Issue of Shares

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Slide 1: 

Accounting for issue and forfeiture of shares

Introduction : 

Introduction A company form of business organisation is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. The companies in India are governed by the Indian Companies Act, 1956

Characteristics of Joint Stock Company : 

Characteristics of Joint Stock Company i. Legal formation : A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956. ii. Artificial person : Company is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person. iii. Separate legal entity Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. iv. Common seal A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level

Characteristics of Joint Stock Company : 

Characteristics of Joint Stock Company v. Perpetual existence A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. vi. Limited liability In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. vii. Democratic management Joint stock companies have democratic management .Normally, the shareholders elect representatives from among themselves known as ‘Directors’ to run the company

Types of Companies : 

Types of Companies i) Private Limited ii) Public Limited iii) Government iv) Indian Company v) Foreign Company vi) Multi-national company

Type of Companies : 

Type of Companies Private Limited Company These companies can be formed by at least two individuals having minimum paid–up capital of not less than Rs. 1 lakh. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50.

Public Limited Company : 

Public Limited Company A minimum of seven members are required to form a public limited company. It must have minimum paid–up capital of Rs 5 lakhs. There is no restriction on maximum number of members. The shares allotted to the members are freely transferable. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. These companies are required to write either ‘public limited’ or ‘limited’ after their names.

Difference between Private Limited and Public Limited Companies : 

Difference between Private Limited and Public Limited Companies 1. Minimum Paid-up Capital : A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000. 2. Minimum number of members : Minimum number of members required to form a private company is 2, whereas a Public Company requires at least 7 members. 3. Maximum number of members : Maximum number of members in a Private Company is restricted to 50, there is no restriction of maximum number of members in a Public Company. 4. Transferability of shares : There is complete restriction on the transferability of the shares of a Private Company through its Articles of Association , whereas there is no restriction on the transferability of the shares of a Public company.

Difference between Private Limited and Public Limited Companies : 

Difference between Private Limited and Public Limited Companies 5 .Issue of Prospectus : A Private Company is prohibited from inviting the public for subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus. 6. Number of Directors : A Private Company may have 2 directors to manage the affairs of the company, whereas a Public Company must have at least 3 directors. 7. Consent of the directors : There is no need to give the consent by the directors of a Private Company, whereas the Directors of a Public Company must have file with the Registrar a consent to act as Director of the company.

Difference between Private Limited and Public Limited Companies : 

Difference between Private Limited and Public Limited Companies 8. Qualification shares : The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company 9. Commencement of Business : A Private Company can commence its business immediately after its incorporation, whereas a Private Company cannot start its business until a Certificate to commencement of business is issued to it.

Difference between Private Limited and Public Limited Companies : 

Difference between Private Limited and Public Limited Companies 10. Further issue of shares : A Private Company need not offer the further issue of shares to its existing share holders, whereas a Public Company has to offer the further issue of shares to its existing share – holders as right shares. 11. Statutory meeting : A Private Company has no obligation to call the Statutory Meeting of the member, whereas of Public Company must call its statutory Meeting and file Statutory Report with the Register of Companies. 12. Quorum : The quorum in the case of a Private Company is TWO members present personally, whereas in the case of a Public Company FIVE members must be present personally to constitute quorum.

Difference between Private Limited and Public Limited Companies : 

Difference between Private Limited and Public Limited Companies 13. Managerial remuneration : Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. Whereas these restrictions do not apply on a Private Company. 14. Special privileges : A Private Company enjoys some special privileges, which are not available to a Public Company.

Types of Companies : 

Types of Companies iii) Government Company In these companies the Government (either state or central government or both) holds a majority share capital i.e., not less than 51%. However, companies having less than 51% share holding by the government can also be called Government companies provided control and management lies with the government. Examples of government companies are: Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited. iv) Indian Company A company having business operations in India and registered under the Indian Companies Act, 1956 is called Indian Company. An Indian company may be formed as a public limited, private limited or government company.

Types of Companies : 

Types of Companies v) Foreign Company A foreign company is a company formed and registered outside India having business operations in India. vi)Multi-national company Multi-national company is one which is registered as a company in one country but carries on business in a number of other countries by setting up factories, branches or subsidiary units. Example: Philips, Siemens, Hyundai, Coca Cola, Nestle, Sony, McDonald’s, Citibank, Nokia, etc

Share Capital : 

Share Capital SHARE CAPITAL: A share is a security which represents a portion of the owner’s capital in a business. Shareholders are the owners of the business. They share in the success or failure of the business. This can be measured by the amount of dividends that they receive and by the price of the share, quoted on the stock market . In the U.S., shares are referred to as common stock.

