ISSUE, FORFEITURE AND REISSUE OF SHARES PART-1/2
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ISSUE, FORFEITURE AND REISSUE OF SHARES
PART-1/2
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Issue, Forfeiture and Reissue of Shares
Meaning and Definition of Company
Company is a voluntary association of persons created by law usually for the purpose ISSUE, FORFEITURE AND REISSUE OF SHARESor carrying on some business for profit. with perpetual succession and common seal.
In the words of Haney. “A company is an artificial person, created by law, having a separate entity with a perpetual succession and a common seal.”
Section 3 (1) () of the Indian Companies Act, 1956 defined a company as “a company formed and registered under this Act, or an existing company.” An existing company means a company formed and registered under any of the former Companies Act. Thus, a company is an artificial person, invisible and existing only in contemplation of the law. Its main features are as follows:
(1) Voluntary Association – It is a voluntary association of persons usually for profit.
(2) Created by Law – A company gets its existence according to some law.
(3) Artificial Person – It is an artificial person and acts through human beings who are called directors.
(4) Separate Entity – A company is a separate legal entity, it is independent of its members and its existence is not affected by the change of its members. It can claim and be sued on its own name.
(5) Perpetual Succession – Its life is not affected by the life of its members.
(6) Common Seal – The company has its common seal. Only those documents can be said to belong to the company which contain its common seal.
(7) Limited Liability – Most of the companies are limited companies. The liability of the members of such companies is limited by the unpaid amount on their shareholdings.
Share Capital of a Company
The capital of a company is divided into units of small denomination. Each unit is called a share. A company collects capital by selling its shares in the public. The person who takes share/shares of the company is called the member or shareholder of the company. Shareholders are the real owners of the company. The Institute of Chartered Accountants of India defines the term share capital as “the aggregate amount of money paid or credited as paid on the shares and/or stocks of a corporate enterprise”. For accounting purposes, the share capital of a company can be divided into the following categories:
1 Authorised Capital – It is the maximum amount of the share capital, set out in the memorandum of association of the company, which the company is entitled to issue. It is that amount by which the company is registered and on the basis of which its registered fees is paid. This sets out a limit beyond which a company can not issue its shares to the public. Authorised capital is also termed as ‘registered capital’ or ‘nominal capital’. The amount of authorised capital is not included in the sum of balance sheet and hence a line is sketched below its amount
2. Issued Capital-It refers to the nominal value of that part of the authorised capital which has actually been offered for subscription. It also includes-bonus-shares and shares issued for consideration other than cash. It sets out the limit or the amount receivable from share issue. Like authorised capital this capital is also demarcated from other amounts of balance sheet by sketching a line below its amount.
3. Subseribed Capital – It refers to the nominal value of that part of issued capital which has actually been subscribed and allotted. If the public has fully subscribed the offer of the company, then issued and subscribed capitals can be shown in the balance sheet under one head as ” Issued and Subscribed Capital”.
Note : (i) Shares issued as bonus shares and shares issued for consideration other than cash should be separately stated under this heading.
(ii) Where the public has fully subscribed the offer of the company, the amounts of issued and subscribed capitals will be the same and so they can be shown in the balance sheet under one head as “Issued and Subscribed Capital”.
(iii) Where shares have been forfeited for non-payment of calls then the issued and subscribed pals will differ. In such a case, the subscribed capital shall be reduced by the number and the value of shares forfeited
4. Called-up Capital – (It is that portion of subscribed capital which the shareholders are called upon to pay on the shares allotted to them
Note: The amount of the share premiun is not a part of the called up share capital but discount on shares is a part of called up capital.
5. Paid-up Capital – It refers to that part of the called up capital which has actually been paid by the shareholders. In case of calls – in – arrear the amount of calls – in – arrear is deducted from the called up capital to arrive at the figure of paid up capital. This is the actual capital of the company and is included in the total of balance sheet.
