Issue of Shares and Share Capital Notes, Corporate Accounting Notes B.Com 2nd & 4th Sem CBCS Pattern

Issue of Shares and Share Capital Notes
Corporate Accounting Notes
B.Com 2nd and 4th Sem CBCS Pattern

Unit 1: Issue of shares and accounting for share capital

Part A: ACCOUNTING FOR SHARE CAPITAL/REDEMPTION OF PREFERENCE SHARES/ BONUS SHARES

Q. Explain the SEBI’s Guidelines regarding issue of various classes of shares and forfeiture of shares.   2013, 2014

Q. What are the statutory books and statistical books required to be maintained by a company?

Q. Discuss the provisions of law with regard to redemption of Redeemable preference shares as laid down in Sec. 55 of the Companies Act.                   2012, 2016, 2018, 2019

Q. What do you mean by Bonus shares? Under what circumstances such shares are issued. Illustrate the SEBI guidelines regarding Bonus issue.        2017

Q. What is right issue? Explain the provisions of the law regarding issue of right shares.

Q. Distinguish between:

Ø  Capital reserve and reserve capital

Ø  Bonus issue and Right issue

Ø  Forfeiture of shares and Surrender of shares

Q. Practical Problems:

a) Issue of Shares Specific points: Oversubscription and prorata allotment, 2010, 2014, 2015, 2016, 2019

b) Redemption of Preference shares            2017

C) Bonus Shares                     2013

Q. Write short notes on:

1)      Reserve Capital                2018, 2019

2)      Securities premium reserve        2015, 2016

3)      Discount on issue of shares         2015

4)      Forfeiture of Share.          2013, 2015

5)      Redeemable Preference Shares  2015

6)      Types of share capital

7)      Four points of distinction between bonus shares and right shares.

8)      Oversubscription and Prorata Allotment.                      2017

Unit – 1: Issue of Shares and Share capital

Company - Introduction:             

A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.

According to Section 3 (20) of the Companies Act 2013 "Company means a company formed and registered under this Act."

According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."

Characteristics of a Company: Following are the salient features of a Company:

a)      Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.

b)      Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.

c)       Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.

d)      Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence.

e)       Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.

f)        Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.

g)      Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.

h)      Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.

i)        Common Seal: As a company is an artificial person, so it cannot sign any type of contracts. For this purpose, its requires a common seal which acts as the official signatories of the company. All the contracts prepared by its directors must bear seal of the company.

j)        Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.

k)       Maintenance of Books: A limited Company is required by law to keep a prescribed set of account books and failure in this regard may attract penalty.

l)        Periodical audit: A Company has to get its accounts periodically audited through the chartered accountants appointed for this purpose by the shareholders.

Shares and Its Types:

A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.

Section 2(84) 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”.

An exhaustive definition of share has been given by Farwell J. in Borland’s trustee v. steel bros. in the following words: “A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the company’s act”.

Thus a share

i) Measures the right of a shareholder to receive a certain proportion of the profits of the company while it is a going concern and to contribute to the assets of the company when it is being wound up; and

ii) Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

Distinguish between

a)      Equity Shares and Preference Shares

b)      Public Limited Company and Private Limited Company

c)       Shares and Debentures

d)      Shares and Stock

(a)  Difference between Equity Shares and Preference Shares   

Types of shares: According to section 43 of the Companies Act 2013, a company can issue only two types of shares:

(a) Preference shares; and

(b) Equity shares.

Equity Share: According to Sec. 43 (a) of the Companies Act 2013 "an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.

Preference Share: According to Sec. 43 (a) of the Companies Act 2013, a share that carries the following two preferential rights is called ‘Preference Share’:

(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.      

(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.

Difference between Preference Share and Equity Share are given below:

Basis of Difference

Preference Share

Equity Share

a)      Right of Dividend

Preference shares are paid dividend before the Equity shares.

Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.

b)      Rate of Dividend

Rate of dividend is fixed.

Rate of dividend is decided by the Board of Directors, year to year depending on profits.

c)       Convertibility

Preference Shares may be converted into Equity shares, if the terms of issue provide so.

Equity shares are not convertible.

d)      Participation in Management

Preference shareholders do not have the right to participate in the management of the company.

