COMPANY ACCOUNTS - ISSUE OF SHARES

Definition of Company, Private Company and Public Company - From Book

Charateristics of Company ( Artificial person, Perpetual Succession,
Transferability of shares and limited liability) – From Book

MEANING OF SHARE –
A share is one of the units into which the capital of the company is divided. As per section 2(46)
of the Companies Act, “Share is the share in capital of a company and includes stock except
where a distinction between stock and share is expressed or implied.
The persons who contribute money through shares are called shareholders.
Shares are movable and transferable property.
 The amount of authorized capital, together with the number of shares in which it is divided,
is stated in the Memorandum of association but the classes of shares in which the company’s
capital is to be divided, alongwith their rights and obligations, are determined by the Articles
of Association of the company.

CLASSES OF SHARE
U/s 86 of the Companies Act, there are only two types of shares :-
(i) Preference shares
(ii) Equity shares
Preference shares : - According to section 85 a preference share is one which carries the
following two rights:
(a) A right to receive dividend at a fixed rate before any dividend is paid on equity shares.
(b) A right to receive repayment of capital on winding up before equity shareholders return.

TYPE OF PREFERENCE SHARES

On the basis of dividend :-
☼ Cumulative Preference Shares: - The arrears of dividend on these shares are shown as
contingent liability. In India a preference share is always cumulative unless specifically
mentioned otherwise. In case, the dividend on these shares remain in arrears for an aggregate
period of not less than two years, holders of such shares will be entitled to take part and vote
on every resolution in the general meeting.

☼ Non - cumulative Preference Shares: - In case the dividend on these shares remain in
arrears for a period of not less than two years immediately preceeding the meeting or for any
three years during a period of six years ending with a expiry of six years holders of such

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 shares will be entitled to take part and vote on every resolution at every meeting of the
shareholders.
On the basis of Participation:-
☼ Participating Preference Shares :- is that type of Preference Share which, in addition to
two basic preferential rights, also carries one or more of the following rights as per Articles:
(a) A right to participate in the surplus profits left after paying dividend to equity
shareholders at a stipulated rate.
(b) A right to participate in the surplus assets left after the repayment of capital to equity
shareholders on the winding up of the company.
☼ Non-Participating Preference Shares
On the basis of redemption:-
☼ Redeemable Preference Shares:- redeemable in accordance with the provisions of Sec.80
and Sec 80A of the Companies Act, 1956
☼ Irredeemable Preference Shares: -
On the basis of Convertibility:-
☼ Convertible Preference Shares: -
☼ Non-Convertible Preference Shares:-

Unless and otherwise it is mentioned Preference Shares are Cummulative, Non-

participating, Redeemable and Non-Convertible.

Equity Share: - An equity share is a share which is not a preference share. Means share which
does not enjoy the right to dividend and return of capital as preference shares, are equity shares.

KINDS OF SHARE CAPITAL

Share capital account:
It is a common pool in which contributions as capital from owners of company is received due
to large number of owners it is not possible to keep individual capital accounts. Therefore a
common account is maintained.

☼ Authorised Share Capital:- It is the maximum amount of share capital that a company can
issue. It is stated in Memorandum of Association of company. It is also called registered
capital of the company because registration fees is to be paid on this amount of capital. The
Authorised capital can be increased or decreased in accordance with the provisions of
Section 94 of the Companies Act, 1956. This capital is also called Nominal Capital.

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☼ Reserve Capital: - According to section 99 a company may reserve a portion of its uncalled
capital to be called only in the event of winding up of the company. Such uncalled amount is
called Reserve capital of the company. It is available only for the creditors on winding up of
the company.
☼ Calls in Arrear: - It often happens that some shareholders fail to pay the amount of
allotment or call when it becomes due. This is known as calls in arrear. At the end of
accounting period, the amount outstanding on calls is transferred to calls in arrear account.
The company is authorized to charge interest on calls in arrear at the specified rate in
Articles, but if the articles are silent than Table A will be applicable, according to which
interest at the rate of 5% per annum shall be charged. The amount of calls in arrear is shown
by way of deduction from the called up capital in the Balance Sheet.
☼ Calls in Advance: - A shareholder may sometime pay a part or whole, of the amount not yet
called upon his shares in order to save himself the trouble of paying different calls at
different times. This amount of future calls received by the company received is called calls
in advance. Under section 92 of the Companies Act, a company can only accept advance
calls when it is so authorized by its Articles of Association. The Board may pay interest on
calls in advance at a specified rate in Articles, but if the articles are silent than Table A will
be applicable, according to which interest at the rate not exceeding 6% per annum shall be
paid. The amount of calls in advance is shown separately on the liabilities side under the
head Share Capital but it is not added to the amount of paid up capital.

