Shares and share Capital

SHARES AND SHARE CAPITAL

SHARES AND SHARE CAPITAL Introduction: The There re are are thre three e main main type types s of busi busine ness ss orga organi nisat satio ion: n: (1) (1) sole sole prop propri riet etors orshi hip p (2) (2) partnership (3) company. company. Each form of business organisation is required capital to carry on its business smoothly. smoothly. On sole proprietorship the whole capital is contributed by sole proprietor in partnership the capital is invested by the partners and in case of company capital is invested by the public. Meaning of share and share capital: A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares. The amount collected by the company from the public towards its capital, collectively is known as share capital and individually is known as share. A share is not a sum of money but is an interest measured by a sum of money and this interest also contains bundle of rights and obligations contained in the contract i.e. Article of Association. Investment in the shares of any company is a basis of ownership in the company and the person who invest in the shares of any company, is known as the shareholder, member and the owner own er of that company. company. Definition: According to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied. Types of shares: Types sha res: As per the provision of section 85 of the Companies Act, 1956, the share capital of a company consists of two classes cla sses of shares, namely: Preference Shares Equity Shares Preference Shares: Accordin According g to Sec 85(1), of the Companies Companies Act, 1956, a preferenc preference e share share is one, which carries the following two preferential rights: (a)

The payment of dividend at fixed rat rate before paying ing divide idend to equity shareholders.

(b) (b)

The The retur eturn n of capit capital al at the time time of wind windin ing g up of the the comp compan any, y, befor before e the the payment to the equity shareholder. shareholder. Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association. Prefere Preference nce shareholders shareholders do not have any voting rights, but in the following conditions conditions they can enjoy the voting rights: (1) In case case of cumulati cumulative ve prefer preferenc ence e shares, shares, if dividen dividend d is outstand outstanding ing for more more than than two years. (2) In case case of non-cu non-cumul mulati ative ve prefer preferenc ence e shares, shares, if dividen dividend d is outsta outstandi nding ng for more more than three years. (3) (3) On any any res resolu oluti tion on of windi winding ng up. up. (4) (4)

On any any res resolu oluti tion on of of capi capita tall reduc reducti tion on..

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Types of preference shares: In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows: Cumulativ tive e prefer preferenc ence e shares shares are those those Cumulative Cumulati ve Pref Preferenc erence e Shar Shares: es: Cumula shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Prefe Preferen rence ce shares shares are always always deemed deemed to be cumula cumulativ tive e unless unless any expres express s provision is mentioned in the Articles.

1)

Non-cumulative tive preferenc preference e shares shares are Non-Cumulative Preference Shares: Non-cumula Non-Cumulative those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years. year s.

2)

Participation ion preferen preference ce shares shares are those those Participating Preference Shares: Participat Participating shares, which, in addition to the basic preferential rights, also carry one or more of the following rights:

4)

(a) (a)

To receiv eceive e divi divide dend nd,, out out of surpl surplus us profi profitt left left after after payi paying ng the divi divide dend nd to equity shareholders.

(b)

To have share share in surplus surplus assets assets,, which remai remains ns after after the entire entire capita capitall has been paid on winding up of the company. company.

Non-Participating Preference Shares: Non-participation preference shares are Non-Participating those shares, which do not have the following rights: (a) (a)

To receiv eceive e divi divide dend nd,, out out of surpl surplus us profi profitt left left after after payi paying ng the divi divide dend nd to equity shareholders.

(b)

To have share share in surplus surplus assets assets,, which remai remains ns after after the entire entire capita capitall has been paid on winding up of the company. company. Prefe Prefere rence nce share shares s are are always always deemed to be non-pa non-parti rticip cipati ating, ng, if the Articl Article e of the company is silent. 5)

Convertib tible le prefe preferen rence ce shares shares are are those those Convertible Converti ble Pref Preferenc erence e Shar Shares: es: Conver shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus.

6)

Non-Convertible Preference Shares: Non-convertible preference shares, which Non-Convertible cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent.

7)

edeemable ble prefer preferenc ence e shares shares are are those those Redeemable Redeema ble Pref Preferen erence ce Shar Shares: es: Redeema shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act 1956. 2


8)

Irredeemable Preference Shares: Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the the time time of wind windin ing g up. up. But But acco accord rdin ing g to the the sec. sec. 80 (5A) (5A) of the the Comp Compan any’ y’s s (Amendment) Act 1988 no company co mpany can issue irredeemable preference shares.

Equity shares: According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following follow ing preferential rights: (a) (a) Pref Prefer eren ence ce of of divi dividen dend d over over oth others ers.. (b) Prefe Preferen rence ce for repay repaymen mentt of capital capital over other others s at the time time of winding winding up of the the company. These These shares shares are also also known known as ‘Risk ‘Risk Capita Capital’, l’, because because they they get dividend dividend on the balance of profit if any, left after payment of dividend on preference shares and also at the time of winding up of the company, they are paid from the balance asset left after payment payment of other liabilities liabilities and preferenc preference e share share capital. capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend dividend on such shares shares is not pre-determ pre-determined, ined, but it depends depends on the profit earned by the company. company. The equity shareholders have the right to vote on each and every resolution placed befo before re the the comp compan any y and and the the hold holders ers of thes these e sh shar ares es are are the the real real owne owners rs of the the company. Distinction between Preference Shares and Equity Shares: Basis of difference Rate of dividend