It is important to note that Part I of Schedule VI of Companies Act, 1956 requires to classify the share capital of a company into three categories only: Authorised, Issued and Subscribed
Reserve Capital – It is that part of the uncalled share capital which a limited liability company has resolved by special resolution, not to call up in its life span. This capital can be called up only in the event of winding up of the company. Thus, it is in the nature of guarantee fund for the creditors on the winding up of the company. Under Section 99 of the Companies Act the word ‘reserve capital has been substituted by the more accurate expression: “reserve liability of limited company”.
Illustration 1. A company was registered with a capital of Rs. 20,00,000, divided into shares of Rs. 100 each. The company issued 12,000 shares, on which Rs. 80 per share had been called up. All shareholders paid the amount with the exception of a call of Rs. 20 on 1,000 shares. Besides, the company issued 3,000 shares as fully paid to the vendor in exchange of machineries. How will you show this information in the Balance Sheet of the company
Issue Forfeiture Reissue Shares
Issue Forfeiture Reissue Shares
Classes of Shares
Section 2(46) of the Companies Act, 1956 defines a share as “a share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”. The Companies Act provides for three classes of shares viz., preference shares, equity shares and deferred shares. However. the companies formed after the commencement of this Act are allowed to issue only preference and equity shares.
(1) Preference Shares – The Act defines preference share capital as that part of the share capital which carries preferential rights as to-i) the payment of dividend at a fixed rate, and (ii) the return of capital on winding up of the company. It may be remembered that the preference shareholders can enforce their right of getting dividend prior to equity shareholders only when the directors declare the dividend.
Classes of Preference Shares – The preference shares are sub-divided as follows:
Cumulative and Non-Cumulative Preference Shares – The term ‘cumulative’ implies that the amount Fixed dividend which the preference shares carry, accumulates if it is not paid in any year or years and such dividend must be paid out of the profits of the subsequent years before dividend is paid to the equity shareholders. Such arrears of preference dividend are shown in the Balance Sheet by way of note under the heading ‘Contingent Liabilities’. Unless Articles provide otherwise, a preference share is deemed to be cumulative.
A non-cumulative preference share is that share on which arrears of dividend do not accumulate. If dividend is not paid for any year, the right to receive dividend for that year lapses.
(ii) Redeemable and Irredeemable Preference Shares – Redeemable preference shares are those the amount of which will be repaid on or after a certain date as per the terms of their issue. On the other hand, irredeemable preference shares are those which can not be redeemed except in the case of winding of the company. After commencement of the Companies (Amendment) Act, 1988 no company limited by shares can issue irredeemable preference shares. Companies (Amendment) Act, 1996 which is effective since 1-3-1997 provides that no company can issue redeemable preference shares which are redeemable after 20 years of their issue.
(iii) Convertible and Non-Convertible Preference Shares – A convertible preference share is that which can be converted into equity shares while a non-convertible preference share is that which does not possess such right. Unless stated otherwise, a preference share is deemed to be non-convertible.
(iv) Participating and Non-Participating Preference Shares – Participating preference shares are those which in addition to receiving dividend at a fixed rate, also carry a right of sharing with equity shares in any (1) surplus profits left after paying a specified equity dividend and/or (ii) surplus assets remained after the entire capital has been repaid on winding up of the company. Non-participating preference shares on the other hand, are those which do not carry such right. Unless stated otherwise, a preference share is deemed to be non -participating
(2) Equity or Ordinary Shares – According to Section 85 of Companies Act, an equtiy share is a share. which is not a preference share. That is to say, if a share does not possess the preferential right as to payment of dividend or repayment of capital, such share is called an equity share. Thus, equity shareholders get dividend and repayment of capital after meeting the claims of preferential shareholders. An equity share carries voting right.
(3) Deferred Shares – A deferred share is that which ranks for dividend only after the equity shares have received dividend at some specified maximum rate. These shares are generally of small nominal value but carry the right to receive a considerable proportion of the surplus profits and also extensive voting powers. Seldom created now-a-days, these shares were often issued to promoters of the company and sometimes to the vendors. After the commencement of Companies Act, 1956, these shares now can be issued by independent private companies only.
