Key Takeaways:
- Understand the procedure and legal framework for issuing shares in companies.
- Distinguish between issues at par, premium, and discount, and handle oversubscription with pro-rata allotment.
- Master journal entries for the entire share issue process, including treatment of securities premium under Companies Act 2013.
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Introduction to Issue of Shares
Companies raise capital by issuing shares to the public. This process lies at the heart of corporate accounting and forms a recurring topic in competitive exams and professional practice alike. The procedure is grounded in statutory regulations, and a sound grasp of both theory and practice.
Definition and Procedure of Share Issue
What Is Share Issue?
The issue of shares refers to the process by which a company allots new shares to applicants, making them shareholders and raising funds for business operations or expansion. Shares may be issued to the public (through prospectus), privately, or to existing shareholders (rights issue).
a. Step-by-Step Procedure
- Board approval of share issue and preparation of prospectus (if public issue).
- Receipt of applications along with application money.
- Allotment of shares to successful applicants; refund or pro-rata allotment if oversubscribed.
- Receipt of allotment money and subsequent calls as per schedule.
Every stage must be supported by precise accounting entries and compliant with the Companies Act.
Issue of Shares
a. Issue at Par
At par means shares are issued at their nominal (face) value. For example, a ₹10 share is issued for ₹10. The entire amount received is credited to share capital.
b. Issue at Premium
When the issue price exceeds the face value, it is an issue at premium. For instance, a ₹10 share issued at ₹12 carries a ₹2 premium per share. The premium is credited to 'Securities Premium Reserve' and used only for purposes specified under Section 52 of the Companies Act, 2013.
c. Issue at Discount
Issuing shares below face value is called issue at discount. The Companies Act 2013, Section 53, generally prohibits such issuance except for sweat equity shares. If permitted, the discount amount is debited to 'Discount on Issue of Shares' and written off as per regulations.
| Type of Issue | Issue Price | Accounting Treatment | Legal Provision |
|---|---|---|---|
| At Par | Equal to face value | Credited to Share Capital | Permitted |
| At Premium | Above face value | Share Capital + Securities Premium Reserve | Section 52, Companies Act |
| At Discount | Below face value | Debited to Discount on Issue of Shares | Generally prohibited (Sec 53); exception: sweat equity |
Oversubscription and Pro-Rata Allotment
a. Oversubscription
Oversubscription occurs when applications exceed the number of shares offered. The company must decide how to allocate shares fairly:
- Reject some applications (full refund).
- Allot shares on a pro-rata basis (applicants receive shares in proportion to their applications).
- Combination of both.
b. Pro-Rata Allotment and Excess Application Money
In pro-rata allotment, excess application money is either:
- Adjusted towards allotment/calls due.
- Refunded if it exceeds the amount due on subsequent payments.
Accounting for excess application money is a frequent exam area—accuracy here demonstrates both conceptual clarity and practical skill.
Journal Entries for Share Issue Process
a. Key Journal Entries
| Stage | Entry |
|---|---|
| On receipt of application money | Bank A/c Dr. To Share Application A/c |
| On application money transfer to share capital (for allotted shares) | Share Application A/c Dr. To Share Capital A/c |
| On refund of excess application money | Share Application A/c Dr. To Bank A/c |
| On allotment money due | Share Allotment A/c Dr. To Share Capital A/c (To Securities Premium A/c if issued at premium) |
| On receipt of allotment money | Bank A/c Dr. To Share Allotment A/c |
| On calls due and received | Similar entries as above, replacing 'Allotment' with 'Call' |
Treatment of Securities Premium Reserve (Section 52, Companies Act 2013)
Legal Use of Securities Premium
The Securities Premium Reserve (SPR) arises when shares are issued at premium. Section 52 restricts its use to:
- Issuing fully paid bonus shares.
- Writing off preliminary expenses.
- Writing off expenses, commission, or discount on securities issue.
- Providing for premium payable on redemption of preference shares or debentures.
- Purchasing its own shares or other securities (buy-back).
SPR cannot be freely used for dividends or general expenses. Misuse is a violation of the Act and attracts severe penalties.
Illustration
Scenario: ABC Ltd. issues 10,000 equity shares of ₹10 each at ₹2 premium. Applications received for 15,000 shares. The company:
- Rejects applications for 2,000 shares (full refund).
- Allots shares pro-rata to remaining applicants (13,000 applications for 10,000 shares).
- Application money: ₹5 (including premium), Allotment: ₹5 (including premium), First and final call: ₹2.
Computation:
- Pro-rata ratio: 10,000/13,000 = 10:13. For every 13 shares applied, 10 allotted.
- Excess application money (on pro-rata): Applicants paid for 13,000 shares, but only 10,000 allotted. Excess for 3,000 shares is adjusted towards allotment.
- Refund: 2,000 applications x ₹5 = ₹10,000 refunded.
| Journal Entry | Amount (₹) | Narration |
|---|---|---|
| Bank A/c Dr. To Share Application A/c |
75,000 | (15,000 x ₹5) |
| Share Application A/c Dr. To Share Capital A/c To Securities Premium A/c To Bank A/c |
75,000 50,000 20,000 5,000 |
(Transfer of application money for 10,000 shares to capital & SPR, refund excess) |
| Share Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c |
50,000 30,000 20,000 |
(Allotment due including premium) |
| Bank A/c Dr. To Share Allotment A/c |
20,000 | (Allotment money received; rest adjusted from excess application) |
Journal Entries for Oversubscription
- Rejected applications for 2,000 shares (refund in full).
- Allotted remaining on pro-rata to applicants for 10,000 shares.
- Application money: ₹3 per share, Allotment: ₹4, First call: ₹3.
Required: Pass journal entries for application, allotment, and calls. Show treatment of excess application money.
| Journal Entry | Amount (₹) | Narration |
|---|---|---|
| Bank A/c Dr. To Share Application A/c |
36,000 | (12,000 x ₹3) |
| Share Application A/c Dr. To Share Capital A/c To Bank A/c |
36,000 24,000 6,000 |
(Application money for 8,000 shares transferred, refund for 2,000 shares) |
| Share Allotment A/c Dr. To Share Capital A/c |
32,000 | (8,000 x ₹4, due on allotment) |
| Bank A/c Dr. To Share Allotment A/c |
8,000 | (Allotment money received; balance of ₹24,000 adjusted from excess application) |
| Share First Call A/c Dr. To Share Capital A/c |
24,000 | (8,000 x ₹3, first call due) |
| Bank A/c Dr. To Share First Call A/c |
24,000 | (First call received in full) |
Understanding these processes lays a strong foundation for both exams and practical accounting careers. Review journal entries regularly, analyze different scenarios, and always check your calculations.