Payment of dividend

Participation management Winding up

Arrears of dividend

Voting rights

in

Preference Share Equity Share The rate of dividend on The The rat rate of div dividen idend d on preference share is fixed. equi equity ty shar share e is chan change ged d from year to year depending upon upon the the avai vailabi labili lity ty of profits. They have a right to receive Dividend on equity shares is dividend before any paid, paid, after after any divide dividend nd is divide dividend nd is paid paid on equity equity paid on preference shares. shares. Preference shareholders are Equi Equity ty shar shareh ehol olde ders rs are are not entitled to participate in enti entitl tled ed to part partic icip ipat ate e in management. management. On the winding up, they In this case, they have been have have a righ rightt to retu return rn of paid only when preferences capi capita tall ahea ahead d (bef (befor ore) e) of capital is paid in full. the the capit apita al retur turned ned on equity shares. If dividend is not paid on In case case of equi equity ty shar shares es,, thes these e shar shares es in any any year year,, dividend cannot the arrear of dividend may accumulate. accumulate. Preference sh shareholders do do Equity Equity share sharehol holder ders s enjoy enjoy not have any voting rights. voting rights.

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Sub-division of share capital: The word capital in connection with a company may mean any of the following divisions of capital: 1) Authorised capital: An authorised capital refers to that amount which is stated in the ‘Capital Clause’ of the Memorandum of Association as the share capital of the company. This is the maximum limit of the company which it is authorised to raise and beyond which company cannot raise unless the capital clause in the Memo Memoran randu dum m is alte altere red d in acco accord rdanc ance e with with the the prov provis isio ions ns of Sec. Sec. 94 of the the Companies Act, 1956. 2)

Issued capital: An issued capital refers to the nominal value of that part of authorised capital, which has been (1) subscribed for by the signatories to the Memorandum Memorandum of Association Association,, (2) allotted for cash or for consideration consideration other than cash and (3) allotted as Bonus B onus shares.

3)

Subscribed capital refers to the paid-up paid-up value of the issued issued Subscribed capital: Subscribed capital i.e. the total amount called by the company less calls-in-arrear. It is only the actual liability for the company hence it will be only be added while totalling the liability side.

Difference between Authorised Capital and Issued Capital: Basis of difference Meaning

Authorised Capital It refers to that amount which is stated in the Memorandum of Asso Associ ciat atio ion n as the the shar share e capital of the company.

Issued Capital It refers to the nominal (actual) value of that part of author authorise ised d capita capitall which which has been: (i) Subscribed for by the signatories to the Memorandum of Association and (ii) Allotted for cash or cons consid ider erat atio ion n for for othe otherr than cash. Consideration of future Its amount is determined after Its amount is determined after requirements considering present and future considering the present requirements. requirements. Disclosure in Memorandum of Its amount amount is requi require red d to be Its amount is not required to Association disclo dis closed sed in Memora Memorandum ndum of be disclosed disclosed in Memorandum Memorandum Association. of Association. Is it the the base based d of of stam stamp p duty? duty? Stam Stamp p duty duty is payab payable le on the It is not based for calculating based of authorised capital. stamp duty. duty. Is it based of company Compan Company y regis registra tratio tion n fee is It is not the basis for registration fees? payable on the based of registration fees. authorised capital. Does Does the the chan change ge amou amount nt to Any change in the amount of Any change in the amount of an alteration of Memorandum? authorised capital amounts to issued capital does not an alteration of Memorandum amou amount nt to an alt alterat eratio ion n of of Association. Memorandum of Association. Whet Whethe herr one one can can excee xceed d othe otherr It can can exceed ceed issu issued ed capi capita tal. l. It cann cannot ot excee xceed d auth author oris ised ed capital.

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Distinction between authorised capital and subscribed capital: Basis of difference Meaning

Cons Consid ider era atio tion requirements

of

futu futurre

Authorised Capital It refers to that amount which is stated in the Memorandum of Association as the share capital of the company. Its Its amou amount nt is dete determ rmin ined ed afte afterr cons consid ider ering ing pres present ent and future requirements. Its amount is required to be disclo dis closed sed in Memora Memorandum ndum of Association.

Subscribed capital It refers to the paid up value of the issued capital.

Its Its amou amount nt is dete determ rmin ined ed after considering the present requirements. requirements. Disclosur Disclosure e in Memorandu Memorandum m Its amount is not required to of Association be disclosed in Memorandum of Association. Is it the the bas based of stam tamp Stam Stamp p duty duty is paya payabl ble e on It is not based for duty? the base based d of aut authori horis sed calculating stamp duty. capital. Is it bas based of company Company registration fee is It is not the basis for registration fees? paya payabl ble e on the basi basis s of registration fees. authorised capital. Does the change amount to Any change in the amount Any change in the amount an alteration of of authorised capital of issu issued ed capi capita tall does does not not Memorandum? amounts to an alteration of amount amount to an altera alteratio tion n of Memorandum of Memorandum of Association. Association. Whet Whethe herr one one can can exce exceed ed It can can exce exceed ed subs subscr crib ibed ed It cannot exceed authorised other capital. capital.