Equity shareholders have the right to participate in the management of the company.

e)      Voting Right

Preference shareholders do not carry the voting right except in special cases.

Equity shareholders have voting rights in all circumstances.

f)        Redemption of Share Capital

Preference shares may be redeemed.

A company may buy-back its equity shares.

g)      Refund of Capital

At the time of winding up of the company, preference share capital is paid before the payment of Equity share capital.

On winding up, Equity Share capital is repaid after preference share capital is paid.

 (b)  Difference between Public Limited Company and Private Limited Company

Basis of Difference

Private Company

Public Company

a)      Number of persons

 

Minimum number of members is 2 and the maximum 200, excluding its present or past employee members.

Minimum number of members is 7 and there is no limit as to maximum numbers.

b)      Issue of Prospectus

Prospectus need not be issued.

Prospectus or a Statement in lieu of Prospectus must be issued for inviting public to subscribe to its shares or debentures.

c)       Transfer of Shares

Transfer of shares is generally restricted by the articles of association of a private limited company.

The shares of a public company are freely transferable.

d)      Number of Directors

A Private Company must have at least two directors.

A Public Company must have at least three directors.

e)      Quorum

The quorum for a meeting is two.

The quorum for a meeting is five.

f)        Name

The word ‘Private Limited’ must be used as a part of the name.

The word ‘Limited’ must be used as a part of the name.

g)      Managerial Remuneration

There is no restriction on managerial remuneration.

Managerial remuneration cannot exceed 11% of the net profits.

 

(c)  Difference between Shares and Debentures

Basis of Difference

Shares

Debentures

a)             Ownership

Shareholders are the owners of the Company.

Debenture holders are the Creditors of the Company.

b)             Repayment

 

Normally, the amount of share is not returned during the life of the company.

Debentures are issued for a definite period.

c)             Convertibility

Shares cannot be converted into debentures.

Debentures can be converted into shares.

d)             Restrictions

There are legal restrictions to be fulfilled to issue shares at a discount.

There are no restrictions on the issue of debentures at a discount.

e)             Purchase

A company can buy back its own shares, but subject to fulfillment of stipulated conditions.

A Company can purchase its own debentures from the market without any conditions.

f)              Forfeiture

Shares can be forfeited for non-payment of allotment and call monies.

Debentures cannot be forfeited for non-payment of call monies.

g)             Payment of dividend/ Interest

Shareholders will get dividend which is dependent on the profits of the company.

Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss.

(d)  Difference between Shares and Stocks

Basis of Difference

Shares

Stocks

a)           Paid-up value

Shares may be fully paid up or partly paid up.

Stocks are fully paid up.

b)           Restriction on issue

Shares are issued when a company is incorporated.

Stock cannot be issued. Only fully paid shares can be converted into stock.

c)            Numbering

Shares are serially numbered.

Stocks are not numbered.

d)           Denomination

Shares are of equal nominal value.

Stocks may be divided into unequal amounts.

e)           Registration

Shares are always registered.

Stock may be registered or unregistered.

f)             Transfer

Shares are not transferable by mere delivery.

Unregistered stock can be transferred by mere delivery.

Share Capital and Its various categories:

The capital of a joint stock company is divided into shares which are collectively called ‘Share Capital’. Share capital refers to the amount that a company can raise or has raised by the issue of shares. The share capital may be classified as below (Sec. 2 of the Companies Act, 2013):

a)       Nominal/Authorized/Registered Capital: This is the amount of the capital which is stated in Memorandum of Association and with which the company is registered. Nominal capital is the maximum amount which the company is authorised to raise from the public.

b)      Issued Capital: Issued capital is that part of the nominal capital, which is offered to the public for subscription. The balance of the nominal capital, which is not offered to the public for subscription, is called unissued capital.

c)       Subscribed Capital: Subscribed capital is that part of the issued capital, which is applied for by the public. The balance of the issued capital, which is not subscribed for by the public is called, unsubscribe capital.

d)      Called up Capital: This is the amount of the capital that the shareholders have been called to pay on the shares subscribed for by them. The amount of the subscribed capital, which is not called, is known as uncalled capital.

e)      Paid up Capital: This represents that part of the called up capital, which is actually received by the company. The amount of the called-up capital, which not paid by the shareholders, is called as unpaid capital or calls in arrears.

f)        Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.