Issue of Shares
A company can issue its shares (i) for cash and (ii) for consideration other than cash.
Shares Issued For Cash
Shares can be issued for cash to friends, relatives, important financial organizations and to public. A private company usually issues shares informally, by personal contact between the directors and the prospective -often existing-shareholders. No notice or circular etc. is issued by such companies. A contract is executed, consideration passes, share certificates are made out and records made in the company’s books. The Registrar of Companies is informed by filing him the return of allotment within 30 days after allotment.
In the case of a public company, a large amount of capital is required. It is therefore, necessary for such companies to make public issue of their share capital. The following procedure is followed by these companies :
(1) Issue of Prospectus – First of all, the company issues a prospectus which is an invitation to the general public to apply for its shares. The main contents of prospectus are usually advertised in leading newspapers , radio and T.V. for the information of general public. The prospectus gives information about the company and the terms of issue. The Companies Act has laid down the details of contents which must be included in the prospectus. Besides other information, it states the number and types of shares offered for issue, the minimum subscription, the date of opening and closure of the lists and the mode of payment
(2) Receipt of Applications – After the issue of prospectus the intending shareholder is required to deposit his application form duly filled alongwith the application money with the prescribed scheduled bank.
(3) of the Companies Act, application money can not be less than 5% of the face value of the share. However, according to SEBI guidelines dated 6-3-1995 the minimum application money to be paid shall not be less than 25% of the issue price. These guidelines also provide that where on application and on allotment an amount exceeding Rs. 250 crores is raised the amount to be called up on application allotment and on various calls shall not exceed 25% of the total quantam of issue. It, therefore, follows that for issues on less than Rs. 250 crores, the issuer company is permitted to call up entire issue price on application set. For the issues of less than Rs. 500 crores the issue amount should be fully called up within a period of 12 months from the date of allotment. For the issues of Rs. 500 crores and above the issue price can be fully called up within the said period only after the financial institutions are satisfied about the utilisation of the issue proceeds.
After the close of subscription list, (which can not be less than 3 days after the opening of subscription list and the subscription list can not be considered open prior to the beginning of the fifth day after the date of first publication of prospectus), the bankers forward all the applications alongwith the application money to the company. The company ultimately records these in the “Application and Allotment Book.”
Section 69 (5) of the Companies Act requires that the amount received on applications for shares has to be kept in a Scheduled Bank till the minimum subscription as laid down in the prospectus is raised and till cerificate of commencement of business obtained, in case of a new company. If the company fails to raise the minimum subscription within 120 days of issue of prospectus, the whole of the application money received has to be refunded to the applicants within the next ten days. Failing this, the directors of the company shall be jointly and severally liable to repay the money with interest at the rate of 6 percent per annum from the expiry of 130th day. As per SEBI guidelines, if the company does not receive 90% of the issued amount from public subscription including accepted devolvement from underwriters, if any, within 60 days from the date of closure of the issue, the amount of subscription received is required to be refunded.
In terms of Section 73(2) and (2A), the company should refund the excess application money after adjusting the allotment call within 10 weeks of closing of the subscription list and pay interest @ 15% p.a. if refunds are delayed by more than 8 days after this period.
(3) Allotment of Shares – After satisfying the conditions laid down in Section 69 and 70 of the Companies Act, the Board of Directors meets and allots the shares. If the number of shares applied for falls short of the number of shares offered, the allotment can be made only for the shares applied for , provided minimum subscription has been received. But if the number of shares applied for exceeds the number of shares offered, the Board of Directors must set a criterion for allotment. Directors have discretionary power either to reject or to accept partially the applications.