Meaning of reserve capital: Under Section 99 of the Companies Act 1956, sometimes a company by means of special resolution decides that certain portion of its uncalled capital shall not be called up durin during g its its exis existe tenc nce e and and it woul would d by avai availab lable le as an addi additi tion onal al secu securi rity ty to its its creditors creditors in the event of its liquidation liquidation.. Such a portion portion of uncalled uncalled capital is termed termed as ‘Reserv ‘Reserve e Capital’. Capital’. It cannot cannot be converted converted into ordinary ordinary uncalled capital without without the leave (order) of the court and also it cannot be charged ch arged by the company. company. Meaning of Capital Reserve: Capi Capita tall Reser eserve ve orig origin inat ates es from from sour source ces s othe otherr than than the the regu regula larr acti activi viti ties es of the the business. In other words, the reserve, which is created out of capital profit, is known as capital reserve. Dividend cannot e distributed out of this reserve but it can be used to meet capital capital losses or to declare declare a bonus share. It is shown in the liability liability side of the Balance Sheet under the heading of ‘Reserve and Surplus’ Following are the principal sources of capital reserve: (a) (a) Prof Profit it on sale sale of a fix fixed ed asse asset. t. (b) Profi Profitt on reva revalua luatio tion n of asse assets ts and and liab liabili ilities ties.. (c) Profi Profitt on forf forfeit eiture ure and and re-is re-issue sue of of forfe forfeited ited shares shares.. (d) Profi Profitt on redem redempti ption on of of debent debenture ures s at a dis discou count. nt. (e) Profi Profitt earned earned by a comp company any prior prior to to its incorpo incorporati ration. on. Difference between Reserve capital and capital reserve: Bases of difference Meaning

Reserve Capital It means that certain port portio ion n of unca uncall lled ed shar share e

Capital Reserve Capital tal reserve is that reserve which is created out

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Resolution

Amount

Accounting treatment

Use

capi capita tall whic which h shal shalll not not be called up except in the case of liquidation. A special resolution is passed by the company for its creation. It represents the amount which has not been received. No accounting treatment is made in the books.

It can be called up only at the time of liquidation and used by the company.

of capital profits.

No need to pass any resolution for its creation. It repr repres esen ents ts the the amou amount nt which hich has has alrea lready dy been been received. Accou ccount ntin ing g trea treatm tmen entt is made in the books and it is show shown n in the the comp compan any’ y’s s Balance Sheet. It can be used to meet capital losses or to declare a bonus share a ny time during the life of a company.

Preliminary expenses: Expe Expens nses es incu incurr rred ed on the the form format atio ion n of a comp compan any y are are term termed ed as ‘Pr ‘Prelim elimin inar ary y Expenses’. These include the following: (a) Expen Expenses ses incur incurred red on the prepa preparati ration on and printi printing ng of various various docume documents nts needed needed for the registration of a company. (b) Stamp Stamp duty duty and and regi registra stratio tion n fees fees on thes these e docume documents nts.. (c) (c) Duty Duty paya payabl ble e on on aut author horis ised ed capi capita tal. l. (d) Expenses Expenses incur incurred red on on the the preparatio preparation, n, printin printing, g, and and issue issue of prospectus prospectus.. (e) (e) Unde Underw rwri riti ting ng com commi miss ssio ion. n. (f) (f) Cost Cost of pre preli limi mina nary ry boo books ks and and the the com commo mon n seal seal.. (g) In case case the compan company y has been been formed formed to purc purchas hase e a running running busine business, ss, the the fees fees charged by accountant or valuer valuing the assets and liabilities of that business. busine ss. (h) (h) This This may be writte written n off off agai agains nstt Secu Securi rity ty Premi Premium um accoun account, t, or agai agains nstt Capi Capita tall Reserv eserve, e, othe otherw rwis ise, e, thes these e may may be writ writte ten n off off from from Prof Profit it and and Loss oss Ac Acco coun untt gradually over some period. The unwritten off portion of such expense is shown on the the asse assets ts side side of the the Bala Balanc nce e Shee Sheett unde underr the the head headin ing g ‘Mis ‘Misce cell llan aneo eous us Expenditure’. Procedure of issue of shares: When When compa company ny has has been been regi regist ster ered ed,, the the foll follow owing ing proc proced edur ure e is adop adopte ted d by the the company to collect money from the public by issuing of shares: 1. Issue of prospectus: When a Public company intends to raise capital by issuing its shares to the public, it invites the public to make an offer to buy its shares through a document called ‘Prospectus’. According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar for registration on or before the the date date of publ publica icati tion on ther thereo eoff. It cont contai ains ns the the brie brieff info inform rmat atio ion n abou aboutt the the company, its past record and of the project for which company is issuing share. It also includes the opening date and the closing date of the issue, amount payable with application, at the time of allotment and on calls, name of the bank in which the application money will be deposited, minimum number of shares for which application will be accepted, etc. 2.

To receive application: After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed presc prescrib ribed ed form. form. Each Each applic applicati ation on form form along along with with applic applicati ation on money money must must be deposited by the public in a schedule bank and get a receipt for the same. The 6


comp compan any y cann cannot ot with withdr draw aw this this mone money y from from the the bank bank till till the the proc proced edur ure e of allotment has been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to commence business is obtained and the amount of minimum subscription has been received). The amount payable on application for share shall not be less than 5% of the nominal amount of share. 3.

Allotments of shares: Allotments of shares means acceptance by the company of the the offe offerr made made by the the appl applic ican ants ts to tak take up the the sh shar ares es appl applie ied d for for. The The info inform rmat atio ion n of allo allotm tmen entt is give given n to the the sh shar areh ehol olde ders rs by a lett letter er know known n as ‘Allotment Letter’, informing the amount to be called at the time of allotment and the date fixed for payment of such money. It is on allotment that share come into existence. Thus, the application money on the share after allotment becomes a part of share capital. Decision to allot the share is taken by the Board of Directors in consultation with the stock exchange. After the closure of the subscription list, the bank sends all applications to the company. On receipt of applications, each application is carefully scrutinised to ascertain that the application form is properly filled up and signed and the money is deposited with the bank.