Issue of shares at Premium and purpose for which the amount of Securities Premium can be utilized:

If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.

Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:

a)       To write off the preliminary expenses of the company.

b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.

c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.

d)      To issue fully paid bonus shares to the shareholders of the company.

e)      In purchasing its own shares (buy back).

Can a company issue shares at discount?

As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.

According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:

a)       The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.

b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.

c)       At least one year must have elapsed since the company was entitled to commence the business.

d)      The shares are of a class, which has already been issued.

e)      The shares are issued within two months from the date of sanction received from the Government.

Reserve Capital Vs Capital Reserve:

Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital. (Sec. 65 of the Companies Act, 2013)

Capital Reserve: It is that part of reserves which is create out of capital profits and normally not available for distribution as dividend.

Difference between Reserve Capital and Capital Reserve

Basis of Difference

Reserve Capital

Capital Reserve

a)             Meaning

Reserve Capital is the part of uncalled capital, which shall not be called except in the event of winding up of the company.

It is that part of the reserves which is not free for distribution as dividend.

b)            Creation

It is created out of uncalled capital.

It is created out of capital profits.

c)             Optional/ Mandatory

It is not mandatory to create Reserve Capital.

Capital Reserve is mandatory to be created in case of profit on reissue of forfeited shares.

d)            Disclosure

It is not to be disclosed in the Balance Sheet of the company.

Capital Reserve is to be shown in liability side of the balance sheet of the company under the heading of ’Reserve and Surplus.’

e)            Writing of Capital Losses

Reserve Capital cannot be used to write off capital losses.

Capital Reserve is used to write off capital losses and to issue bonus shares to shareholder.

 

SEBI Guidelines for issue of fresh share capital

1. All applications should be submitted to SEBI in the prescribed form.

2. Applications should be accompanied by true copies of industrial license.

3. Cost of the project should be furnished with scheme of finance.

4. Company should have the shares issued to the public and listed in one or more recognized stock exchanges.

5. Where the issue of equity share capital involves offer for subscription by the public for the first time, the value of equity capital, subscribed capital privately held by promoters, and their friends shall be not less than 15% of the total issued equity capital.

6. An equity-preference ratio of 3:1 is allowed.

7. Capital cost of the projects should be as per the standard set with a reasonable debt-equity ratio.

8. New company cannot issue shares at a premium. The dividend on preference shares should be within the prescribed list.

9. All the details of the underwriting agreement.

10. Allotment of shares to NRIs is not allowed without the approval of RBI.

11. Details of any firm allotment in favor of any financial institutions.

12. Declaration by secretary or director of the company.

SEBI Guidelines for first issue by new companies in Primary Market:

1. A new company which has not completed 12 months of commercial operations will not be allowed to issue shares at a premium.

2. If an existing company with a 5-year track record of consistent profitability, is promoting a new company, then it is allowed to price its issue.

3. A draft of the prospectus has to be given to the SEBI before public issue.

4. The shares of the new companies have to be listed either with OTCEI or any other stock exchange.

SEBI guidelines for Secondary market

1. All the companies entering the capital market should give a statement regarding fund utilization of previous issue.

2. Brokers are to satisfy capital adequacy norms so that the member firms maintain adequate capital in relation to outstanding positions.

3. The stock exchange authorities have to alter their bye-laws with regard to capital adequacy norms.

4. All the brokers should submit with SEBI their audited accounts.

5. The brokers must also disclose clearly the transaction price of securities and the commission earned by them. This will bring transparency and accountability for the brokers.

6. The brokers should issue within 24 hours of the transaction contract notes to the clients.

7. The brokers must clearly mention their accounts details of funds belonging to clients and that of their own.

8. Margin money on certain securities has to be paid by claims so that speculative investments are prevented.

9. Market makers are introduced for certain scrips by which brokers become responsible for the supply and demand of the securities and the price of the securities is maintained.

