Issue of shares

ISSUE OF SHARES AT PREMIUM
Shares are issued At premium to the public by
well managed and financially strong companies
through the IPO.
Called Value > Face Value
Securities Premium A/c is made for this purpose.
This Premium can be called with any installment
like (Application, Allotment, Ist Call, IInd Call……)
In absence of information the amount of
Premium is to be recorded at the time Allotment.
A Presentation By Himanshu Arya,
2/11/2012 Daksh Professional Education Meerut 1
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ISSUE OF SHARES AT PREMIUM
 Securities Premium is a Capital Gain.
 It shows on Liabilities side under Reserve &
Surplus.
 To issue fully paid up bonus shares to the
shareholders.
 To Buy-back its on shares as per section 77A.
 To Write off:
 Preliminary Expenses.
 commission paid, Discount Allowed on issue of shares
or debentures.
 Premium on the Redemption of preference shares or
debentures.
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ISSUE OF SHARES AT DISCOUNT
Called Value < Face Value
 Section 79 provides the conditions to issue the shares at
discount:
 This class of shares has already been issued. OR A New
Company or New Class Shares cannot be issued at Discount.
 Authorised by an ordinary resolution passed by the company
in its General Meeting.
 Sanctioned by the Central Government.
 Issued within 2 months from the date of receiving sanction.
 Issued at least 1 year expiry of commence the business.
 Rate of Discount <= 10% of Nominal Value of Share
 It may be > 10% after the permission of Central Govt.

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For allotment money due excluding discount:
Share Allotment A/C Dr.
Discount on Issue of Shares A/C Dr.
To Share Capital A/C
For allotment money received:
Bank A/C Dr.
To Share Allotment A/C
Discount on shares is recorded at the time of
allotment by debiting “Discount on Issue of Shares
A/C”.
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 Discount Allowed on shares is a Capital Loss.
 It shows on the Assets side under Miscellaneous
Expenditure.
 It can be written off by:
 Capital Reserve (straight way)

 Securities Premium A/C (straight way)

 Profit & Loss A/C (gradually over the period of years)

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FORFEITURE OF SHARES
Shareholder fails to pay the called up money on
allotment & further calls.
Shares can be cancelled & amount already paid
may be forfeited.
SEBI guidelines- The subscription money must
be received within 12 months from the date of
allotment.
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.
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The name of the shareholder is removed from
the register of members.
Amount already received on these shares as
forfeited to the company.
The forfeited amount should be transferred to
newly opened “Share Forfeiture Account”.

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• Case 1 when shares are issued originally at
PAR or at PREMIMUM (RECEIVED)
Share Capital A/C Dr. (Called UP Money)
To Share Allotment A/c (Arrear on Allot)
To Share Calls in Arrear A/C (Arrear on Calls)
To Share Forfeiture A/C (Money Received)

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PREMIMUM (NOT RECEIVED)
Securities Premium A/C Dr. (Called UP Prem.)

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DISCOUNT
Discount on Issue of Shares Dr. (discount amount)

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RE-ISSUE OF FORFETED SHARES
• Case 1 when shares are Re-Issued at PAR

Bank A/C Dr.
To Share Capital A/c

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• Case 2 when shares are Re-Issued at
PREMIMUM

Bank A/C Dr.
To Share Capital A/c
To Securities Premium A/C

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• Case 3 when shares are Re-Issued at
DISCOUNT
Max Discount on Re-issue allowed:
Forfeited Amount – Discount Allowed on original issue

Discount = Original Issue Price – Re-issue Price
(10+2) – (10+1) = 1
(10+1) – (10-1) = 2
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• Case 3 when shares are Re-Issued at DISCOUNT
Bank A/C Dr.
Share Forfeiture A/c Dr.
To Share Capital A/C

Discount Amount will be Written Off from the
“Share Forfeiture A/C”

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• Transfer the Balance of Share Forfeiture A/C
The Balance must be Credit.

Share Forfeiture A/C Dr.
To Capital Reserve A/C

(The Forfeited Amount must be of the forfeited
shares which are Re-Issued to Transfer the CR
A/C)
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• CAPITAL RESERVE
 Originates from sources other than the regular activities of
the business.
 Created out of capital profit.
 Used to meet capital losses or to declare a bonus on shares.
Sources are:
 Profit on sale of a fixed asset.
 Profit on revaluation of assets and liabilities.
 Profit on forfeiture and re-issue of forfeited shares.
 Profit on redemption of debentures at a discount.
 Profit earned by a co. prior to its incorporation.

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OVER SUBSCRIPTION
Shares are issued to the public by well
managed and financially strong companies
through the IPO.
Over Subscription is a situation when
Shares applied > Shares Offered
The board of directors cannot allot shares
more than that offered to the public for
subscription.
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OVER SUBSCRIPTION
Three alternatives are available to the directors in
this situation.
Alternative 1:
Full Allotment to some Applicants and
Totally rejected the others.
Issued 20,000 shares
Offered 50,000 shares
Full Allotment to 20,000 applications.
Remaining 30,000 applications are rejected.
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OVER SUBSCRIPTION
• Accounting Treatment in the case of Alternative 1:

Share Application A/C Dr. (App. Money Received on total Apps)

To Share Capital A/C (App. Money Due on allotted Shares)

To Bank A/C (Refund excess Money for rejected apps)

 Due Application money is transferred to “Share Capital A/C”.
 Excess money of rejected applications is refund.

