SHARE CAPITAL
The total capital of the
company is divided into shares, the capital of the company is called “share capital”.
Share
as defined in Section 2(84) of the Companies Act, 2013 means a share in the
share capital of a
company
and it also includes stock. A share is one unit into which the total share
capital is divided. It is a
fractional
part of the share capital and forms the basis of ownership in the company.
Types of Share Capital in Balance sheet -:
1)Authorized
Share Capital: A company estimate its maximum capital requirements. This amount
of capital mentioned in ‘capital clause ‘Memorandum of Association. It is shown
in balance sheet at face value.
2)Issued share
capital: Whatever portion of the shares capital issued by the company, it
is called ‘issued capital’. It is shown in balance sheet at factory value. 8.
Portion of authorized capital which is not issued is known as ‘Un-issued
capital’. It is not shown in balance sheet.
3)Subscribe
share capital: Part of issued share capital wh9ich is subscribed by public and
allotted by company. (Includes face value of shares issued for consideration
other than cash).
4)Called-up
shares capital: The portion of issue price of shares which a company has
demanded or called from shareholder is known as ‘called-up capital’ and the
balance.
5)Paid-up
shares Capital: Portion of the called-up which is paid by shareholders when
shareholders. When shareholders fail to pay a particular amount it is known as
‘calls-in-arrear’.
6)Reserve
capital: As per companies Act, 2013 a company may be by passing a special
resolution decide that certain portion of its subscribed uncalled capital shall
not be called up except in the event of winding up to the company (i.e. it is
that portion which company has decided to call only in the event of liquidation
of company)
Capital
reserve,
which is created out of profits only, is a part of reserve and surplus and are
not available for declaration of dividend. (May be use to write-off capital
losses such as discount on issue of shares, may be used to issue bonus shares,
subject to condition that reserve is realized in case.
TYPES OF SHARES
1.
Preference
shares -:
Preference shares enjoy preference over equity shares in the matter of:
(a) Payment of dividend
(b)
Repayment of capital
2.
Equity shares -:
Equity share are
those share, which are not preference share. It means that they do not enjoy
any preferential rights in the matter of payment of dividend or repayment of
capital. Equity share capital can be-:
(i) with voting rights; or
(ii) with differential
rights as to dividend or voting or any other right
Important points-:
I.Equity shares are non-preferential shares and are known as common shares.
II.To issue shares, private company depend upon ‘private placement of shares’.
III. A public company issues prospectus inviting general public to subscribe for its shares.
IV.Applications are deposited in a scheduled bank by interested parties
V.First installment paid along with application is called ‘Application Money’.
VI.Application money must be at least 5% of face value of shares as per companies Act, 2013.
VII.The minimum application money to be paid by an application along with the application money shall not be less than 25% of issue price, as per SEBI guidelines.
VIII. As per SEBI guidelines, a company must receive a minimum of 90% subscription is aginst the entire issue.
IX.A company cannot proceed to make allotment of shares, till minimum subscription is received within 30 days from date of issue of prospectus.
X. If the company does not receive minimum subscription of 90% of issue, the entire subscription shall be refunded to9 the applicants within 15 days from the date of closure of issue. In case of delayed refund, interest for the delayed period shall be payable.
XI. In case of delay in refunding, the company becomes liable to pay interest @15% p.a. on the amount of refund.
XII. Second installment is known as ‘Allotment Money’
XIII.Subsequent installment, if any, to be called by company are known as ‘calls’.
XIV.Successful applicants become the shareholders of the company.
XV. A period of at least one month must be there between two calls.
XVI.The Securities and Exchange Board of India (SEBI) Guidelines, require that shares issued are made fully paid-up within twelve months of the date of allotment if size of issued is upto Rs. 500 cores.
XVII.Under-subscription means shares offered are for subscription is more than the number of shares subscribed by public.
XVIII. When shares applied for by public are more than shares offered over-subscription. [Number of shares is allotted is restricted to nu8mber of shares issued for subscription]
XIX.Full subscription means shares issued and shares applied for subscription are equal.
JOURNAL ENTRIES FOR ISSUE OF SHARES FOR CASH:
Under the issue of share capital
by a company, The under mentioned entries are made in the financial books:
Sometimes separate Application and Allotments accounts are not prepared and entries relating to Application and Allotment monies are passed through a combined Application and Allotment A/c.
Issue of Shares at Premium-:
The shares of many successful companies which offer attractive
rates of dividend on their existing capitals fetch a higher price than their
face value in the market. When shares are issued at a price higher than the face
value, they are said to be issued at a premium. Thus, the excess of issue price
over the face value is the amount of premium. For example, if a share of Rs. 10
is issued at Rs. 12, Rs. (12 – 10) = Rs. 2 is the premium.