4.

The remai remainin ning g amount amount left left after after applic applicati ation on and To mak make e call calls s on shar shares: es: The allotment money due from shareholders may be demanded in ne or more parts which are termed as ‘First Call’ and ‘Second Call’ and so on. A word ‘Final’ word is added to the last call. The amount of call must not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date which was fixed for the payment of the last preceding call, for which at least 14 days notice specifying the time and place must be given.

Modes of issue of shares: A company can issue shares in two ways: 1. For cash. 2. For cons consid ider erat atio ion n othe otherr than than cash cash.. hen the the shar hares are are iss issued ued by the com compan pany in Issu Is sue e of sh shar ares es fo for r ca cash sh:: When consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or at a premium or at a discount. Such issue price may be payable either in lump sum along with application or in instalments at different stages stages (e.g. (e.g. partly partly on applic applicati ation, on, partly partly on allotm allotment ent,, partly partly on call). call). Accoun Accountin ting g procedure for the issue of shares for cash is given below:

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S tep s 1. 2.

Conditions

Treatment

Record the receipt of application money ransfe ferr the the full full amou amount nt of appl applic icat atio ion n a) When number of shares applied is equal Trans money received to Share Capital A/c. to the number of shares issued. b) When number of shares applied are less If the the mini minimu mum m subs subscr crip ipti tion on has has at than the number of shares issued. least been received: Trans ransfe ferr the the full full amou amount nt of appl applic icat atio ion n money received to Share Capital A/c. •

If the minimu minimum m subscr subscript iption ion has not been received: Refund the total application money to all the applicants. Make due the allotment money on shares allotted. Record the receipt of allotment money. •

3. 4. 5. 6.

Make due due the call money on allotted. Record the receipt of call money.

shares

Shares are said to be issued at par when they are issued at a price Issue of shares at par: Shares equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par. par. Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called premium. It is a capital profit for the company and will show credit balance; hence it will be shown in the liability side of the Balance Sheet under the heading ‘Reserves and Surplus’ in a separate account called ‘Security Premium Account’ . Shares of those companies can be issued at premium which offer attractive rate of dividend on their existing shares, having a good profit track for last few years and whose shares are in demand. The amount of premium depends upon the profitability and demand of shares of such company. Note: The Company may collect the amount of security premium in lump sum or in inst instalm almen ents ts.. Prem Premiu ium m on sh shar ares es may may be coll collec ecte ted d by the the comp compan any y eith either er with with appl applic icat atio ion n mone money y or with with the the allot allotme ment nt mone money y or even even with with one one of the the calls calls.. In abse absenc nce e of any any info inform rmat atio ion, n, the the amou amount nt of the the prem premiu ium m is to be record ecorded ed with with allotment.

Utilisation of Security Premium Amount: According to Section 78 of the Companies Actt 1956, Ac 1956, the amount amount of securi security ty premi premium um may be applie applied d only only for the follow following ing purposes: (i) (ii) (ii)

To issue issue fully fully paid paid up up bonus bonus shar shares es to the the exist existing ing s shar hareho eholder lders. s. To write write off prelim prelimina inary ry expens expenses es of the the company company.

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(iii) (iii) To write off the expens expenses, es, or commiss commission ion paid, paid, discoun discountt allowed allowed on iss issue ue of the shares or debentures of the company. (iv) (iv) To pay pay prem premiu ium m on the the redem redempt ptio ion n of pref prefer eren ence ce sh shar ares es or debe debent ntur ures es of the the company. (v) (v) To buybuy-bac back k its own shares shares as per per secti section on 77A. 77A. If the company wishes to use the premium amount for any other purpose, it will have to first obtain the sanction of the court for the same or it will be treated as reduction of capital. Issue of shares at discount: Shares are said to be issued at a discount when they are issued

at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 – Rs. 9)] is called as the amount of discount. Share Share discount account showing showing a debit balance denotes denotes a loss to the company company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of ‘Miscellaneous Miscellaneous Expenditure’ in a separate account called ‘Discount on issue of Shares Account’ .

Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act 1956: (i) (i) At leas leastt one one year year must must have have elaps elapsed ed since since the compa company ny becam became e enti entitl tled ed to commen commence ce busine business. ss. It means means that that a new company company cannot cannot issue shares shares at a discount at the very beginning. (ii) (ii) The compan company y has has alrea already dy issu issued ed such such type types s of shares shares.. (iii) (iii) An ordina ordinary ry resolut resolution ion to issue issue the shares shares at a dis discou count nt has been passed passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained. (iv) The resoluti resolution on must specif specify y the maximum maximum rate rate of discount discount at which which the shares shares are are to be issued but the rate of discount must not exceed 10% of the face value of the shar sh ares es.. For more more than than this this limi limit, t, sanc sancti tion on of the the Comp Compan any y Law Law Tribun ribunal al is necessary. (v) The The issu issue e mus ustt be made ade with within in two two month onths s from the the dat date of recei eceiv ving ing the the sanc sancti tion on of the the Comp Compan any y Law Law Tribu ribuna nall or with within in su such ch exte extend nded ed time time as the the Company Law Tribunal may allow. Accounting entries for issue of shares: Par

