The following points highlight the five main steps for the issue of shares by a company. The steps are: 1. Issue of Prospectus 2. Use of Application Moneys 3. Pro Rata Allotment 4. Calls in Advance 5. Calls in Arrear 6. Balance Sheet.
Step # 1. Issue of Prospectus:
To collect capital from the public, a public company issues a document called the Prospectus inviting the public to submit applications to take up shares of the company. Subscription list for a public issue has to be kept open for at least 3 working days.
The prospectus mentions the number and class of shares offered and the manner in which the amount of shares is payable by the public. Usually, the total amount of a share is payable in a number of installments. A certain sum called the application money has to be paid along with the application which has to be made in a prescribed form.
Actually while framing the terms of the issue SEBI guidelines in this regard have to be followed. The following are a few examples of SEBI guidelines:
(i) In case of public issue at par, minimum number of shares for which application is to be made should be fixed at 200 shares of the face value of Rs 10 each.
(ii) Where the issue is at a premium or comprises of debentures whether convertible or non- convertible, the amount payable in all in aspect of each instrument (i.e., on application, allotment and calls) by each applicant shall not be, less than Rs 2,000 irrespective of the size of the premium.
(iii) The minimum application money shall not be less than 25% of the issue price.
(iv) Where on application and on allotment, an amount exceeding Rs 250 crores is raised, the amount to be called up on application/allotment and on various calls shall not exceed 25% of the total quantum of issue.
(v) The capital issued should be made fully paid up within 12 months from the date of the issue. Here, the term issue means ‘allotment’. This guideline does not apply to issues of Rs 500 crore or above.
When the application has been accepted and the shares have been allotted, the second installment called the allotment becomes payable. Subsequent installments will be payable as per terms of the issue and they are termed as calls and are serially numbered.
Thus, the third installment will be called the first call while the fourth installment will be called the second call. The amount of a ten rupee share may be payable as to Rs 2.50 p. with application, Rs 3.50 p. on allotment, Rs 2 on first call and Rs 2 on second and first call.
Application money received will be debited to Bank and credited to Share Applications Account. If equity shares have been issued, the credit will be to Equity Share Applications Account and if preference shares have been issued, the credit will be to Preference Share Applications Account.
Thus, for receipt of application money in respect of equity shares, the entry will be:
To Equity Share Applications Account
(Receipt of application money in respect of equity shares @ Rs per share)
Step # 2. Use of Application Moneys:
The application money has to be kept in a separate bank account maintained with a scheduled bank.
The issuer company, till the date of allotment of shares, can use the application money only for the following:
(i) Adjustment of excess moneys against allotment of shares permitted to be dealt with in a Stock Exchange; or
(ii) Repayment of moneys for failure to get permission from the Stock Exchange.
On and from the date the allotment is made, the application moneys can be utilised by the company for the purposes for which the issue was made.
Allotment of shares:
If the applications received are adequate to fulfill the condition of minimum subscription the Board of Directors can proceed to allot shares on applications received as per SEBI guidelines All applications for identical number of shares have to be dealt with in an identical manner.
In case of over subscription, allotment on a pro-rata basis has to be made subject to the condition that the number of shares allotted to every allotee is in marketable lot or a multiple thereof. Interested student is advised to go through the relevant detailed guidelines in this regard by SEBI.
SEBI guidelines have been changed a few times and a student should remember that SEBI may change them again. Letters of Regret along with refund of the application money are sent to applicants whose applications are rejected Letters of Allotment are sent to other applicants in which the shareholders are requested to remit money due, if any, on allotment; the amount being called allotment money.
The Board of Directors cannot allot more than the number of shares offered to the public in the prospectus even if it has received applications for a larger number.
If the company does not receive applications for at least 90% of the issued amount from the public subscription plus accepted development (i.e., the amount not subscribed for by the public) from underwriters within 120 days from the date of the opening of the issue, the company has to refund the amount of subscription.
In case of the disputed development also, the company has to refund the subscription if the above conditions are not met.
Section 73 of the Companies Act provides for payment of interest on excess application money from the expiry of the 78th day from the closing of the subscription list. Hence, the refund of application money within 120 days from the opening of subscription list is without prejudice to the company’s liability for payment of interest on delayed refunds pursuant to Section 73 of the Companies Act.