The
premium is usually payable with the installment due on allotment. However, some
companies may charge
premium with share application money or partly with share application money and
partly at the time of allotment of shares. It may be included in call money
also.
JOURNAL ENTRY
When allotment money becomes due:
Share Allotment A/c Dr. (with the money due on allotment including premium)
To
Securities Premium A/c (with the
premium amount)
To Share Capital
A/c (with the share allotment amount)
The
Securities Premium Account must be shown as “Securities premium reserves”
separately in the liabilities side of the balance sheet under the head “Reserves
& Surplus”.
Issue of Shares at A Discount-:
When
shares are issued at a price lower than the face value, they are said to be
issued at discount. Thus, the excess of the face value over the issue price is
the amount of discount. For example, if a share of `
10 is issued
at ` 9
then ` (10
– 9) = Re. 1 is the discount.
As
per companies Act 2013, a company shall not issue shares at a discount except
as provided in section 54 for issue of sweat equity shares. Any share issued by
a company at a discounted price shall be void.
Where
a company contravenes the provisions of this section, the company shall be
punishable with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees
and every officer who
is in default shall be punishable with imprisonment for a term which may extend
to six months or with
fine which shall not be less than one lakh rupees but which may extend to five
lakh rupees, or with both.
SUBSCRIPTION OF SHARES:
Accounting for issue of
shares depends upon the type of subscription. Whenever a company decides to
issue shares to public, It invites application for subscription by issuing a
prospectus. It is not necessary for company receives application for the number
of shares to be issued by it. There are three of possibilities:
Full subscription-:Issue is fully subscribed if the number of shares
offered for subscription and the number of shares actually subscribed by the
public are same. To start discussion on accounting treatment for issue of
shares let us assume that the issue is fully subscribed.
Undersubscription-: It means the no. of shares offered for subscription
is more than the number of shares subscribed by the public. In this, the
journal entries as discussed above are passed but with one charge i.e.,
calculation of application, allotment and for that matter, the call money is
based on no. shares actually applied and allocated. it must be remembered that
shares can be allotted, in this case, only when the minimum subscription
received.
Oversubscription-:Issue of shares are generally either under or over
subscribed. If an issue is over subscribed, some application may be rejected
and application money refunded and in respect of others, only a part of shares
applied for may be allotted and the excess amount received can be utilized
towards allotment and call money which has fallen due or will soon fall due for
payment. The entries are:
1.
On refund of
application money to applicants to whom shares have not been allotted:
Share application a/c Dr.
To Bank a/c
2.
When only a part
of shares applied for are allowed:
Share Application a/c Dr. (With the amount received in advance for
allotment)
To share Allotment a/c
To shares calls in advance a/c
Calls in advance and interest on
calls in advance -:CALLS-IN-
If authorised by the articles, a company may receive from a
shareholder the amount remaining unpaid on shares, even though the amount has not been called up. This is
known as calls-in-advance. It is a debt of a company until the calls are made and the amount already paid is
adjusted. Calls-in-advance may also arise when the number of shares allotted to
a person is much smaller than the number applied for and the terms of issue permit
the company to retain the amount received in excess of application and
allotment money. Of course, the company can retain only so much as is required
to make the allotted shares fully paid ultimately. The calls-in-advance account
is ultimately closed by transfer to the relevant call accounts. It is noted
that the money received on calls-in-advance does not become part of share
capital. It is shown under a separate heading, namely ‘calls-in-advance’ on the
liabilities side. No dividend is paid on calls-in-advance.
Accounting Treatment
On receipt of call money in advance:
Bank Dr. (with the amount of
call
To
Call-in-Advance A/c money received in
advance)
As and when calls are made:
Calls-in-Advance A/c Dr. (with the amount adjusted on
To Relevant
Call A/c relevant call becoming due)
The amount received as calls-in-advance is a debt of the company,
the company is liable to pay interest on the amount of Calls-in-Advance from
the date of receipt of the amount till the date when the call is due for payment.
Generally the Articles of the company specify the rate at which interest is
payable. If the articles do not contain such rate, Table A will be applicable
which leaves the matter to the Board of directors subject to a maximum rate of
12% p.a. It is to be noted that the interest payable on Calls-in- Advance is a
charge against the profits of the company.
As such, Interest on Calls-in-Advance must be paid even when no
profit is earned by the company.