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OVER SUBSCRIPTION
Alternative 2:
 Pro-Rata Allotment
 It means the proportion is determined by the ratio which the
number of shares to be allotted bear to the number of shares
applied
Ratio = (20000:50000) OR (2:5)
20,000 applications are rejected.
Applicants who offered 500 shares got 200 shares.
So, Applicants may be allotted less number of shares than they have
applied for.

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OVER SUBSCRIPTION
• Accounting Treatment in the case of
Alternative 2:

To Share Allotment A/C (Adjusted excess money for allotment)
To Calls in Advance A/C (Adjusted excess money for calls)

 Excess money on application transferred to “Share Allotment A/C” and
the balance transferred to “Calls in Advance A/C”.

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OVER SUBSCRIPTION
Alternative 3:
 Combines Alternatives 1 & 2
 It means Full Allotment + Allotment on Pro-Rata basis
+ Full Rejections to others applicants.
20,000 applications are rejected.
Applicants who offered remaining 25,000 shares got
15000 shares on the basis of Proportion (15000:25000).
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OVER SUBSCRIPTION
• Accounting Treatment in the case of
Alternative 3:

To Share Allotment A/C (Adjusted excess money for allotment)
To Calls in Advance A/C (Adjusted excess money for calls)
To Bank A/C (Refund excess Money for rejected apps)

 Excess money on application transferred to “Share Allotment A/C” and the
balance transferred to “Calls in Advance A/C”.
 Excess money of rejected applications is refund.

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OVER SUBSCRIPTION
• Categorization of Applications
Disposition of Application Money Received
Categories Shares Shares App Share Share Calls in Refund
Applied Allotted Money Capital Allotment Advance
Received

<1000 5,000 0 25,000 - - - 25000
>=1000<2 20,000 20,000 1,00,000 1,00,000 - - -
000
>=2000 50,000 30,000 2,50,000 1,50,000 90,000 10,000 -
Company Demands: Application Rs. 5, Allotment Rs. 3 Calls Rs. 2

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UNDER SUBSCRIPTION
Over Subscription is a situation when
Shares applied < Shares Offered
The number of shares applied for is less than
shares offered to the public for subscription.
All the applications for shares are accepted.
Accounting entries are made on the basis of
number of shares applied for by the public
rather than shares offered for.
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RIGHT SHARES
 A Ltd. company already issued shares.
 A Ltd. Wishes to raise capital through the further issue of shares.

It comes under following legal obligation:
 Company has to First offer the fresh shares to its existing
shareholders. It means:
 Existing shareholders have Right to apply for these shares on
Priority Basis.
 Right Issue by 15 days notice.
 Right shares issue must not be opened more than 60 days
under SEBI guidelines.
 If existing shareholders are not interested, such remaining
right shares are offered to common public.
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RIGHT SHARES
Section 81 of the companies Act, 1956 provides
 If a Public Limited Company wishes to increase its
subscribed capital at any time, (after the expiry of 2 years
of the formation or after the expiry of 1 year from the First
Allotment of shares), whichever is earlier, by allotment of
further shares, then
 Such fresh shares shell be offered to the existing
shareholders of the company, in Proportion of their Equity
Holding on that date.
If a company which has already issued 3,00,000 shares wishes
to issue fresh 1,00,000 shares,
It shall have to offer the existing shareholders a Right to
subscribe for 1 NEW SHARE for every 3 OLD SHARES held.
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RIGHT SHARES
• Value of Right =
Market Price of a Share – Average Price of a Share
Where,

Average Price of a Share =
(Market Price of a Existing Share * No. of Shares held) + Issue Price of a Right share)
No. of Existing Shares + No. of Right Shares

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RIGHT SHARES
• Why A Company Go For Right Issue
 Raising of capital is more certain- than IPO.
 Improves the image of the company – shows the management
concern towards the shareholders.
 Provides opportunity- to the existing shareholders to invest in the
well conversant company.
 Expenses of Right issue is lower- than IPO.
 Right Shares are issued to existing shareholders in Proportion of
their Equity Holding, So It :
 Ensures directors do not misuse their position – to issue new shares
to their relatives/friends.
 Preserves the control of the company – in hands of the existing
shareholders.

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SWEAT EQUITY SHARES
 Issued by the company to its directors or employees at a
discount.
 Issued for consideration other than cash.
 Makes available rights to use intellectual property.
 Section 79A provides the conditions to issue Sweat Shares:
 Authorised by an special resolution passed by the company
in its General Meeting.
 Resolution specifies No. of Shares, Current Market Price,
Consideration, Classes of directors or employees.
 Issued at least 1 year expiry of commence the business.
 Shares are listed on a recognized stock exchange.

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Issue of shares

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Issue of shares