When allotment is made, two things are to be done simultaneously. Application money received in respect of shares allotted is to be made part of share capital and allotment money in respect of the same shares is to be made due. Entries for the two are similar.
Assuming that equity shares have been allotted, the journal entry will be as follows:
Equity Share Applications Account Dr.
Equity Share Allotment Account Dr
To Equity Share Capital Account
(Capitalisation of application money in respect of equity shares
@ Rs per share and allotment money due on the
same number of equity shares @ Rs per share
allotted by the Board of Directors)
Application money received with applications which have been rejected will be returned; the journal entry being as follows:
Equity Share Applications Account Dr.
(Refund of application money in respect of applications rejected by the Board of Directors)
As pointed out earlier, some applications may be accepted partially. The surplus application money on such an application will be transferred from Share Applications Account to Share Allotment Account to the extent of allotment money on shares allotted; the balance of surplus application money will be refunded unless the applicant has agreed to get it treated Calls in Advance in which case it will be transferred from Share Applications Account to Calls in Advance Account.
If application money received with an application exceeds the total amount payable on shares allotted, such an excess will have to be refunded even in the case where the applicant has agreed to get the excess application money treated as Calls in Advance.
Let us assume, company issues equity shares of Rs 10 each payable as follows:—
Rs 2.50 with application,
Rs 3.50 on allotment, and
Rs 4 on first and final call.
Further assume that an applicant applies for 500 shares but his application is accepted partially and only 100 shares are allotted to him. The applicant must have paid Rs 1,250 by way of application money. Application money on 100 shares is Rs 250. Out of the surplus of Rs 1,000, Rs 350 will be appropriated towards allotment money, Rs 400 will be treated as Calls in Advance and the balance, Rs 250 will be refunded.
The combined journal entry for disposal of remaining application money after capitalisation of application money on 100 shares will be as follows: –
One may not open separate applications and allotment accounts, but make entries regarding both applications and allotment in one account called ‘Applications and Allotment Account’. If it is done, there will be no entry for transferring surplus application money on partially accepted applications to the extent it can be appropriated towards allotment money.
The balance due on shares after taking into account application money and allotment money may be asked for by the Board of Directors in a number of installments depending upon the terms of the issue. Each such installment is called a ‘Call’.
Wherever a call is made, the relevant share capital account is credited and a separate share call account is debited with the amount due. On receipt of the call, Bank is debited and the relevant Share Call Account is credited with the amount received.
Suppose, in respect of some equity shares, there are in all two calls, the journal entries will be as follows:
According to Table A, no call can exceed one fourth of the nominal value of the shares or be payable at less than one month from the date fixed for the payment of the last preceding call and at least 14 days’ notice must be given to the members for payment of a call.
It may also be noted here that shares may be issued at par, at a premium or at a discount. Issue of a share at par means that the total amount payable by the shareholder in respect of that share is equal to face value (or nominal value or par value) of the share.
Suppose, a company issues shares of the face value of? 10 each on which the shareholders are required to pay Rs 4 per share with applications and Rs 6 per share on allotment, there being no calls, we shall say that the company has issued shares at par because the total amount payable by the shareholder per share is Rs 4 + Rs 6 = Rs 10 which is equal to the face value of one share.
If by the terms of the issue, the shareholders are required to pay more than the face value of the shares allotted to them, it is called an issue at a premium. On the other hand if the shareholders are required to pay less than the face value of the shares allotted to them, it is called issue of shares at a discount. First study a few illustrations relating to issue of shares at par.
P Ltd. issued a prospectus inviting applications for 1,00,000 equity shares of Rs 10 each, payable as to Rs 2.50 p. with application, Rs 3.50 p. on allotment and the balance on first and the final call. Applications were received for 99,000 shares only.
All the applications were accepted in full. The call was also made in due course of time. All moneys were duly received. Journalise all the above mentioned transactions including cash transactions.
In practice, cash transactions are recorded in Cash Book. In a practical problem, if Cash Book has also been asked for, cash transactions should not be journalised.