On the shares being allotted, a letter known as “the letter of allotment” is sent by the company to each allottee informing him of the number of shares allotted and asking him to pay the allotment money due from him, by a specified date. The allotment money becomes due immediately after allotment is made. On dispatch of the letter of allotment, an applicant becomes the bonafide shareholder of the company. On receipt of this letter, the allottees will forward to the company the amount due on allotment which will be recorded in the Application and Allotment Book. Where no allotment is made to an applicant, a letter of regret” is sent to him alongwith refund of his application money.
(4) Calls on Shares – The entire share money may be payable either in a lump sum alongwith the application money or in instalments. If the amount is payable in instalments, the amount payable alongwith application is known as application money, the amount payable on allotment as allotment money and the remainder is known as call money. If the balance due is collected in more than one instalment, the instalments are known as the first call, the second call and so on, the last call being termed as the final call. Calls are made by the directors on specified dates fixed by its Articles. If the Articles are silent in this respect, the provisions laid down in Table A shall apply. Table A imposes the following restrictions:
(i) a period of one month must elapse before another call is made;
(ii) The amount of the call should not exceed 25% of the face value of the share: and
(iii) fourteen days notice is given to the shareholders to pay the amount.
According to Section 91 of Comapnies Act, calls must be made on a uniform basis on all shares within the same class. Particulars of each call are entered in “Share Call Book”
Note: Where both the equity and the preference shares are issued, separate application and allotment. call and capital accounts are maintained in respect of the two classes of shares.
Application and Allotment Account-As application and allotment both calls are due on the date of allotment of shares, some accountants do not open separate application and allotment accounts, but make entries regarding both in one account called ” Application and Allotment Account”. If this procedure is adopted, journal entries regarding application and allotment moneys in illustration 2 will be as follows:
Preparation of Cash Book – When shares (or debentures) are issued, it would be proper to prepare the Cash Book and enter the cash transactions in this book. If Cash Book is prepared, it would not be necessary record entries for cash transactions in the Journal. In that case only non-cash transactions will be journalized If Cash Book is prepared, the solution to illustration 2 will be as follows:
Two classes of shares – Where both preference and equity shares are issued, there will be separate preference and equity shares accounts to record applications, allotments and calls. Similarly, ‘share capital account will be separated into “Preference share capital account and Equity share capital account
Illustration 3. Calcutta Textiles Ltd. was incorporated on January 1, 1998. The authorised capital of the company was Rs. 5,00,00,000 divided into 30,00,000 equity shares of Rs. 10 each and 2,00.000 12% preference shares of Rs. 100 each. The company issued 12,00,000 equity shares and half of the preference shares payable as follows Equity Shares – Rs. 3 on application, Rs. 3 on allotment, Rs. 2 on first call and Rs. 2 on final call Preference Shares – Rs. 30 on application, Rs. 30 on allotment, Rs. 20 on first call and Rs. 20 on final call All these shares were subscribed. Prepare Cash Book and Journal assuming that all money was duly received Solution:
Terms of Issue of Shares : Shares of a company may be issued in any of the following three ways: (1) At par, (2) At premium or (3) At discount.
(1) Issue of Shares at Par : Shares are said to have been issued at par where an applicant has to pay a total sum equal to the face value of the share. This has already been discussed earlier.
(2) Issue of Shares at Premium : Shares are said to have been issued at premium where an applicant has to pay a total sum in excess of the face value of the shares, the premium being the difference of issue price and face value of the share. For example, if a share of Rs. 10 is issued at Rs. 15, then Rs. 15 – Rs. 10 = Rs. 5 is premium. The word ‘share’ used in Section 78 has been substituted by ‘Securities’ by Companies (Amendment) Act, 1999. Section 2 (45 AA) inserted by the Companies (Amendment) Act, 2000, defines the expression securities to include shares, scrip, stock, bonds, debentures, debenture stock etc. Hence, now the amount of share premium will be credited to Securities Premium Account which will be shown on the liabilities side of Balance Sheet under the head “Reserves and Surplus”.