Types of Shares : 

Types of Shares Equity Share Capital (Also known as ordinary shares,) Ordinary shares give holders the rights of ownership in the company, such as the right to share in the profits, the right to vote in general meeting and to elect and dismiss directors; Obligations of ownership are also conferred and this may result in the loss of an investor’s money if the company is unsuccessful; Ordinary shares usually form the bulk of a company’s capital and have no special rights over other shares and in the event of liquidation, ordinary shares rank after all other liabilities of the company.

(2) Preference SharesShares which carry the right to dividend (normally fixed) which ranks for payment before that of ordinary shareholders;Preference shares may be preferred also as regards distribution of assets upon dissolution of the company;Generally carry no voting rights, but voting rights may be made contingent upon failure to pay dividends on preference shares for a certain period of time : 

(2) Preference SharesShares which carry the right to dividend (normally fixed) which ranks for payment before that of ordinary shareholders;Preference shares may be preferred also as regards distribution of assets upon dissolution of the company;Generally carry no voting rights, but voting rights may be made contingent upon failure to pay dividends on preference shares for a certain period of time

Types of Preference shares : 

Types of Preference shares (a) Participating preference shares are entitled to participate in the profits beyond the fixed dividends, by way of an additional fluctuating dividend if the company is successful. (b) Cumulative preference shares are preference shares which, apart from having a preferential right to receive a fixed dividend ahead of ordinary shares, also carry the right of any arrears of the preference dividends which may have built up. (c) Non-cumulative preference shares are preference shares which are not entitled to any arrears in dividends. (d) Redeemable preference shares may be redeemed by the company at a stated redemption price on advance notice of a period of time.

Slide 19: 

(e) Convertible preference shares are preference shares which carry the right to be made convertible, at the option of the holder, into another class of shares, normally into ordinary shares.

Types of Share Capital : 

Types of Share Capital Authorised Share Capital Issued Capital Subscribed Capital Called up Capital Paid up Capital

Types of Share Capital : 

Types of Share Capital 1. Nominal, Authorised or Registered Capital:- It is the maximum amount which the company is authorised to issue. Any company whether public or private cannot issue shares more than the amount of its authorized capital. This amount is stated in Memorandum of Association. 2. Issued Capital:- Issued Capital is a part of Nominal or Authorised Capital, which has been issued by the company for public subscription. A company cannot issue all of its authorised capital at once. It can never be more than Nominal Capital.

Types of Share Capital : 

Types of Share Capital 3. Subscribed Capital:- It is that part of Nominal Capital which has been actually subscribed by general public for cash or in kind. If the whole issued capital has been subscribed by the public, then issued capital becomes the subscribed capital. e.g. suppose if the issued capital is Rs.5,00,000 and the applications were received for only 4,00,000 shares, then Rs.4,00,000 would be the Subscribed Capital of the company.

Uncalled and paid up Share Capital : 

Uncalled and paid up Share Capital Shares can be issued to be paid in full or issued partly paid with the balance paid at a future date Amounts to be paid at a future date are referred to as calls A company’s share capital is also referred to as paid-up capital = number of shares issued by the amount that the directors require as payment of shares The amount not required for payment is referred to as the uncalled amount

Procedure for issuing shares under a prospectus : 

Procedure for issuing shares under a prospectus The Prospectus together with an application form is made available to the general public. Receiving applications alongwith the application money. Minimum subscription must be received before allotment Allotment of shares at director’s discretion Allotment advice is communicated to the applicant. Allotment monies may be required at this stage Making calls for payment of balance money, if any

Issue of SharesThe prospectus states the number of shares offered and the amount of application money required : 

Issue of SharesThe prospectus states the number of shares offered and the amount of application money required

Shares issued fully paid on application : 

Shares issued fully paid on application

Excess application money returned : 

Excess application money returned

Allotment of Shares : 

Allotment of Shares

Journal Entries on Call Payments : 

Journal Entries on Call Payments

Journal Entry on Call Money Received : 

Journal Entry on Call Money Received

Calls in arrears : 

Calls in arrears Call on shares is made Co may not receive all call monies owed Call account remains in a debit balance New account – Call in arrears and the above is transferred to this account Call in arrears = Shareholder equity account = reduction in share capital Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share reissued

Calls in Arrear : 

Calls in Arrear

Call Money received in advance : 

Call Money received in advance

Calls in advance adjusted : 

Calls in advance adjusted

Interest payable on Calls in advance : 

Interest payable on Calls in advance

Shares issued at Premium : 

Shares issued at Premium A company is allowed to issue shares at premium The amount of premium is transferred to “Share Premium A/c” The share premium amount can be utilized In writing off preliminary expenses For issue of shares as fully paid bonus shares For premium payable on redemption of preference shares In writing off any discount allowed on issue of shares/debentures In buying back its own securities

Shares issued at Premium : 

Shares issued at Premium

Shares Alloted at premium : 

Shares Alloted at premium

Case Study : 

Case Study Fashion Fabrics Ltd. issued 100000 shares of Rs.10 each on 1st April, 2006. The amount payable on these shares was as under: Rs 2 per share on application. Rs 3 per share on allotment. Rs 5 per share on call. Make journal entries and prepare relevant accounts in the books of company.