Premium Discount For receipt of application money Bank A/c Bank A/c Bank A/c Dr Dr Dr To Shar Share e appl applic icat atio ion n To Shar Share e appl applic icat atio ion n To Share Share appl applic icat atio ion n A/c A/c A/c For transferring application money to Share Capital A/c Share application A/c Share application A/c Share application A/c Dr Dr Dr To Share capital A/c To Shar Share e appl applic icat atio ion n Disc Discou ount nt on issu issue e of shar shares es A/c A/c Dr To Secu Securi rity ty Prem Premiu ium m To Share Share appl applic icat atio ion n A/c A/c For allotment money becoming due Share allotment A/c Share allotment A/c Share allotment A/c

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Dr To Share capital A/c

Dr Dr To Share capital A/c Disc Discou ount nt on issu issue e of shar shares es To Secu Securi rity ty Prem Premiu ium m A/c Dr A/c To Share Share appl applic icat atio ion n A/c For receipt of allotment money Bank A/c Bank A/c Bank A/c Dr Dr Dr To Share allotment A/c To Share allotment A/c To Share allotment A/c For call money becoming b ecoming due Share call A/c Dr Share call A/c Dr Share call A/c Dr To Share capital A/c To Shar Share e appl applic icat atio ion n Disc Discou ount nt on issu issue e of shar shares es A/c A/c Dr To Secu Securi rity ty Prem Premiu ium m To Share Share appl applic icat atio ion n A/c A/c For receipt of call money Bank A/c Bank A/c Bank A/c Dr Dr Dr To Share call A/c To Share call A/c To Share call A/c

Joint Application and allotment account: These days it is becoming a practice to open only one account in respect of application and allotment and not two separate accounts. This is based on the reasoning that allotm allotment ent withou withoutt applic applicati ation on is imposs impossibl ible e while while applic applicati ation on withou withoutt allotm allotment ent is mean meanin ingl gles ess s so that that the the stag stages es of the the sh shar are e capi capita tall tran transa sact ctio ions ns are are clos closel ely y interrelated, hence, form this point of view, Share Application and Share Allotment Accou Ac count nt appear appear more more logica logical. l. If combin combined ed accoun accountt for applic applicati ation on and allotm allotment ent is opened, in such a case instead of passing first 4 entries following 3 eateries will be passed: Par

Premium Discount For receipt of application money Bank A/c Bank A/c Bank A/c Dr Dr Dr To Share application & To Share application & To Share application & allotment A/c allotment A/c allotment A/c For transferring application and allotment money to Share Capital A/c Share application & allotment Share application & allotment Share application & allotment A/c Dr A/c Dr A/c Dr To Share capital A/c To Shar Share e appl applic icat atio ion n Disc Discou ount nt on issu issue e of shar shares es A/c A/c Dr To Secu Securi rity ty Prem Premiu ium m To Share Share appl applic icat atio ion n A/c A/c For receipt of allotment money Bank A/c Bank A/c Bank A/c Dr Dr Dr To Share application & To Share application & To Share application & allotment A/c allotment A/c allotment A/c

Call-in-arrear and interest thereon: If a shareholder makes a default in sending the call money due on allotment or on any calls according to the conditions, the money not so sent is called calls-in-arrear. calls-in-arrear. In other words, the portion of called up capital which is not paid by the shareholder within a specified time is known as calls-in-arrear. The company is authorised to charge interest 10


at a specified rate on calls-in-arrear from the due date to the date of actual payment of the allotment money or the calls. But if the Articles of Association are silent, Table A shall be applicable which provides for interest at 5% per annum. However, the directors have the right to waive the payment of interest on call-in-arrear.

Accounting treatment of calls-in-arrear: There are two methods of dealing with the accounting of calls-in-arrear: 1.

By opening Calls-in-arrear Account: In such a case, a separate account for calls-in-

arrear is opened. If the amount of calls has not been paid by some shareholders, such amount is transferred to newly opened ‘Calls-in-arrear ‘Calls-in-arrear Account’ Account’. Thus allotment and other call accounts will not show any balance but the Calls-in-arrear account will show a debit balance equal to the total unpaid on allotment / calls, which will be shown as deduction form the amount of the subscribed capital on the liabilities side of the Balance Sheet.

Accounting treatment: For calls-in-arrear : Bank A/c Dr Calls-in-arrear A/c Dr To Share allotment A/c To Share call A/c On making the interest on call-in-arrear due: Shareholder’s A/c Dr To Interest on call-in-arrear A/c For transferring interest on calls-in-arrear year: Interest on calls-in-arrear A/c Dr To Profit and Loss A/c

2.

For receipt of arrear subsequent date: Bank A/c Dr To Call-in-arrear A/c

amount

at

For receipt of interest on calls-in-arrear: Bank A/s Dr To Shareholder’s A/c A/c to P/L A/c at the end of the accounting

not nece necess ssar ary y to open open a sepa separa rate te Without Witho ut openin opening g calls calls-in-arr -in-arrear ear accou account: nt: It is not accoun accountt for callscalls-inin-arr arrear ear.. In that that case, case, amount amount actual actually ly receiv received ed from from the shareholders is credited to the relevant allotment / call account and the various allotment / call accounts will show debit balance equal to the total unpaid amount of allotment / calls, which will be shown as deduction form the amount of the subscribed capital on the liabilities side of the Balance Sheet.