10. A broker cannot underwrite more than 5% of the public issue.

11. All transactions in the market must be reported within 24 hours to SEBI.

12. The brokers of Bombay and Calcutta must have a capital adequacy of Rs. 5 lakhs and for Delhi and Ahmadabad it is Rs. 2 lakhs.

13. Members who are brokers have to pay security deposit and this is fixed by SEBI.

Statutory and Statistical Books Maintained by Company:

Statutory book: Such books are those which a limited company is under statutory obligation to maintain at its registered office with a view to safeguard the interests of shareholders and creditors. Main statutory books are:

a.       Register of investments held and their names

b.       Register of charges

c.       Register of members

d.       Register of debenture holders

e.       Annual returns

f.        Minute books

g.       Register of contracts

h.       Register of directors

i.         Register of director’s shareholdings

j.         Register of loans to companies under the same management

k.       Register of investment in the shares and debentures of other companies

l.         Register of fixed deposits

m.     Index of members where the number is more than fifty unless register of members itself affords an index

n.       Index of debenture holders where the number is more than fifty, unless the register of debenture holders itself affords an index

o.       Foreign register of members and debenture holders, if any

p.       Register of renewed and duplicate certificates.

Statistical Books:

In order to keep a complete record of numerous details of certain transactions and activities of the company the following statistical books are usually maintained by joint stock companies in addition to statutory books. The keeping of such books are optional. The main books are:

a.       Share application and allotment book

b.       Share calls book

c.       Share certificate book

d.       Debenture application and allotment book

e.       Debenture calls book

f.        Register of share transfers

g.       Dividend book

h.       Debenture interest book

i.         Register of documents sealed

j.         Register of share warrants

k.       Dividend mandates register

l.         Register of debenture transfers

m.     Register of powers of attorney

n.       Agenda book

o.       Register of lost share certificates

p.       Register of director’s Attendance

Forfeiture and Re-issue of forfeited shares

Forfeiture of shares:

A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a shareholder fails to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.

Before the shares are forfeited the shareholder:

i) Must be served with a notice requiring him to pay the money due on the call together with interest;

ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;

iii) There must be a proper resolution of the board;

iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.

A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.

Reissue of the forfeited shares:

The directors of the company have the power to re-issue the forfeited shares on such terms as it thinks fit. Thus the forfeited shares can be reissued at par, or at premium or at discount. However, if the forfeited shares are reissued at discount, the amount of discount should not exceed the amount credited to the share forfeiture A/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the share forfeited A/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.

Procedure for reissue of forfeited shares

a)       The forfeited shares may then be disposed by sale or in any other manner as directed by the Board.  

b)      Short particulars of reissued shares will be advised to the stock exchange concerned.  

c)       To give effect to the sale of forfeited shares, the Board will authorise some person, preferably the director or Secretary, to transfer the shares sold to the purchaser thereof and to make a declaration in connection therewith.  

d)      The defaulting members will be asked to return the share certificates. If they fail to do so fresh certificates will be issued.  

e)      Public and stock exchange will be advised not to deal with the old certificates.  

f)        Any surplus arising out of sale after adjusting the amount due to the company in respect of the shares will be refunded to the member concerned.

Difference between surrender and forfeiture of shares:

Surrender of shares

Forfeiture of shares

1.       It is an initiative of the shareholders concerned.

2.       In this case, the procedure for reduction of the share capital as provided in sec. 66 of the companies’ act should be followed.

3.       The shareholder is stopped from questioning validity in surrender of shares.

4.       4. The company is saved from the formalities of serving notice and working till the period of notice is over.

1.       It is at the instance of the company.

2.       No such procedure is followed for forfeiture of shares.

3.       The shareholder can challenge the defects in the notice for forfeiture of shares.

4.        The forfeiture is possible only when the articles of association of a company empowers the board of directors to do so

 

Cum-Dividend and Ex- Dividend price

The term ‘Cum’ and ‘Ex’ are Latin words. ‘Cum’ means with and ‘Ex’ means without. The term ‘Cum-dividend’ and ‘Ex-dividend’ relates to shares. Cum-dividend can be expanded as share price inclusive of dividend and Ex-dividend can be expanded as share price exclusive of dividend. Cum dividend is the amount of dividend accrued in the duration between the dividend declaration date and the settlement date or transaction date. The cum-dividend price includes not only the cost of investment but also includes the dividend accrued upto the date of purchase, and when dividend is declared it would be the right of the buyer to claim dividend. Conversely, the quotation, Ex-dividend, covers only the cost of the investment and the buyer is liable to pay additional amount as dividend accrued upto the date of purchase of Shares.