Jupiter Co. Ltd. issued 5,00,000 equity shares of Rs 10 each payable as follows:
Rs 2.50 with application,
Rs 3.50 on allotment,
Rs 2 on first call
and, Rs 2 on second and final call.
Applications totaled 10,00,500 shares. One application for 500 shares was rejected on technical grounds. All other applications were accepted allotting one share for every two shares applied for. The two calls were also made on due dates.
Assuming that all moneys were duly received, prepare cash book, journal and ledger accounts.
Instead of opening two accounts namely Share Applications Account and Share Allotment Account, only one account called Share Applications and Allotment Account may be opened to serve the purpose of both the accounts.
In the following illustration, the treatment of Share Applications and Allotment Account should be noted.
On 1st April, 2011, A Ltd. issued 4,00,000 equity shares of Rs 10 each payable as follows:
Rs 2.50 on application;
Rs 3.50 on allotment;
Rs 2 on 1st October, 2011; and
Rs 2 on 1st February, 2012.
By 20th May, the issue was fully subscribed. Allotment was made on 1st June. All sums due on allotment were received by 1st July; those on 1st call were received by 20th October. When accounts were closed on 31st March, 2012, the second and final call on 1,000 shares had not been received.
Journalise the transactions.
Step # 3. Pro Rata Allotment:
Pro rata means proportionately. Allotment on pro rata basis means that allotment on every application is made in the ratio which the total number of shares to be allotted on this basis bears to the total number of shares applied for in all such applications.
If, 20,000 shares are allotted on pro rata basis on applications for 25,000 shares, it means that four shares are allotted for every five shares applied for. Usually applications are invited in multiples of a certain number of shares and it becomes possible to allot shares on pro rata basis without involving fractions of shares to be allotted. Shares are mostly allotted to the nearest multiple of marketable lot, mostly 100 shares.
On 1st March, 2011 Alpha Co. Ltd. issued 12,500 10% preference shares of Rs 25 each payable as to Rs 8 with application, Rs 12 on allotment and the balance in two equal calls of Rs 2.50 per each. Subscription list (which was opened on 6th March, 2011) totaled 25,500 shares.
The Board of Directors rejected one application for 500 shares and allotted shares on the remaining applications on pro rata basis on 1st April, 2011. First call was made three months after allotment whereas the second call was made four months after the first call. All moneys were duly received. In each case, a 14 days’ notice was served.
Pass journal entries, prepare cash book and show ledger accounts.
Where both the equity and preference shares are issued, the company will maintain separate application, allotment, call and capital accounts in respect of the two classes of shares.
In a question on the issue of both classes of shares unless different dates have been mentioned in the question, it may be assumed that both classes of shares have been allotted on the same date and the dates for the making and receiving the different calls on the two classes of shares also concur.
Keswani Co. Ltd. issued 7,50,000 equity shares of unit required 10 each and 50,000 12% preference shares of Rs 100 each, payable as under:
The company received applications for 15,01,000 equity shares and 49,000 preference shares. Applications totaling 1,000 equity shares had to be rejected. Allotment on other applications for equity shares was made on a pro rata basis. All applications for preference shares were accepted in full. Calls were made on due dates. All moneys were duly received.
Show journal entries for the abovementioned transactions.
Step # 4. Calls in Advance:
A company, if its Articles of Association permit, may receive from shareholders the amount remaining unpaid on shares held by them even though the amount has not been called up. The amount so received is credited to Calls in Advance Account. When a call is made, the appropriate amount is transferred from Calls in Advance Account to the relevant call account.
Interest on calls in advance may be paid from the date of receipt of the advance to the date of appropriation (i.e. to the date of making the call). Entry for payment of such interest will be to debit Interest on Calls in Advance Account and to credit Bank. If surplus application money is treated as calls in advance, interest will be paid with effect from the date of allotment and not from the actual receipt of the application money.
Interest on Calls in Advance is a nominal account and hence while preparing the final accounts of the company, it is transferred to Profit & Loss Account.
Step # 5. Calls in Arrear:
Some shareholders may not pay allotment money or call in time. Share Allotment Account or Share Call Account is a personal account showing the amount due from the shareholders. If all moneys are duly received, these accounts will close. But if even after the expiry of the last date fixed for payment, some shareholders fail to pay, these accounts will show balances.