Accounting treatment: For calls-in-arrear : Bank A/c To Share allotment A/c To Share call A/c

Dr

For rece receip iptt of amou amount nt at subs subseq eque uent nt date: Bank A/c Dr To Share allotment A/c To Share call A/c

Calls-in-advance and interest thereon: Calls-in-advance is just opposite to calls-in-arrear. When a company accepts money paid by some of its shareholders for the call not yet due, such amount is known as ‘Callin-Advance’. It may also happen in case of partial or pro-rata allotment of shares when the compan company y retain retains s exces excess s amount amount recei received ved on applic applicati ation on of share shares. s. Since Since the amount has not become due, hence, it is a liability of the company; therefore it is tran transf sfer errred to the the cred credit it of a newl newly y open opened ed acco accoun untt call called ed ‘Calls-in-advance

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Account’ . A company may, if authorised by its articles, accept calls in advance from its shareholders. In case of calls-in-advance, the company must pay interest at the rate prescribed in its Articles of Association. However, in the absence of interest clause in the Articles of Association, the provisions of Table A of the Companies Act will apply according to which the company will have to pay interest @ 6% p.a. on calls-in-advance, from the date of receipt till the date when the call becomes due. Accounting treatment: For receipt of advance money: For adjustment of calls-in-advance: Bank A/c Dr Calls-in-advance A/c Dr To Share allotment A/c To Respective call A/c To Share call A/c To Calls-in-advance A/c On making the interest on call-in-advance For paym paymen entt of inte intere rest st on call callss-in in-due: advance: Interest on calls-in-advance A/c Dr Shareholder’s A/c Dr To Shareholder’s A/c To Bank A/c For tran transf sfer erri ring ng inte intere rest st on call callss-in in-a -adv dvan ance ce A/c A/c to P/L P/L A/c A/c at the the end end of the the accounting year: Profit and Loss A/c Dr To interest on calls-in-advance A/c

Distinction between Calls-in-arrear and Calls-in-advance: Calls-in-arrears Basis of difference Meaning

Interest Rate of interest Auth Au thor orit ity y unde underr Association

Disclosure

Arti Articl cles es

Calls-in-advance

Calls-in-arrear is the amount Calls-in-advance is the amount called up by the company, but not called up by the company, not paid by the shareholders. but paid by the shareholders. Interest is charged on calls-in- Interest is allowed on calls-inarrear. advance. 5% - as per Table A. 6% - as per Table A. of Articles of Association do not A company may accept callshave any clause to this effect in advance only if Articles of as non-payment is beyond the Association authorise to do so. company’s control. Its amount is shown by way of Its amount is shown as deduction from the separate item, under the head Subs Subscr crib ibe ed-c d-capit apital al in the the current liabilities. Balance Sheet.

Forfeiture of shares: When any company allots share to the applicants, it is done on the basis of a legal contract between the company and the applicant, which makes it binding upon the shareholders to pay the amount of allotment and calls whenever they are due. Now if any any sh shar areh ehol olde derr fail fails s to pay pay the the allo allotm tmen entt and and or call call mone money y due due to him, him, the the shareholder violates the contract and the company is entitled to take its share back, whic which h is know known n as forf forfei eitu ture re of sh shar ares es.. The The comp compan any y can can forf forfeit eit su such ch sh shar ares es if authorised by the Articles of Association. Forfeiture of share can be done according to the rules laid sown in the Articles and if no rules are given in Articles, the provisions of Tabl Table e A, regard regarding ing forfei forfeitur ture e will will apply apply.. Forfeit orfeitur ure e of shares shares means means cancel cancellat lation ion of allotment to defaulting shareholders and to treat the amount already received on such shares is not returnable to him – it is forfeited. 12


Procedure for forfeited shares: The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice requiring him to pay the amount due on his shares along with interest on it stating that if he fails to pay the amount and the interest on it, the shares will be forfeited. Inspite of this notice, the shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit the shares and information will be given to the defaulting shareholder about the forfeiture his shares. Effect of forfeiture of shares: 1. Termination of membership: The membership of the defaulting will be terminated and they lose all the rights and interest on those shares i.e. ceases to be the member / shareholder / owner of the company and his name will be removed from the Register of Members 2.

Seizur Sei zure e of mon money ey pai paid: d: The amount already paid on the forfeited shares by the

defaulting shareholders will be seized by the company and in no case will be refunded back to the shareholder. 3.

Non payment of dividend: When shares are forfeited the shareholder remains no

longer the member of the company therefore he looses the right to receive future dividend. 4.

Reduction of share capital: Forfeiture of shares result in the reduction of share capital

to the extent of amount called up on such shares. Accounting Entries: Sinc Since e the the comp compan any y issu issue e sh shar ares es at par, par, at prem premiu ium, m, or at disc discou ount nt.. As su such ch the the accounting entries for forfeiture of shares in all the above the cases are different, which are as following:

Forfeiture of shares issued at Par: If calls-in-arrear account is opened Share capital A/c Dr To Calls-in-arrear A/c To Share forfeiture A/c

With the called up amount With the amount of arrear on shares forfeited With the amount paid by the shareholder

If call-in-arrear account is not opened: Share capital A/c Dr To Share allotment A/c To Share call A/c To Share forfeiture A/c

With the called up amount With the amount of arrear on allotment With the amount arrear on call With the amount paid by the shareholder