There are no restrictions in the Companies Act on the issue of shares at premium but there are restrictions on its disposal. Section 78 provides that a company may apply Securities Premium Account wholly or in part only for :
(i) issuing fully paid bonus shares to the members:
(ii) writing off preliminary expenses of the company;
(iii) writing off the expenses of, or the commission paid or discount allowed on any issue of shares or debentures of the company; or
(iv) providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
In addition, according to Section 77A, a company may purchase its own shares or other specified securities out of the Securities Premium Account.
Accounting Entries : A company can realize premium with any installment but in the absence of any information to the contrary, it is presumed to be payable on allotment. Therefore, the amount of premium be debited (along with the amount due in respect of share capital) to share allotment account and Securities Premium Account. For example, if a share of Rs. 100 is issued at a premium of Rs. 20 and Rs 45 including premium is due on allotment, the journal entry will be as follows:
Shares Share Allotment Account Dr. 45
To Share Capital Account 25
To Securities Premium Account
When the amount is received, following entry will be made :
Bank Account Dr. 45
To Share Allotment Account 45
Securities Premium Account is shown on the liabilities side of a company’s balance sheet under the head “Reserves and Surplus”.
Illustration 4. Dinarpur Paper Mills Ltd. issued 25.000 Equity shares of Rs. 100 each, payable as to S. 20 on application, Rs. 30 on allotment (including Rs. 10 premium) and Rs. 60 on call. All shares were applied for and allotted. All money was received. Make journal entries in the books of the company.
Issue Forfeiture Reissue Shares
Issue Forfeiture Reissue Shares
(3) Issue of Shares at Discount : Shares are said to have been issued at discount where an applicant has to pay a total sum less than the face value of the share, the discount being the difference of face value and issue price of the share. For example, if a share of Rs. 10 is issued at Rs. 9 then Rs. 10 – Rs. 9 – Re. I is the discount. It must be remembered that according to Section 79 of Companies Act, a company can issue shares at a discount only when the following conditions are fulfilled :
(i) The shares must belong to a class already issued.
(ii) The issue is authorised by a resolution passed by the general meeting and sanctioned by Company Law Board;
(iii) The issue is made at a discount specified in the above resolution but in no case the rate of discount should exceed 10 percent or such higher rate as permitted by the Company Law Board.
(iv) At least one year has elapsed since the date on which the company was entitled to commence business.
(v) The issue is made within two months from the date of receiving the sanction of the Company Law Board or within such extended time as the Board may allow.
Discount on issue of shares is a loss of capital nature and as such debited to a separate account called Discount on Issue of Shares Account”. Until it is written off, it must be distinctly shown on the assets side of the company’s Balance Sheet under the head “Miscellaneous Expenditure”.
Accounting Entries : The journal entry for discount on shares is generally made at the time of allotment of shares. Share
Allotment Account is debited only with the net amount due and the discount allowed is count due and the discount allowed is debited to Discount on mares Account, the total amount is credited to Share Capital Account For example, if a share on 100 is issued at Rs. 90, of which Rs. 25 is payable on allotment, the journal entry at the day as follows:
Calls-In-Arrear
If a shareholder makes a default in sending the call money within the specified period, the money not so sent is called calls-in-arrear. There are two alternative methods of dealing with this problem:
(A) Opening a Separate Account – If some shareholders fail to pay the amount of a call, Calls-inArrear Account is debited and the relevant call account is credited. In this method, 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 amount on various instalments. The balance of calls-in-arrear account is shown as a deduction from the called up capital on the liabilities side of the company’s Balance Sheet. On receipt of amount of calls-in-arrear on a subsequent date, Bank Account will be debited and Calls-in-Arrear Account credited.
(b) Not Opening a Separate Account – It is not necessary to open a separate account for calls-inarrear. In that case, amount actually received is credited to the call account and hence the various call accounts will show debit balance equal to the total unpaid amount of each call. On receipt of amount of calls-in-arrear on a subsequent date, Bank Account will be debited and the relevant Call Account will be credited. At the year end, the balance of various call accounts may be transferred either to Calls-in-Arrear Account or to the Balance Sheet. In both circumstances, total amount of unpaid calls will be shown as a deduction from the called up capital.
