Accounting for Share Capital: Issues of Shares for Cash
A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,000 and is divided into 10,000 units of ₹100 each. Each unit of ₹100 will be called a share. To easily identify the shares, it is essential to give them numbers. The share of a company is moveable in nature and can be moved through the process stated by the Articles of Association of the Company.
According to Indian Companies Act, 2013, “Shares means shares in share capital of the company and includes stock except where the distinction between stock and share is expressed or implied.”
The capital raised by a company by way of issuing shares is known as Share Capital. In general, the share capital of a company is largely distributed. The minimum number of members in a private company is 2 and the maximum is 200. However, the minimum number of members required to incorporate a public company is 7 and there is no limit on the maximum number of members. A consolidated capital account, known as Share Capital Account consists of all the amount contributed by different individuals and institutions to the capital of the company.
A company can issue shares in two ways: For Cash-By Public Subscription of Shares and Consideration other than Cash.
Public Subscription of Shares:
When a company issues shares to the public, it has to take the following steps:
- Issue Prospectus
- Receive Applications
- Make Allotments
- Make Calls
1. Issue Prospectus:
For making an appeal to the public to subscribe for its shares, a Public Limited Company, limited by shares have to issue a prospectus. It is an invitation or a circular given to the general public to invest in the company or subscribe to its shares. The prospectus of a company consists of the following:
- Name and address of the registered office of the company
- Names and addresses of the directors
- Objects of the company
- Risks involved in the issue
- Consent from the Securities and Exchange Board of India (SEBI)
- Authorised and Issued Capital of the company
- Number of shares now offered for subscription
- Terms of the present issue
- Dates of opening and closing of the issue, etc.
2. Receive Application:
Once the public company has issued a prospectus to the public, it will receive applications on a prescribed form. The company will accept the application only when it is submitted along with the application money. The application money should not be less than 25% of the issue price per share. The public must deposit the amount of application money in a scheduled bank, mentioned by the company at the time of issuing the prospectus. Till the company has obtained the certificate of commencement, it cannot withdraw the application money from the bank. The minimum amount payable on the application of every share should not be less than 5% of the nominal value of the share.
3. Make Allotments:
After the last date for the application money fixed by the company expires, the bank sends all the applications to the company. However, unless the company has received a minimum subscription, it cannot go for allotment.
According to Section 39(1) of the Companies Act, 2013, a Company cannot allot any securities of the company to public unless the amount stated in the prospectus as the minimum amount has been received by the company by cheque or other instrument which has been paid.
Minimum Subscription is the amount, which according to the Directors is the minimum amount raised by the issue of shares so that it can provide:
- The price of any property purchased or to be purchased by the company
- The preliminary expenses payment (including underwriting, brokerage, and commission on the issue of shares)
- The repayment of any money that the company has borrowed for the matters mentioned in the last two points
- Working Capital
- Any other expenditure required to conduct usual business operations.
According to SEBI, if a company does not receive a minimum subscription of 90% of the net offer made to the public including the devolvement of underwriters within 60 days from the date of closure of the issue, it has to refund the entire amount received for a subscription.
There can also be a case where a company can receive applications more than it requires (Over-subscription of shares), For example: if ABC Ltd. invites applications for 10,000 shares through the issue of prospectus and receives applications for 50,000 shares, it means the issue has been oversubscribed by 5 times. In this case, ………………………….
If a company gets over subscription for the issued shares, it has to reject some applications in full, accept some partially, and accept some applications in full. The applicants who are allotted shares are sent a Letter of Allotment, which indicates the number of shares allotted and the amount due on allotment. However, the applicants who are not allotted shares are sent a Letter of Regret along with a cheque for the refund of the application money.
4. Make Calls:
Once the company has received application money and allotment money, it will call money in subsequent instalments as and when required, which are known as calls. A company can demand this amount in one instalment, say on the application itself. However, if the company has not fully called the whole amount on the application, the directors can call for the unpaid amount in one or more instalments. These instalments are named first call, second call, third call, and so on. The time interval between two consecutive calls should be at least one month. The company must make calls strictly in accordance with the provisions of the Articles of Association. If the AOA is not there, then it should apply the Provisions of Table F of Schedule I of the Companies Act, 2013. These provisions are as follows:
- If the total issue size of a company exceeds 250 crores, then the amount to be called up either on application, on the allotment, or calls shall not exceed 25% of the total quantum of the issue. Hence, if the company issues up to 250 crores, then it can call up the entire issue price on the application.
- A company with shares up to 500 crores should fully call up the amount on shares within a period of 12 months from the date of allotment.
- The time interval between two consecutive calls should be at least one month.
- The shareholders must be given notice of at least 14 days to pay the amount of the call.
The call letter of the company must specify the amount of the call, mode of remitting money, address to which call money is required to be sent, and the last date for sending the money.
The expenses incurred by a company for its establishment are known as Preliminary Expenses. The expenses included under preliminary expenses are as follows:
- Expenses incurred by the company at the time of registration for the preparation and printing of various documents.
- Cost of basic books of accounts and a common seal.
- Stamp duty and registration fees of such documents.
- Duty paid on authorised capital.
- Commission given to underwriters.
- Expenses paid on the preparation and printing of prospectus and issuing of shares.
According to AS-26, a company has to write off preliminary expenses in the year in which they are incurred, and should be written off from the Securities Premium Reserve Account. However, if there is no Securities Premium Reserve Account, then the company can write off preliminary expenses from General Reserve or from Surplus (Balance in Statement of Profit & Loss Account under ‘Reserves and Surplus’).
Accounting Entries on Issue of Shares:
1. Entries on Receiving Application Money:
The applicants who want to invest in a company deposit the application money directly in the bank. The bank
then sends the application forms to the company’s office.
A. For entry is made by the company on receiving the application money:
B. For Application money is transferred to Share Capital A/c (When a share application is accepted, it is an allotment of shares):
2. Entries on Allotment:
The applicants who are allotted shares are sent a letter of allotment. The letter consists of information regarding the number of shares allotted and the amount due to allotment. Once the allotment letter is sent to the applicants, the allotment money becomes due on the allotment and becomes a part of share capital.
A. For making allotment for money due:
B. For receipt of allotment money:
3. Entries on First Call:
A. For entry is passed for call money due:
B. For receipt of first call money:
4. Entries of Second and Final Call:
A. For the second call money due as follows:
B. For receipt of Second Call Money:
- While passing journal entries, it is essential to use words ‘equity’or ‘preference’ to address the share type. For example, Equity Share Allotment A/c, Preference Share Application A/c, Equity Share First Call A/c, Preference Share Second Call A/c, Equity Share Capital A/c, etc.
- The last call whether it is first or second, will be called the final call along with its serial number. For example, First & Final Call, Second & Final Call, etc.
Expenses on Issue of Shares:
A company incurs different types of expenses on the issue of shares. For example, stationery expenses, postage expenses, bank expenses, printing expenses, etc. The expenses incurred on the issue of shares are the capital expenditure of the company. Therefore, these expenses are written off from Securities Premium Account or Profit & Loss Account. Until the total amount of capital expenditure is written off by the company, the balance is shown on the asset side of the balance sheet under ‘Miscellaneous Expenses’ heading.
1. For payment of expenses on the issue of shares:
2. For writing off expenses on the issue of shares: