   Dr.

To Share Capital A/c

For making allotment due

Share Allotment A/c                                                      Dr.

Discount on issue of shares A/c                                    Dr.                   (If shares are issued at a discount)

To Share Capital A/c    

To Securities Premium A/c                                                                    (If shares are issued at a premium)

On receipt of allotment money

Bank A/c                                                                                   Dr.

To Share Allotment A/c

On making call money due

Share Call A/c                                                               Dr.

To Share Capital A/c

On receipt of call money

Bank A/c                                                                                   Dr.

To Share Call A/c

If the number of shares applied for by the public is more than the number of shares offered, it is the case of over - subscription of shares. When the shares are over - subscribed, the company cannot satisfy all the applicants. In such a situation, the Board of Directors may decide to allot the shares in certain proportion. This proportion is determined by the ratio which the number of shares to be allotted bear to the number of shares applied for. This is called “Pro-rata allotment of shares”. When allotment is made on pro-rata basis, each applicant receives the shares in proportion to the shares applied for. For example, if a company receives applications for 3,00,000 shares against an issue of 2,00,000 shares, then the proportion of shares applied to shares allotted is 3 : 2.

Forfeiture of shares means cancellation of shares. If a shareholder fails to pay the allotment or calls money, his shares are liable to be forfeited by the company. The power to forfeit shares must be contained in the Articles of Association. The directors must follow certain procedures while forfeiting the shares. They have to first give a minimum 14 days notice to the defaulting shareholder calling upon him to pay the amount due from him together with interest before a specified date. This notice must state that if the shareholder fails to pay the amount along with interest within the specified period, the shares will be forfeited. If the shareholder still does not pay, the directors may forfeit his shares by passing an appropriate resolution.

The effect of forfeiture of shares is that the shares of the defaulting shareholder are cancelled; his name is removed from the Register of Members and the amount already paid by him is forfeited.

Accounting Treatment:

The following Journal Entry is passed at the time of forfeiture of shares:

Share Capital A/c                                  Dr.   (No. of Shares forfeited x Called up value per share)

Securities Premium A/c             Dr.                   (with the amount of premium not received)

To Share Allotment                                 (with the amount due but not paid on allotment)

To Share Call A/c                                    (with the amount due but not paid on call)

To Discount on issue of shares    (with the amount of discount allowed, if any)

To Shares Forfeited A/c              (with amount already paid by the shareholders)

Surrender of Shares:

Surrender of shares means the voluntary return of shares to the company for cancellation. A shareholder may voluntarily surrender his shares to the company if he finds that he is not able to pay the further calls made upon him. The company cancels the shares thus surrendered and the effect of surrender of shares is the same as that of forfeiture of shares. Surrendered shares can be re-issued by the board of directors in the same way as forfeited shares.

Accounting Treatment:

The journal entries to be passed in the case of surrender of shares are similar to those passed in case of forfeiture of shares.

The directors of a company have the power to re-issue the forfeited shares on such terms as it thinks fit. Thus, the forfeited shares can be re-issued at par or at a premium or at a discount. However, if the forfeited shares are re-issued at a discount, the amount of discount should not exceed the amount credited to Shares Forfeited Accounts if the discount allowed on re-issue is less than the forfeited amount, there will .be a surplus left in the ‘Shares Forfeited Account’. This surplus will be in the nature of capital profits and therefore should be transferred to ‘Capital Reserve Account’.

Balance of Share Forfeited Account:

If a shareholder fails to pay the allotment or calls money, his shares are liable to be forfeited by the company. The power to forfeit shares must be contained in the Articles of Association. The effect of forfeiture of shares is that the shares of the defaulting shareholder are cancelled; his name is removed from the Register of Members and the amount already paid by him is forfeited. The following Journal Entry is passed at the time of forfeiture of shares:

On re-issue of forfeited shares: The directors of a company have the power to re-issue the forfeited shares on such terms as it thinks fit. Thus, the forfeited shares can be re-issued at par or at a premium or at a discount. However, if the forfeited shares are' re-issued at a discount, the amount of discount should not exceed the amount credited to Shares Forfeited Account. If the discount allowed on re-issue is less than the forfeited amount, there will be a surplus left in the ‘Shares Forfeited Account’. This surplus will be in the nature of capital profits and therefore should be transferred to ‘Capital Reserve A/c’ and shown on the ‘Equity and Liabilities’ side of the Balance Sheet under the heading ‘Reserves and Surplus’.

On shares remaining un-reissued: The forfeited amount on shares remaining un-reissued should be shown on the ‘Equity and Liabilities’ side of the Balance Sheet under the heading ‘Share Capital’.

Effects of Forfeiture:

The effect of forfeiture of shares is that the shares of the defaulting shareholder are cancelled; his name is removed from the Register of Members and the amount already paid by him is forfeited.

Reserve Capital

A company may decide by special resolution that certain portion of its uncalled capital shall not be available for being called up except in the event, and for the purpose of liquidation. Such a portion is called ‘Reserve Capital’.

Difference between ‘Capital Reserve’ and ‘Reserve Capital