It must be remembered that if there are more than one class of shares, Calls-in-Arrear in respect of each class of shares should be shown separately.
Interest on Calls-in-Arrear – Directors are actually authorised by the Articles to charge interest at a rate on calls-in-arrear from the due date to the date of payment. However, if the Articles are silent,
Calls-in-Advance
The money received by a company from its shareholders in excess of what has been called upon the shares is called Calls-in-Advance. Section 92 of Companies Act states that calls-in-advance can be accepted only when company is so authorised by its Articles. On receipt of such sums by a company, the amount should be credited to a separate account, called Calls-in-Advance Account by passing the following entry :
Bank Account Dr
To Calls-in-Advance Account
The amount received as calls-in-advance is a debt of the company until the calls are made and the amount is actually payable by the shareholders. As and when calls are made, the appropriate amount is transferred from the Calls-in-Advance Account to the relevant Call Account by passing the following entry :
Calls-in-Advance Account Dr
To Relevant Call Account
It is to be noted that the money so received does not form part of the company’s share capital. So, the shareholders making advance are not entitled to any voting rights in respect of such amount. They are also not entitled to receive dividend on such advance amount. The balance of Calls-in-Advance Account is shown as a separate item on the Balance Sheet after paid up capital. Some companies show this balance as a current liability
Interest on Calls-in-Advance – Generally, Articles of the company specify the rate at which interest is payable on calls-in-advance. If the company has adopted Table A, the Board of Directors can pay interest on such advances subject to the maximum of 6% per annum from the date of receipt to the date when the call is due for payment. It is to be noted that this interest is a charge on profits of the company. As such, this interest will be paid even if no profit is earned by the company.
Issue Forfeiture Reissue Shares
Accounting Entries :
1 If interest is paid in cash –
Interest on Calls-in-Advance Account Dr.
To Bank Account
Issue, Forfeiture and Reissue of Shares
2. If interest is not paid in cash
Interest on Calls-in-Advance Account Dr.
To Sundry Shareholders Account
3. For writing off the amount of interest –
Profit & Loss Account
To Interest on Calls-in-Advance Account
Illustration 7 On 1st January, 1998, X Ltd. makes an issue of 10.000 equity shares of Rs. 10 each payable as below:
On application Rs. 2
On allotment Rs. 3
On first and final call Rs. 6
(Three month after allotment) The issue was subscribed for in full and the shares were allotted. A shareholder holding 20 shares paid first and final call with allotment money and another shareholder did not pay allotment money on his 30 shares but which he paid with first and final calls Directors have decided to charge and allow interest, as the case may be, on calls-in-arrears and calls-in-advance respectively according to the provisions of Table A. Journalise the transactions including cash transactions.
Under-Subscription of Shares
The shares are said to be under-subscribed if the number of shares applied for is less than the number of shares offered for issue. A company may go ahead with its allotment plan provided the subscription is more than the minimum amount of subscription. In such a case entries are made on the basis of the number of shares applied for.
Illustration 8. On 1st January, 1998, Indian Explosives Ltd. issued a prospectus offering 2,00,000 shares of Rs. 10 each to the public. The shares were payable as follows:
On application Rs. 3, allotment Rs. 2, first call Rs. 3 (June 1, 1998) and second call Rs. 2 (Oct. 1, 1998).
Applications for 1.80,000 shares were received upto Feb. 20 and these shares were allotted on March 1, 1998. All allotment money and first call money were received on April 15 and June 20 respectively. At the close of accounting year on Dec. 31, it was known that second call on 1,000 shares was in arrear.
Journalise these transactions.
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DR. PRAVEEN KUMAR-9760480884
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DR. PRAVEEN KUMAR-9760480884
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