Difference between Ex-dividend and cum-dividend

Basis

Ex-dividend

Cum-Dividend

Meaning

It means price of shares without dividend.

It means price of shares with dividend.

Right to dividend

The seller retains the right to receive any dividend declared or paid after sale.

The buyer gets the right to dividend received dividend declared or paid after the sale.

Price

The price is lower than what would have to be paid otherwise.

The price is higher than what would have to be paid otherwise.

Accrued Dividend

In case of cum-Dividend nothing is payable for interest Dividend.

In case of ex-dividend, accrued dividend is payable.

 Book building

Book building is a process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about a company. It involves selling an issue step-wise to investors at an acceptable price with the help of a few intermediaries’/merchant bankers who are called book-runners. Under book-building process, the issue price is not determined in advance, it is determined by the offer of potential investors. The book runner maintains a record of various offers and the price at which the institutional buyers, mutual funds, underwriters etc. are willing to subscribe to securities. On receipt of the information, the book runner and the issuer company determine the price at which the issue will be made. Thus, book-building helps in determining the price of an issue on more realistic way based on the intrinsic worth of the security. The main objective of book building is to arrive at fair pricing of the issue which is supposed to emerge out of offers given by various large investors like mutual funds and institutional investors.

As per SEBI guidelines, in an issue of securities through a prospectus option of 100% Book Building is also available to an issuer company if Issue of capital is Rs.25 crores and above. In India, there are two options for book building process. One, 25% of the issue has to be sold at fixed price and 75% is through book building. The other option is to split 25% of offer to the public (small investors) into a fixed price portion of 10% and a reservation in the book built amounting to 15% of the issue size. The rest of the book-built portion is open to any investor.

Procedure for the Book Building Process

The modern and more popular method of share pricing these days is the Book Building route. Procedure of book building is stated below:

a) Appointment of merchant banker as a book runner whose main purpose was to maintain the records of various offer prices at which potential investors are willing to subscribe to securities.

b) After appointing a merchant banker as a book runner, the company planning the IPO (i.e., initial public offer), specifies the number of shares it wishes to sell and also mentions a price band.

c) Potential Investors place their orders in Book Building process at a price higher than the floor price indicated by the company in the price band to the book runner.

d) Once the book building period ends, the book runner evaluates the bids on the basis of the prices received, investor quality and timing of bids.

e) Then the book runner and the company conclude the final price at which the issuing company is willing to issue the stock and allocate securities. Traditionally, the number of shares are fixed and the issue size gets determined on the basis of price per share discussed through the book building process.

Advantages of Book Building Process

a)       It allows for price and demand discovery.

b)      It is cost effective as compared to traditional method of share issue.

c)       It is less time consuming.

d)      The demand for shares in book building is known before the issue closes.

Write short notes on the following:

1.       Prospectus

2.       Issue of share in consideration other than cash

3.       Calls-in-Arrears

4.       Calls-in-Advance

5.       Minimum Subscription

6.       Preliminary Expenses

7.       Statement in lieu of Prospectus

8.       Sweat Equity Shares

9.       Preferential Allotment

10.   Oversubscription and prorata allotment

11.   ESOP

12.   Methods of Raising Capital

1. Prospectus: Prospectus is an invitation to the public to subscribe for its shares or debentures. A prospectus has been defined as "any document described or issued as a prospectus and included notice, circular advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate." The main purpose of the prospectus is to pursue the public to purchase the shares or debentures of the company.

A public company is required to publish a prospectus whenever it wants to make a public issue of its shares or debentures. Everything stated in the prospectus must be correct because prospectus is the basis of contract between the company and the intending purchaser of shares who buys shares on the faith of a prospectus. Therefore, a shareholder has the right to rescind the contract within a reasonable time and before the winding up of the company if the prospectus contains a misleading statement.