Accounting Treatment
If
Interest on Calls-in-Advance is paid in cash -
Interest on
Calls-in-Advance A/c Dr. (with the amount of
To Bank interest
paid)
If
interest on Calls-in-Advance is not paid in cash
-
Interest on
Calls-in-Advance A/c Dr. (with the
amount of
To
Sundry Shareholders A/c interest
payable)
At
the end of the year, when interest on Calls-in-Advance is transferred to Profit
and Loss A/c -
Profit and Loss A/c
Dr. (with the amount of interest)
To Interest
on Calls-in-Advance A/c
Calls in arrears and interest on
calls in arrearsIN ARREAR AND
When calls are made upon shares allotted, the shareholders holding
the shares are bound to pay the call money within the date fixed for such payment. If a shareholder
makes a default in sending the call money within the appointed date, the amount thus failed is called
Calls-in-Arrear.
The interest on Calls-in-Arrear is recoverable according to the
provisions in this regard in Articles of the company. But if the Articles are silent, Table ‘F’ shall be
applicable which prescribes that if a sum called in respect of shares is not paid before or on the day
appointed for payment, the person who failed to pay shall pay thereof from the
day appointed for payment to the time of actual payment at a rate not exceeding 10% per annum. However, the directors have the right to
waive the payment of interest on Calls-in-Arrear. The interest on Calls-on-Arrear Account is
transferred to the Profit and Loss Account at the end of the year.
Journal Entries
When call money is in arrear:
Calls-in-Arrear A/c
Dr. (with
the amount-failed by
To Relevant
Call A/c the
shareholders)
On receipt of amount of Calls-in-Arrear
with interest, on a subsequent date:
Bank Dr. (with the amount
received)
To
Calls-in-Arrears A/c
To Interest on
Calls-in-Arrear
FORFEITURE OF SHARES:
‘Forfeit’ means taking away of property
on breach of condition. Failure to pay call money results in forfeiture of
shares. It is the action taken by company to cancel the shares.
Forfeiture should be done ‘bonafide’ in the interest of company.
If member fails to pay calls
on due date, BOD may serve a notice requiring payment of call together with
interest, If any. Notice shall state further period of 14 days from the date of
service of notice. If the amount is not paid even then, such shares shall be
liable to be forfeited by passing board resolution. A person whose shares have
been forfeited shall cease to be a member but shall remain liable to pay to the
company all monies payable by him in respect of such shares. If the premium has
already been received by the company, it cannot be cancelled even if the shares
are forfeited in future. Shares may be forfeited for non –payment of calls, premium or the
unpaid portion of face value of shares.
·
Fully paid-up
shares may be forfeited for realization of debts of shareholders if the
Articles so provide it.
·
Reissue of
forfeited shares is not allotment of shares but only a ‘sale’.
FORFEITURE OF SHARE WHICH WERE ISSUED AT PAR:
RE-ISSUE OF SHARE:
ISSUE OF SHARE FOR CONSIDERATION OTHER THAN CASH:
(Imp) points for consideration for students:
(a) Loss on re-issued should not exceed the forfeited amount.
(b) If the loss on re-issue is less than the amount forfeited,
the surplus shall be transferred to capital reserve.
(c) The forfeited amount on shares not yet reissued should be
shown in the balance sheet as an additional to the share capital.
(d) When only a portion of the forfeited shares are re-issued,
then the profit made on re-issue of
such shares must be transferred to capital reserve.
(e) When the shares are
re-issued at a loss, such loss is to be debited to “Forfeited shares account”.
(f) If the shares are
re-issued at a price which is more than the face value of the shares, the
excess amount will be credited to securities premium account.
(g) If the re-issued amount
and forfeited amount (taken together) exceeds the face value of the shares are
re-issued, it is not necessary to transfer such amount to securities premium
account.
(h) Even though original
shares cannot be issued at a discount, but forfeited shares can be issued at a
discount.
(i) If forfeited shares are
re-issued at a discount the amount of discount can in no case, exceed the
amount credited to the shares forfeiture amount.
FORFEITURE OF SHARES WHICH WERE ISSUED AT PREMIUM:
If the premium has already
receivedby the company, it cannot be cancelled even if the shares are forfeited
in the future.
FORFEITURE OF FULLY PAID SHARES:
CALCULATION OF PROFIT ON RE-ISSUE OF FORFEITED SHARE:
Students will appreciate that
the credited balance of forfeited share account cannot be considered a surplus
untill the shares forfeited have been re-issued, because the company may, on
re-issue, allow the discount to the new purchaser equivalent to the amount held
in credit in this regard in the forfeited share a/c.