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Forfeiture of shares issued at Premium: If calls-in-arrear account is opened: Share capital A/c Dr Security Premium A/c Dr To Calls-in-arrear A/c To Share forfeiture A/c

With the called up amount excluding premium amount If amount of premium is not paid With the amount of arrear on shares forfeited With the amount paid by the shareholder

If call-in-arrear account is not opened: Share capital A/c Dr Security Premium A/c Dr To Share allotment A/c To Share call A/c To Share forfeiture A/c

With the called up amount excluding premium amount If amount of premium is not paid With the amount of arrear on allotment With the amount arrear on call With the amount paid by the shareholder

Forfeiture of shares issued at Discount: If calls-in-arrear account is opened: Share capital A/c Dr To Calls-in-arrear A/c To Discount of shares A/c To Share forfeiture A/c

With the called up amount With the amount of arrear on shares forfeited With discount on shares forfeited With the amount paid by the shareholder

If calls-in-arrear account is not opened: Share capital A/c Dr To Discount of shares A/c To Share allotment A/c To Share call A/c To Share forfeiture A/c

With the called up amount With discount on shares forfeited With the amount of arrear on allotment With the amount arrear on call With the amount paid by the shareholder

Forfeiture of fully paid up shares: Usually the shares are forfeited for non-payment of the calls. But at the same time fully paid up shares can be forfeited in such cases as default in fulfilling any agreement between between the member members s or on expuls expulsion ion of member members s where where the articl articles es sp specif ecifica ically lly provide for such details.

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Surrender of shares: When a shareholder feels that he cannot pay further calls; he may himself surrender the shares to the company. company. These shares are then cancelled. cancelled. Surrender Surrender of shares shares is a voluntary return of shares for the purposes of cancellation. The directors can accept the surrender of shares only when the Articles of Association authorise them to do so. Surrender is lawful only in two cases viz. (a) where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture and (b) where shares are surrendered in exchange for new shares of the same nominal value. A surrender will be void if it amounts to purchase of the shares by the company or if it is accepted for the purpose of reliev relieving ing a member member from from his liabilitie liabilities. s. Entrie Entries s are are passed passed just like like forfei forfeitur ture e of shares. Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the instance of company.

Re-issue of Forfeited of shares: Re-issue Shares forfeited becomes the property of the company and the directors of a company have an authority to re-issue the shares once forfeited by them in accordance with the provi provisio sions ns contai contained ned in Articl Articles es of Ass Associ ociati ation. on. Table able ‘A’ provi provides des that that “A forfei forfeited ted shares may be sold or otherwise disposed off on such terms and in such manner as the Board Board thinks thinks fit”. They They can re-issu re-issue e the forfeite forfeited d shares shares at par, par, at premi premium um or at discount. However, if the shares are re-issued at discount, the amount of the discount does not exceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount, the maximum permissible discount will be amount paid on such shares by the original shareholder plus the amount of original discount.

Accounting treatment for re-issue of forfeited shares: Following are the journal entries for re-issue of forfeited shares: Re-issue of forfeited shares at par: Bank A/c Dr To Share Capital A/c

With the amount received on re-issue With the amount credited as paid-up / called up

Re-issue of forfeited shares at premium: Bank A/c Dr To Share capital A/c To Security premium A/c

With the amount received on re-issue With the amount credited as paid-up / called up With With the amount amount of prem premium ium on reissue

Re-issue of forfeited shares at discount: Bank A/c Dr Discount on shares A/c Share forfeiture A/c Dr To Share Capital A/c

Dr

With the amount received on re-issue With the amount of original discount With the excess of re-issue discount With the amount credited as paid-up / called up

15


Note: If after re-issue of shares there is still a profit, it should be credited to the Capital Reserve Account. F Following ollowing entry will be passed for this: Share forfeiture A/c Dr To Capital reserve A/c

Over subscription of issue: When the application received from the public are more than the shares issued by the company, this situation is called as over subscription of issue. The Board of Directors cann cannot ot allot allot sh shar ares es more more than than that that offe offere red d to the the publ public ic,, in su such ch a cond condit itio ion n the the Directors of the company make the allotment of shares on the basis of reasonable criteria. Any allotment to be made by the company in case of over subscription should be according to the scheme, which is finalized with the consultation of Security and Exchange Board of India (S.E.B.I.) The journal entry for application money will be passed for all the shares applied for, but while transferring the application money to share capital account, only the application money on shares issued will be considered. Following three alternatives are available to deal with the situation of oversubscription:

16


Alternati ve 1 To rejec ejectt the excess applicatio ns and to allot in full to other applicants

Course of action

Journal entry

Lett etter of regr egret along long Share applica application tion a/c Dr with the refund of To Bank A/c appl applic icat atio ion n Lette etters rs of regr egret along long with ith the the refun efund d of appli pplic catio ation n To Share capital A/c mone money y are are sent sent to the the appl applic ican ants ts of rejec ejecte ted d applications and letters of allo allotm tme ent are are sent ent to appli applica cant nts s of acce accept pted ed applications.

Alternati ve 2 To reje reject ct the excess applicatio ns and to allot in full to other applicants

Course of action Letters of allotment are sent to all the applic applicant ants s and exces excess s application money recei eceive ved d is adju adjust sted ed towa toward rds s the the amou amount nt due on allotment, calls of share shares s allott allotted ed and the balance application money left after adjustment will be refunded.