2. Issue of Shares in consideration other than cash: A company may issue shares for consideration other than cash to the vendors who sell their whole business or some assets to the company or to the promoters for rendering services to the company. When shares are so issued, there is no receipt of cash and hence it is termed as issue of shares for consideration other than cash. The fact of such issues must be stated in the balance sheet of the company and must be distinguished from the shares issued for cash as per requirement of Schedule VI Part 1 of the Companies Act pertaining to the prescribed balance sheet.

3. Calls-in-Arrears: It often happens that some shareholders fail to pay the amount on allotment and or calls due on the shares held by them. The total of the unpaid amounts on account of one or more installments is known as ‘Calls-in-Arrears’. It is not mandatory to maintain a separate account for calls in arrears. The debit balance on the Allotment or Calls Account will be presented in the balance sheet not as an asset but by way of deduction from the called up capital.

The Articles of Association of a company usually empower the directors to charge interest at a stipulated rate on calls in arrears. In case the Articles are silent in this regard, the rule contained in Table F shall be applicable. Table F represents the model Articles of Association framed under Companies Act, 2013. It provides the rate of interest must not exceed 10 per cent.

4. Calls-in-Advance: Sometimes, it so happens that a shareholder may pay the entire amount on his shares even though the whole amount has not been called up. The amount received in advance of calls from such a shareholder should be credited to "calls in advance" account and should be shown separately from the called up capital in the Balance Sheet. The company can receive calls in advance if the article permits. Interest is usually paid on calls in advance and the article specifies the rate of interest. The maximum rate of interest allowed on calls in advance is 12% per annum. It should be noted that calls in advance are not entitled to any dividend.

5. Minimum Subscription: However, a company invites the general public to subscribe to its share capital. An individual who is interested to subscribe to the share capital of the company sends an application to the company with application money. The Company Act 2013, provides that the directors of the company fix the amount of the application money but it can in no case be less than 5 per cent of the face value of the shares.

Therefore, no allotment shall be made unless the amount of share capital stated in the prospectus as the minimum subscription has been subscribed and the company thereof has received the sum of at least 5 per cent in cash.

Minimum Subscription is that amount of money which in the opinion of directors, must be made available to meet the financial need of the business of the company for the following operations:

a)       The purchase price of any property acquired or to be acquired out of the proceeds of the issue of shares.

b)      For Working Capital

c)       Preliminary Expenses payable by the company.

d)      Underwriting Commission payable by the company.

e)      Repayment of any money borrowed by the company in respect of any of the forgoing matters.

f)        Any other expenditure required for the conduct of usual business operations.

6. Preliminary Expenses: Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following: -

a)       Expenses incurred in order to get the company registered.

b)      Expenses incurred for the preparation, printing and issue of prospectus.

c)       Cost of preliminary books and Common Seal.

d)      Duty payable on Authorized Capital.

e)      Underwriting Commission etc.

Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.

7. Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It should be dated and signed by each director or proposed director and should contain the same particulars as are required in case of prospectus proper.

8.  Sweat Equity Shares: The expression ‘sweat equity shares’ means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. The companies will be allowed to issue Sweat Equity Shares if authorized by a resolution passed by a general meeting. The resolution should specify the number of shares, their value and class or classes of directors or employees to whom such equity is proposed to be issued. The issue of sweat equity shares will be further subject to regulations made by SEBI in this behalf. All limitations, restrictions and provisions relating to equity shares shall be applicable to sweat equity shares as well.

9. Preferential Allotment: Preferential Allotment means placing a bulk of fresh shares with individuals, companies, financial institutions and venture capitalists. The placement is made at a pre-determined price to such parties, who wish to have strategic stake in the company. Such placements have to seek approval from the shareholders by way of special resolution, i.e., it must be approved by at least 75% shareholders foregoing their rights to subscribe to fresh issue and also approving the preferential allotment. A listed company making the preferential allotment shall have to follow the guidelines issued by SEBI in this regard. Mainly the guidelines prescribe that the minimum price of such an issue should be average of highs and lows of 26 weeks preceding the date on which the Board of Directors resolves to make the preferential allotment. Also, if the preferential allotment is above 15 per cent of the equity, an open offer is mandated by SEBI. It may be noted that such shares carry a lock-in period of three years from the date of allotment, i.e., the holders cannot sell the shares for a period of three years. In case, shares have been allotted by an unlisted company, the lock-in period is one year from the date of commercial production or the date of allotment in the public issue, whichever is earlier.

