Quick summary
A company raises its owned capital by issuing shares to the public. This topic covers the kinds of shares, the steps of issue (application, allotment, calls), issue at par and at premium, over-subscription with pro-rata allotment, and calls in arrears and in advance. The rules come from the Companies Act, 2013 and the accounting is done in the journal of the company.
Key points
- Share – one unit of the share capital of a company (Sec 2(84), Companies Act 2013).
- Two kinds: equity shares (voting rights, dividend after preference) and preference shares (preference for fixed dividend and return of capital on winding up).
- Kinds of capital: authorised → issued → subscribed → called-up → paid-up.
- Money is collected in stages: application, allotment, first call, second and final call.
- Shares may be issued at par (face value) or at premium (above face value). Issue at discount is not allowed under Sec 53, except sweat equity shares.
- Securities premium (प्रतिभूती अधिमूल्य) goes to a separate account. Under Sec 52 it can be used only for: issuing fully paid bonus shares, writing off preliminary expenses, writing off expenses/commission/discount on issue of shares or debentures, premium on redemption of preference shares or debentures, and buy-back of own shares.
- Minimum subscription: as per SEBI rules, a public issue must receive at least 90% of the issue size, otherwise application money is refunded.
- Over-subscription: when applications are more than shares offered, the company may reject some and allot the rest pro-rata; excess money is adjusted towards allotment (and calls, if the Articles allow) and the balance is refunded.
- Calls in arrears – call money due but not paid. Calls in advance – money received before it is called.
- Under Table F, interest on calls in arrears is charged at up to 10% p.a. and interest on calls in advance is paid at up to 12% p.a. (unless the Articles say otherwise).
Important terms
- Face value – the value printed on the share certificate, e.g. ₹10.
- Allotment – acceptance of the application by the board; the applicant becomes a shareholder.
- Call – a demand by the company for an unpaid part of the share price.
- Pro-rata allotment – allotment in proportion to the shares applied for.
- Private placement – issue to a selected group of persons, not the public.
Formats and formulas
Worked problem: X Ltd issued 10,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹4 on allotment (including premium) and ₹5 on first and final call. All money was received.
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 | Bank A/c Dr | 30,000 | |
| To Equity Share Application A/c | 30,000 | ||
| 2 | Equity Share Application A/c Dr | 30,000 | |
| To Equity Share Capital A/c | 30,000 | ||
| 3 | Equity Share Allotment A/c Dr | 40,000 | |
| To Equity Share Capital A/c | 20,000 | ||
| To Securities Premium A/c | 20,000 | ||
| 4 | Bank A/c Dr | 40,000 | |
| To Equity Share Allotment A/c | 40,000 | ||
| 5 | Equity Share First and Final Call A/c Dr | 50,000 | |
| To Equity Share Capital A/c | 50,000 | ||
| 6 | Bank A/c Dr | 50,000 | |
| To Equity Share First and Final Call A/c | 50,000 |
Check: share capital = 30,000 + 20,000 + 50,000 = ₹1,00,000 (10,000 × ₹10); securities premium = ₹20,000 (10,000 × ₹2).
- Excess application money = (shares applied − shares allotted) × application money per share.
- Amount due on allotment from shareholders = allotment due − excess application money adjusted.
5 important questions
Q1. What is securities premium? State any two uses.
It is the amount received over the face value of a share. Under Sec 52 it can be used to issue fully paid bonus shares and to write off preliminary expenses (also discount on issue of debentures, premium on redemption, buy-back).
Q2. Distinguish between calls in arrears and calls in advance.
Calls in arrears is money called but not yet paid by a shareholder; it is shown as a deduction from called-up capital. Calls in advance is money paid before it is called; it is a liability shown separately and may earn interest up to 12% p.a. under Table F.
Q3. Explain the procedure for issue of shares by a public company.
Outline: (1) issue of prospectus, (2) receipt of applications through banks/ASBA, (3) minimum subscription of 90%, (4) allotment by the board and basis of allotment approved with the stock exchange, (5) refund of excess money, (6) making calls, (7) listing on a stock exchange, (8) issue of share certificates or credit in demat account.
Q4. In the problem above, 15,000 shares were applied for and 10,000 allotted pro-rata. Show the effect of excess application money.
Application money received = 15,000 × ₹3 = ₹45,000. Needed = 10,000 × ₹3 = ₹30,000. Excess = ₹15,000, adjusted to allotment. Allotment due ₹40,000 − ₹15,000 = ₹25,000 received in cash. Entry: Equity Share Application A/c Dr ₹15,000, To Equity Share Allotment A/c ₹15,000.
Q5. Explain the kinds of share capital shown in the Balance Sheet.
Authorised (maximum in MoA), issued (offered to the public), subscribed (taken up by the public), called-up (demanded so far), paid-up (actually received). Shown under "Shareholders' funds – Share capital" with details in the notes to accounts as per Schedule III.
Exam tip
Always split allotment money into capital and premium. Write narrations, and show a short check of total share capital at the end of a numerical answer.