ISSUE OF SHARES
Shares may be issued in any of the following ways:
(i) For Cash: By Private placement of shares
(ii) For Cash: By Public Subscription of shares
(iii) For consideration other than cash

 Public Subscription of shares: - By making an offer, inviting the public in general to

subscribe to shares is also known as Initial Public Offer (IPO).
Following steps are taken for issue of shares to public:
To Issue Prospectus
To Receive Applications
To Make Allotments
To Make Calls

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To Issue Prospectus
Prospectus is an invitation to the public to purchase its shares. It describes the profitability and
soundness of the business of the company to attract the investing public.
In response to above invitation public propose to purchase shares. It is dome through scheduled
Bank after minimum 4 days after the issue of prospectus. This is called opening of subscription.

To Receive Applications
After reading the prospectus the public applies for shares in the company on a prescribed form.
Each application must accompany with application money which should not be less than 5% of
the face value of each share [section 69(3)]. The amount of share application money should must
be deposited by the public in a Scheduled Bank. The name of the company’s Scheduled Bank is
also mentioned in the prospectus. The company cannot withdraw this amount from the bank till
the certificate of commencement of business has been obtained by it.
However as per SEBI guidelines, the minimum application money must be at least 25% of the
issue price and minimum application value must be within the range of Rs.5,000 to Rs.7,000.
Generally subscription to the issue is kept open for 2 weeks. However according to law it must
be kept open for at least three working days. Subscription on basis of number of application
received can be of three types:
(a) Under Subscription: - When number of applications received is less than number of shares
issued.
(b) Over subscription: - When number of application received is more than number of shares
issued. This happens in respect of those companies, which are financially strong and well
managed.
(c) Full Subscription: - When number of applications is equal to number of shares issued, this
situation is not however practical.

To Make Allotments
Allotment is an acceptance by the company of the offer made by an applicant. It means the
appropriation out of the previously inappropriate capital of the company, of a certain number of
shares to a person. It is on allotment that shares come into existence.
After the last date fixed for receipt of application money expires, the Bank sends all applications
to the company. Section 69(1) of Companies act provides that the directors of the company
cannot proceeds to allot shares unless Certificate for Commencement of Business and
Minimum Subscription has been received by the company.
According to SEBI minimum subscription has been fixed at 90% of the issued amount. The
company has to get minimum subscription within 120 days from the date of issue of the
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prospectus. If company fails to get minimum subscription than entire application money is to be
returned back within 130 days from the date of issue of the prospectus. If there is delay in
refund by more than 8 days than interest @ 15% per annum is to be paid for the delayed
period.
Those who are allotted shares letters of allotment are sent to them and for those shares are not
allotted letters of regret are sent along with a Cheque for the refund of application money.

To Make Calls
A company may demand the whole money on application and allotment, but if not than unpaid
amount can be called by company in one or more installment. Each installment is called as first
call, second call etc. Calls must be made strictly accordance to Articles of Association. In
absence of Articles of Association the provisions of Table A will be applicable. These
provisions are –
(1) All amounts on shares should be fully called within a period of 12 months from the date
of allotment. However this guideline does not apply to issue of Rs.500 crores or above.
(2) There must be an interval of atleast one month between the making of two calls.
(3) At least fourteen days notice must be given to the shareholders to pay the amount of call.
Share Application, Share Allotment and Share Calls accounts are Personal Accounts.
Rule :- Dr. Receiver; Cr. Giver
Important –
Ÿ It should be noted that the application money received will remain in share application
account till the board of directors approve the allotment of shares. Board of directors will
cannot approve until Minimum Subscription is received. After approval, it will be treated
as a part of share capital.
Ÿ In case nothing is mentioned regarding the class of shares issued, they are always treated
as equity shares.
Ÿ The term Securities Premium has been used instead of Share Premium in accordance
with the provision of Companies (amendment) Act,1999.
Ÿ No dividend is payable on calls in advance since it is not a part of share capital. Interest
on calls in advance is a charge against the profits and hence it is to be paid whether there
are profits or not.
Ÿ When company maintains three columnar cashbook than entries relating to Bank are not
passed, because cashbook is subsidiary book of journal and in three columnar cashbook
there is also Bank column.