Reservation for Small Individual Applicants

In Case the issue is oversubscribed, the applicants will have to be allotted lesser number of shares than applied for. The Board of Directors may adopt either the lottery method, or pro rata method. SEBI Guidelines, 2000, in this regard, stipulate that the allotment shall be subject to allotment in marketable lots on a proportionate basis. In order to protect the interest of small investors, SEBI Guidelines stipulate a minimum reservation of 50% of the net offer or securities to be allotted to small individual applicants who have applied up to ten marketable lots.

10. Oversubscription and prorata allotment: When the number of shares applied is more than the number of shares issued by a company, the issue of shares is said to be oversubscribed. The company cannot allot shares more than those offered for subscription. In case of over-subscription, there are three possibilities arise:

(a) Some applicants may not be allotted any shares. This is known as ‘rejection of applications’.

(b) Some applicants may be allotted less number of shares than they have applied for. This is known as partial or pro-rata allotment.

(c) Some applicants may be allotted the full number of shares they have applied for. This is known as full allotment.

In such a situation if shares are allotted in proportion of shares issued to shares applied, then such an allotment is called partial or prorata allotment. For example, if company allots shares to the applicants of 70,000 shares. It is a pro-rata allotment in the proportion of 5:7. In such cases, excess application money is transferred to allotment.

11. Sweat Equity Shares: The expression ‘sweat equity shares’ means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. The companies will be allowed to issue Sweat Equity Shares if authorized by a resolution passed by a general meeting. A company can issue sweat equity share any time after registration.

12. Employees stock option plan (ESOP): Employees stock option plan (ESOP) is an employee benefit scheme under which the company encourages employees to acquire shares in the company. Under such scheme, shares are issued to the employees normally at a discounted price.  The main purpose of this plan is:

a)       To motivate the employees to work together for the common goal of company’s growth.

b)      To give financial benefit to the employees.

c)       To create a feeling of responsibility amongst the employees.

d)      To give better job security and job satisfaction.

13. Methods of raising capital:

1. Initial Public Offer (IPO): In a capital market, company can borrow funds from primary market by way of initial public offer. It is process by which a company sale it securities to the general public for the first time.

2. Rights Issue: In capital market, rights issue means selling securities in primary market by issuing shares to existing shareholders.

3. Private Placement: In this method the capital issue is sold directly to institutional investors like insurance companies, banks, mutual funds etc.

4. Offers for Sale: In this case, the company sells the entire issue of shares or debentures to a merchant banker at an agreed price, which is normally below the par value.

5. Venture Capital: It is an important source of funds for new technology based industries where the venture capital firm invests funds in exchange of equity in the startup.

CORPORATE ACCOUNTING CHAPTER WISE NOTES

Unit-I: Shares & Debentures

1. ISSUE OF SHARES AND SHARE CAPITAL

2. RIGHTS SHARES AND BONUS SHARES

3. BUY-BACK OF SHARES

4. REDEMPTION OF PREFERENCE SHARES

5. ISSUE AND REDEMPTION OF DEBENTURES

Unit II: Preparation of financial statements of companies

1. FINAL ACCOUNTS OF COMPANIES

2. ACCOUNTS OF BANKING COMPANIES

Unit-III: Valuations of Goodwill and Shares & Cash Flow Statement

1. VALUATIONS OF GOODWILL AND SHARES

2. CASH FLOW STATEMENT

Unit-IV: Amalgamation, External Reconstruction and Internal Reconstruction

1. AMALGAMATION AND EXTERNAL RECONSTRUCTION

2. INTERNAL RECONSTRUCTION AND CAPITAL REDUCTIONS

Unit-V: Accounts of Holding Companies

ACCOUNTS OF HOLDING COMPANY COMPLETE NOTES

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