Modes of issue of shares:
A company can issue shares in two ways:
1. For cash.
2. For consideration other than cash.
Issue of shares for cash: When the shares are issued by the company in consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or at a premium or at a discount. Such issue price may be payable either in lump sum along with application or in instalments at different stages (e.g. partly on application, partly on allotment, partly on call). Accounting procedure for the issue of shares for cash is given below:
|
Steps
|
Conditions
|
Treatment
|
|
1.
|
|
Record the receipt of application money
|
|
2.
|
a) When number of shares applied is equal to the number of shares issued.
|
Transfer the full amount of application money received to Share Capital A/c.
|
|
|
a)
b) When number of shares applied are less than the number of shares issued.
|
· If the minimum subscripttion has at least been received:
Transfer the full amount of application money received to Share Capital A/c.
· If the minimum subscripttion has not been received:
Refund the total application money to all the applicants.
|
|
3.
|
|
Make due the allotment money on shares allotted.
|
|
4.
|
|
Record the receipt of allotment money.
|
|
5.
|
|
Make due the call money on shares allotted.
|
|
6.
|
|
Record the receipt of call money.
|
Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par.
Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called premium. It is a capital profit for the company and will show credit balance; hence it will be shown in the liability side of the Balance Sheet under the heading ‘Reserves and Surplus’ in a separate account called ‘Security Premium Account’.
Shares of those companies can be issued at premium which offer attractive rate of dividend on their existing shares, having a good profit track for last few years and whose shares are in demand. The amount of premium depends upon the profitability and demand of shares of such company.
Note: The Company may collect the amount of security premium in lump sum or in instalments. Premium on shares may be collected by the company either with application money or with the allotment money or even with one of the calls. In absence of any information, the amount of the premium is to be recorded with allotment.
Utilisation of Security Premium Amount: According to Section 78 of the Companies Act 1956, the amount of security premium may be applied only for the following purposes:
(i) To issue fully paid up bonus shares to the existing shareholders.
(ii) To write off preliminary expenses of the company.
(iii) To write off the expenses, or commission paid, discount allowed on issue of the shares or debentures of the company.
(iv) To pay premium on the redemption of preference shares or debentures of the company.
(v) To buy-back its own shares as per section 77A.
If the company wishes to use the premium amount for any other purpose, it will have to first obtain the sanction of the court for the same or it will be treated as reduction of capital.
Issue of shares at discount: Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 – Rs. 9)] is called as the amount of discount.
Share discount account showing a debit balance denotes a loss to the company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of ‘Miscellaneous Expenditure’ in a separate account called ‘Discount on issue of Shares Account’.
Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act 1956:
(i) At least one year must have elapsed since the company became entitled to commence business. It means that a new company cannot issue shares at a discount at the very beginning.
(ii) The company has already issued such types of shares.
(iii) An ordinary resolution to issue the shares at a discount has been passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained.
(iv) 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% of the face value of the shares. For more than this limit, sanction of the Company Law Tribunal is necessary.
(v) The issue must be made within two months from the date of receiving the sanction of the Company Law Tribunal or within such extended time as the Company Law Tribunal may allow.
CAclubindia