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 Shares can be issued at par, premium or discount.
 At Premium – Since the company has inherent power to issue shares at a premium,
it can issue shares at a premium in absence of any express authority in its articles.
 Section 77A and 78 from book in reference of use of premium money. (to be
prepared from book)
 At Discount – certain conditions to be fulfilled for issuing shares at discount given
in section 79 (to be prepared from book)

Over Subscription :-
Shares are said to be over subscribed when the numbers of shares applied for is more than the
number of shares offered for issue by the company. However allotment can be made only to
those number of shares that are issued.
There are three options regarding share allotment in case of over subscription:-
(a) Refusal of excess applications
(b) Prorata allotment
(c) Full allotment to some applications, prorata to others and no allotment to the rest.
DISTINCTION BETWEEN OVER AND UNDER SUBSCRITION
BASIS OVER SUBSCRIPTION UNDER SUBSCRIPTION
1. No. of shares applied In case of over subscription, In case of under subscription
as compared to no. of number of shares applied for is number of shares applied for is
shares offered more than the number of shares less than the number of shares
offered by the company. offered by the company.
2. Acceptance of all All applications are not accepted All applications are accepted in
applications in full full.
3. Problem of minimum This problem does not arise at If the minimum subscription has
subscription when all. not been subscribed, all
shares are issued for the application money may be
first time. required to be returned.
4. Return of money if The company returns the money The question of returning money
minimum subscription to the applicants whose does not arise at all.
has been received. applications have been either
been rejected or have been
accepted partially.

In case of over subscription following table will ease calculation.

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 Analysis Table
1 2 3 4 5 6 7
Share Application Share Amount Amount Excess ADJUSTMENT OF
Issued received allotted received due EXCESS
Allotment Call

Refund

Explanation of above columns:

Column 1- In this column number of shares issued by company is recorded.
Column 2- In this column application received according to category in which allotments are
made is recorded.
Column 3- Shares allotted are recorded category wise.
Column 4- Amount received = Number of applications X Application money
Column 5- Amount due = Number of shares allotted X Application money
Column 6- Excess = Amount received – Amount due
Column 7- In this Column adjustments relating to excess amount are recorded. Money on such
applications which are fully rejected is refunded.

SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH

When the company purchases some assets (including services), instead of making the payment
to the supplier in the form of cash, it issues its fully paid shares, such issue of shares is called as
the issue of shares for consideration other than cash.
 If the amount of purchase consideration is greater than the value of assets acquired than the
difference should be debited to Goodwill Account. If the amount of purchase consideration
is lower than the value of net assets acquired, the difference should be credited to Capital
Reserve Account.
There are two situations when shares are issued for consideration other than cash.
When any assets is purchased and in consideration shares are issued
(2) Issue of shares to promoters for consideration other than cash.

PRIVATE PLACEMENT OF SHARES [Section 81(1A)]

 Sometimes the promoters of a public company are confident of raising capital through
private sources and contacts. In such a case the company does not invite public to subscribe
its shares, but make private placement of its shares to promoters, their friends, relatives,
shareholders of group companies, mutual funds, non resident Indians, financial institutions
etc. When the shares are not offered to public company need not to issue prospectus. Instead
of it statement in lieu of prospectus must be filed with Registrar of companies at least 3 days
before the first allotment of either shares or debentures. In case of private placement of
shares, the allottees will not sell their shares for a minimum period of three years from the
date of allotment. This period is known as lock in period.

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  Sweat Equity Shares: - These shares are issued by the company to its employees or
directors at discount or for consideration other than cash for providing know-how or making
available intellectual property rights. According to section 79A of the Companies Act, a
Company may issue sweat equity shares of a class of shares already issued, if the following
conditions are fulfilled, namely :
(a) The issue should be authorized by a special resolution passed at general meeting.
(b) Not less than one year has elapsed since the date on which athe company was entitled to
commence business;
(c) The sweat equity shares of a company whose equity shares are listed on recognized stock
exchange, are issued in accordance with the regulations made by the SEBI in this behalf.
(d) Such shares cannot be resold by their holders within a period on one year, called lock in
period.
The entries for issue of sweat equity shares are the same as for issue of other equity shares.

 Employees Stock Option Plan or Scheme (ESOP or ESOS): - This scheme was
introduced by the Companies (Amendment) Act, 2000 through section 2 (15A). Employees
stock option means the option (right and not the obligation) given to the whole time director,
officers and employees right to purchase or subscribe at a future date, the securities offered
by the company at the predetermined price, which usually is lower then market price. Share
allotted under this scheme are having a lock in period of one year from the date of allotment.
Objectives or importance of ESOP –
a) Its main objective is to inspire employees to have a higher participation in company.
b) ESOP is also a means to attract, retain and motivate the good and efficient employees.
c) Its another object is to create long term wealth in the hands of the company.
Who is eligible to participate in ESOS ?
Only an employee shall be eligible to participate in ESOS. The term employee include –
Ÿ Permanent employee of the company working in India or outside India.
Ÿ Director of the company whether a whole time or part time,
Ÿ Employee of a subsidiary or a holding company of the company.
Vesting Period –
Vesting period is the time period during which the ESOS remains in operation and the
employee has a right to exercise the option of purchase of shares. Vesting is the process by
which an employee gets the right to apply for shares against the option given under ESOS.
According to SEBI guidelines, there must be a minimum period of 1 year between the grant

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 of option and vesting the option. Employees have no right to dividends or to vote to any
other shareholders benefit till shares are issued on exercise of the option.