With the total amount received on application With the amount refunded on applications rejected With the application money on shares issued

Journal entry Share Share application application a/c Dr

A/c

A/c

With the total amount received on application To Share Share allot allotmen mentt With the amount retained for allotment With the amount retained To CallsCalls-inin-adva advance nce for calls With the amount refunded on applications rejected To Bank A/c

Course of Journal entry action Ay combi combinat nation ion Letters of Share Share application application a/c Dr of the above two regret regret along alternatives such with the To To Share Sha re allotment allot ment as: refund of A/c application To Calls-in-advance a) To reject mone oney are A/c some some of the the sent sent to the the To Bank A/c applications applicants a nd make of reje reject cted ed pro-rata applications allo allotm tmen entt to and and lett letter ers s remaining of allotment allotment applicants. are are sent sent to the b) To allot in full applicants to some of and and exce excess ss the application applicants money a nd make rece receiv ived ed is pro-rata adjusted allo allotm tmen entt to towards towards the remaining amount amount due applicants on Alternative 3

With the total amount received on application With ith the the amou amount nt reta retain ined ed for for allotment With ith the the amou amount nt reta retain ined ed for for calls With the amount refunded on applications rejected

17


c)

To rejectallotment, some some of the the calls of applications shares allotted and allot in full to allotted balance e some some of the the the balanc application applications oney lef left a nd make mone after pro-rata allo allotm tmen entt to adjustment will be remaining refunded applicants

Under subscription of issue: Shares are said to be under-subscribed when the number of shares applied for is less than the number of shares offered, but at least minimum subscription (According to the guidelines guidelines issued by S.E.B.I. S.E.B.I. minimum subscription subscription means ‘If the company does not receive a minimum subscription of 90% of the issued amount within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount’) is received. For example, in case has offered 5,000 shares to public but the public applied for 4,500 shares only, it is called a case of under-subscription. Journal entries are passed on the basis of shares applied for. for. Difference between over over-subscription -subscription and under-s under-subscription: ubscription:

Basis Shares applied Accep ccepttance ance

Refund

Minimum subscription

Under-subscription Number of shares applied is less than the shares offered for subscription. All All th the app applica licant nts s for for sha sharres are are acce accept pted ed,, i.e. i.e. full full allo allotm tmen entt is made. As all the applications are acce accept pted ed,, ther there e is no exce excess ss money to be refunded. The company may face the problem of ‘Minimum Subscription’.

Over-subscription Numb Number er of sh shar ares es appl applied ied is more more than the shares offered for subscription. All the applications are not accepted. Some Some are are rejec rejecte ted. d. Alte Altern rnat ativ ivel ely, y, shares are allotted on pro-rata basis. Exces Excess s applic applicatio ation n money money is to be refunded or adjusted towards allotment. The company does not face such a problem.

Private placement of shares: Accordin According g to Section 81 (1A) of the Companies Companies Act, 1956 private placement of shares implies issue and allotment of shares to a selected group of persons such U.T.I., L.I.C. etc. in other words; an issue which is not a public issue but offered to a select group of persons is called Private Placement of shares. Preferential allotment: A preferential allotment is one that is made at a pre-determined price to the preidentified people who wish to take a strategic stake in the company such as promoters, vent ventur ure e capi capita tali list sts, s, fina financ ncia iall inst instit itut utio ions ns,, buye buyers rs of comp compan anie ies s prod produc ucts ts ore ore its its suppliers. In other such a case, the allottees will not sell their securities in the open

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market for a minimum period of three years from the date of allotment. This period is known as the lock-in-period. The preferential allotment can take place only if three-fourths of the shareholders agree to the issue on preferential basis. S.E.B.I. has prescribed that the minimum price of such an issue has to be an average of highs and lows of the 26 week preceding the date on which the board resolves to make the preferential allotment. Employee stock option plan: In orde orderr to reta retain in high high calib caliber er empl employ oyees ees or to give give them them a sens sense e of belo belong nging ing,, companies companies may offer their equity equity shares to be purchased purchased at their will. Such scheme scheme is called called Employ Employee ee stock stock option option plan plan (ESOP (ESOP). ). Follo Followin wing g are are the the charac character terist istics ics of this this scheme: 1) ESOP ESOP impl implie ies s the the right right,, b but ut not not an an obli obliga gati tion on.. 2) The The employ employee ee has a right right to exer exerci cise se the opti option on of purch purchas ase e of share shares s within within the vesting period, i.e., the time period during which the scheme remains in operation. 3) Any An y share share issu issued ed unde underr the the sche scheme me of ESOP ESOP shall shall be lock locked-i ed-in n for for a minim inimum um period of one year from the date of allotment. Buy-back of shares: The term buy-back of share implies the act of purchasing its own shares by a company either from free reserves, securities premium or proceeds of any shares or securities. According to Section 77A of the Companies Act 1956, a company can buy its own shares either from the: a) Exis Existi ting ng equi equity ty shar shareh ehol olde ders rs on a prop propor orti tion onat ate e basis basis.. b) Open market c) Odd lot shareholders d) Emplo Employee yees s of the the compan company y pursuan pursuantt to a scheme scheme of of stock stock option option or or sweat sweat equity equity. Right shares: Under Under Sectio Section n 81 of the Companie Companies s Ac Act, t, the existin existing g shareh sharehold olders ers have have a right right to subscribe, in their existing proportion, to the fresh issue of capital or to reject the offer, or sell their rights. The existing existing shareholders shareholders can authorize authorize the company company by passing passing a special resolution to offer such shares to the public.

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Shares and share Capital

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