Shares issued at discount : 

Shares issued at discount Section 79 of Companies Act 1956 has laid down certain conditions subject to which a company can issue its shares at a discount. These conditions areas follows : (i) At least one year must have elapsed from the date of commencement of business; (ii) Such shares are of the same class as had already been issued; (iii) The company has sanctioned such issue by passing a resolution in its General meeting and the approval of the court is obtained. (iv) Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%, it will have to obtain the sanction of the Central Government.

Shares issued at Discount : 

Shares issued at Discount

Retention of excess application monies : 

Retention of excess application monies Prospectus issued calls for monies to be paid on application, allotment and future calls Some applicants may forward all monies in the hope that they receive preferential treatment. Co may choose to keep this money and allocate it against money owing on allotment and future calls Directors can only make this decision if allowed by Co constitution

Retention of excess application monies : 

Retention of excess application monies

Costs associated with share issue : 

Costs associated with share issue Preparation of prospectus Registration with SEBI Publication Receipt of money Issue of shares Including stamp duty and taxes, professional advisers’ fees, underwriting costs, commissions and brokerage fees The above “equity issue costs” must be recognized in equity Indirect costs are not included as transaction costs.

Costs associated with share issue : 

Costs associated with share issue

Issue of Bonus Shares : 

Issue of Bonus Shares Bonus Shares may be issued at par or at premium Before Bonus shares are issued all the existing shares must be either fully paid or made fully paid Whenever Bonus is declared Share Capital increases and Reserves decrease Declaration of Bonus is known as Capitalization of reserve

Sources of Declaration of Bonus : 

Sources of Declaration of Bonus P & L A/c credit balance General Reserve Capital Reserve Balance in Debenture Redemption or Sinking Fund Capital Redemption Reserve Share Premium A/c Capital Redemption Reserve & Share Premium A/c can be used only for issue of fully paid bonus shares and not for making partly paid shares fully paid

When Bonus is declared : 

When Bonus is declared

Bonus utilised for issue of Bonus Shares at Par : 

Bonus utilised for issue of Bonus Shares at Par

Bonus Utilised for issue of Bonus Shares at Par : 

Bonus Utilised for issue of Bonus Shares at Par

Bonus Utilised for issue of Bonus Shares at Premium : 

Bonus Utilised for issue of Bonus Shares at Premium

Forfeiture and Re-issue of shares : 

Forfeiture and Re-issue of shares By becoming a shareholder a person enters into a contract with the company that he is liable to pay full price of the share to the company from time to time and as and when the calls are made by the company If he fails to comply the company can forfeit his shares Forfeiting means taking back the shares without giving any compensation to the shareholder

Procedure : 

Procedure As per Articles of Association the company has power to forfeit the shares only for non payment of call money Notice to the defaulting shareholder sent warning him about the forfeiture of shares On shareholder’s failure to pay the amount due in time a resolution to forfeit the shares is passed by the directors

Forfeiture of shares issued at par : 

Forfeiture of shares issued at par Amount called up are debited to Share Capital A/c – Forfeiture means cancellation of shares and reduction in share capital Unpaid amount is credited to Share Allotment or Calls-in-Arrears A/c Amount received so far on forfeited shares is transferred to Shares Forfeited A/c

Forfeiture of shares issued at Par : 

Forfeiture of shares issued at Par

Forfeiture of shares issued at Premium : 

Forfeiture of shares issued at Premium

Forfeiture of shares issued at Discount : 

Forfeiture of shares issued at Discount

Reissue of shares at Par : 

Reissue of shares at Par

Re-issue of shares at Premium : 

Re-issue of shares at Premium

Re-issue of shares at Discount : 

Re-issue of shares at Discount

Profit on Re-issue : 

Profit on Re-issue Amt received originally on forfeited shares (Re-issued shares/ Forfeited shares) * 1 Discount on Re-issued shares = Paid up price less Re-issue price Profit on Re-issue = Amt forfeited less Discount

Bookbuilding : 

Bookbuilding Occurs where an investment banker solicits bids from institutional investors prior to pricing an equity issue

Stapled securities : 

Stapled securities Stapling is an arrangement under which different securities are quoted jointly

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