 Employees Stock Purchase Scheme (ESPS): - ESPS means a scheme under which a
company offers shares to its employees as part of a public issue or otherwise.
Accounting treatment: - Following journal entry is passed :
Bank a/c Dr. [Issue price X No. of shares]
Employee compensation expenses Dr. [Accounting value of options]
To Share Capital [No. of shares X Face value]
To Securities Premium [No. of shares X Market price – Face value]

 Preferential Allotment: - It is one that is made at a predetermined price to the pre –

identified peoples who wish to take a strategic stake in the company such as promoters,
venture capitalists, financial institutions, buyers of companies products or its suppliers.
Guidelines as to preferential allotment :
(a) Lock in period – The allottees will not sell their securities in the open market for a
minimum period of three years from the date of allotment.
(b) Special Resolution – The preferential allotment can take place only if three fourth of
shareholders agree to the issue on preferential basis.
(c) Minimum issue price – The minimum price of such an issue has to be an average of
highs and lows of the 26 weeks preceeding the date on which the Board resolves to make
the preferential allotment.

 Right Shares : - Section 81 gives pre – emptive right to existing equity shareholders in case
of further issue of shares. Pre – emptive right means that further shares must be offered to
the existing shareholders in proportion as nearly as the circumstances admit to the capital
paid up on those shares at that date. Such shares are called Right Shares. Pre – emptive right
is available only when it is proposed to increase the subscribe capital of the company by
allotment of further shares at any time after the expiry of two years from the formation of the
company or after the expiry of one year from the first allotment of shares, whichever is
earlier.

FORFEITURE OF SHARES

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Forfeiture means cancellation of allotment. In case if shareholder fails to pay amount due on
shares than director may at any time by following the procedure given in Articles or Table A as
the case may be proceed to forfeit the shares. When shares are forfeited, name of shareholder is
removed from the register of members and the amount paid by him on those shares is forfeited
by company. Shares can be forfeited at any time after allotment

REISSUE OF FORFEITED SHARES

A company can reissue such shares, which were earlier forfeited due to non-payment of
allotment and or calls as and when it finds suitable and convenient. However following points
are important for dealing with reissue of forfeited shares:
1. The company has liberty to reissue them at any price it likes, but it should not be less than
face value less amount already collected from the defaulting member. For example, if a share of
Rs.10 was forfeited on which Rs.6 was received than it should not be reissued for less than Rs.4
(10 – 6).
2. When the shares which are forfeited were originally issued at discount than at the time of their
reissue that discount should again be reinstated in books, so that the discount on shares will
remain in proportion to the shares actually issued. In this case minimum price on which share
can be reissued can be calculated by subtracting discount and amount already received from
defaulting shareholder from face value of share. For example if a share of Rs.10 is forfeited
which was issued at a discount of 10% an on which Rs.6 were received than it should not be
reissued for less than Rs.3 (10 – 6 – 1).
To Prepare from Text Book –
Buy back of shares
Escrow account
Difference between Capital Reserve & Reserve Capital
Difference between Equity Shares & Preference Shares
Difference between Partnership and Company
Difference between Private Company and Public Company
Procedure of forfeiture

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 Reservation for small individual applicants:
In case of over subscription, the allotment shall be made on proportionate basis subject to the
reservation for small individual applicants. Following are the rule for this:-
(i) A minimum of 50% of the net public offer to be reserved for allotment to individual
applicants who have applied for allotment equal to or less than 10 marketable lots of
shares or debentures or other securities offered.
(ii) SEBI in this regard has clarified that a minimum of 50% means that if the above
mentioned individual applicants in accordance with the proportionate formula are
entitled to get 70%, they would get 70% and not 50%. On the other hand if they are
entitled to only 30% as per the proportionate formula, they would be given 50% of the
net offer to the public.

Minimum Tradable Lot-

The minimum tradable lot, in case of shares of face value of Rs.10 shall at the option of the
issuer / offerer, be fixed on the basis of offer price as given below, provided that the minimum
tradable lot in any case shall not exceed 100 shares.
Offer Price per share Minimum
Tradable Lot
Upto Rs.100 100 Shares
Rs.101 – Rs.400 50 Shares
More than Rs.400 10 Shares
Shares allotted to an applicant cannot be less than tradable lot.
(i)

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

(e) Private Placement of Shares: -

(f) Sweat Equity Shares: -

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