Company: An organisation consisting of individuals called ‘shareholders’ by virtue of their holding the shares of a company, who can act as one legal person as regards its business through an elected board of directors.
Share: Fractional part of the capital, and forms the basis of ownership in a company; shares are generally of two types, viz. equity shares and preference shares, according to the provisions of The Companies Act, 1956. Preference shares again are of different types based on varying shades of rights attached to them.
Share Capital of a company is collected by issuing shares to either a select group of persons through the route of private placements and/or offered to the public for subscription. Thus, the issue of shares is basic to the capital of a company. Shares are issued either for cash or for consideration other than cash, the former being more common. Shares are said to be issued for consideration other than cash when a company purchases business, or some asset/assets, and the vendors have agreed to receive payment in the form of fully paid shares of a company.
Stages of Share Issue: The issue of shares for cash is required to be made in strict conformity with the procedure laid down by law for the same. When shares are issued for cash, the amount on them can be collected at one or more of the following stages:
(i) Application for shares
(ii) Allotment of shares
(iii) Call/Calls on shares.
Calls in arrears: Sometimes, the full amount called on allotment and/or call (calls) is not received from the allottees/shareholders. The amount not so received are cumulatively called ‘Unpaid calls’ or ‘Calls-in-Arrears’. However, it is not mandatory for a company to maintain a separate Calls-in-Arrears Account. There are also instances where some shareholders consider it descreet to pay a part or whole of the amount not yet called-up on the shares allotted to them. Any amount paid by a shareholder in the excess of the amount due from him on allotment/call (calls) is known as ‘Calls-in-Advance’ for which a separate account is maintained. A company has the power to charge interest on calls-in-arrears and is under an obligation to pay interest on calls-in-advance if it accepts them in accordance with the provisions of Articles of Association.
Oversubscription: It is possible for the shares of some companies to be oversubscribed which means that applications for more shares are received than the number offered for subscription through the prospectus. Under such a condition, the alternatives available to the directors are as follows :
(i) They can accept some applications in full and totally reject the others,
(ii) A pro-rata distribution can be made by them,
(iii) A combination of the above two alternatives can be adopted by them.
If the amount of minimum subscription is not received to the extent of 90%, the issue devolves. In case the applications received are less than the number of shares offered to the public, the issue is termed as ‘under subscribed’.
Issue of Shares at Premium: Irrespective of the fact that shares have been issued for consideration other than cash, they can be issued either at par or at premium. The issue of shares at par implies that the shares have been issued for an amount exactly equal to their face or nominal value. In case shares are issued at a premium, i.e. at an amount more than the nominal or par value of shares, the amount of
premium is credited to a separate account called ‘Securities Premium Account’, the use of which is strictly regulated by law.
Issue of Shares at Discount: Shares can as well be issued at a discount, i.e. on an amount less than the nominal or par value of shares provided the company fully complies with the provisions laid down by law with regard to the same. Apart from such compliance, shares of a company cannot ordinarily be issued at a discount. When shares are issued at a discount, the amount of discount is debited to ‘Discount on Issue of Share Account’, which is in the nature of capital loss for the company.
Forfeiture of Shares: Sometimes, shareholders fail to pay one or more instalments on shares allotted to them. In such a case, the company has the authority to forfeit shares of the defaulters. This is called ‘Forfeiture of Shares’. Forfeiture means the cancellation of allotment due to breach of contract and to treat the amount already received on such shares as forfeited to the company. The precise accounting treatment of share forfeiture depends upon the conditions on which the shares have been issued — at par, premium or discount. Generally speaking, accounting treatment on forfeiture is to reverse the entries passed till the stage of forfeiture, the amount already received on the shares being credited to Forfeited Shares Account.
Re-issue of Shares: The management of a company is vested with the power to reissue the shares once forfeited by it, subject of course, to the terms and conditions in the articles of association relating to the same. The shares can be reissued even at a discount provided the amount of discount allowed does not exceed the credit balance of forfeited shares’ account relating to shares being reissued. Therefore, discount allowed on the reissue of forfeited shares is debited to forfeited shares’ account. Once all the forfeited shares have been reissued, any credit balance on forfeited shares’ account is transferred to Capital Reserve representing profit on forfeiture of shares. In the event of all forfeited share not being reissued, the credit amount on forfeited shares’ account relating to shares yet to be reissued is carried forward and the remaining balance on the account only is credited to capital reserve
account.