The company may accept late payment of allotment money or call with or without interest for late payment. If interest is received, it will be debited to Bank and credited to Interest on Calls in Arrear Account, the latter account being transferred to Profit & Loss Account at the end of the accounting year.
A company may maintain Calls in Arrear Account. In such a case, after the expiry of the last date for payment of allotment money or a call, the amounts not received by the company are transferred from Share Allotment Account or the relevant Share Call Account to Calls in Arrear Account.
For receipt of calls in arrear, Bank will be debited and Calls in Arrear Account will be credited. Here also, for interest on calls in arrear for the period between the last date fixed for payment and the actual date of payment, Bank will be debited and Interest on Calls in Arrear Account will be credited.
If nothing is given in the question, it may be assumed that 14 days notice was given for payment of a call. In the examination if notice period is not motioned, interest may be calculated from the date of making of the call with a note.
Sometimes in a practical problem on issue of shares, it is stated that the company has adopted Table A as its Articles of Association.
While attempting such a problem, it is necessary to remember the following provisions of Table A:
1. No call shall exceed one-fourth of the nominal value of the share or be payable at less than one month from the date fixed for the payment of the last preceding call. At least 14 days’ notice must be given to the members for payment of the call.
2. If a sum called in respect of a share is not paid on or before the due date, the person concerned shall pay interest thereon from the due date to the time of actual payment at 5 per cent per annum. The Board shall be at liberty to waive interest or charge it at a lower rate.
3. The Board:
(a) May, if it thinks fit, receive from any member willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him; and
(b) Upon all or any of the moneys so advanced, may (until the same would, but for such advance, become presently payable) pay interest at such rate not exceeding, unless the company in general meeting shall otherwise direct, six per cent per annum as may be agreed upon between the Board and the member paying the sum in advance.
Briefly speaking, while attempting such a problem:
(i) Interest on calls in advance should be paid @ 6% per annum.
(ii) Interest on calls in arrear should be charged @ 5% per annum,
(iii) It should be assumed that 14 days’ notices were given to pay calls.
Even if a company has framed its own Articles of Association but the document does not contain any provisions to the contrary, the relevant provisions of Table A of the Companies Act will be applicable.
Good luck Ltd. issued on 1st April, 2011 a prospectus inviting applications for 10,00,000 equity shares of Rs. 10 each, payable as stated below:
With application Rs 2.50
On allotment Rs 2,50
On first call (three months after allotment) Rs 2.50
On second call (four months after first call) Rs 2.50
Every application had to be for a minimum of 500 shares. Prospectus also stated that the surplus application money, if any, remaining after appropriation towards allotment money, would be treated as calls in advance.
Subscriptions totaled 25,00,500 shares. On 1st May, 2011 the Board of Directors rejected one application for 500 shares on technical grounds and accepted all other applications, allotment being made on a pro rata basis.
One shareholder who had applied for 1,000 shares and to whom 400 shares had been allotted paid the final call two months late along with interest for late payment. All other moneys were received in time. The company has adopted Table A as its Articles of Association. It closes its books of account every year on 31st March.
Pass journal entries for all the above mentioned transactions during the year ended 31st March, 2012.
Step # 6. Balance Sheet:
Balance Sheet of a joint stock company has to be prepared in the prescribed form shown in Schedule VI Part I of the Companies Act. All items have to be shown under the prescribed heads and in the prescribed order. In every illustration where balance sheet has been shown, note carefully the order of items and the headings under which different items appear.
Wye Ltd. was registered with an authorized capital of Rs 2 crore divided into shares of Rs 10 each.
It issued at par 10,00,000 equity shares, the payment per share was to be made as follows:-
with application Rs 2.50,
on allotment Rs 3.50, and
on first and final call Rs 4
Applications were received for 9,90,000 shares. The Board of Directors accepted all the applications in full. All the allottees paid the allotment money in time. The call was also made. Call on 500 shares was received 5 months late along with interest @ 12% per annum whereas call on 1,000 shares was still in arrear when the final accounts for the first year were prepared.
Record the abovementioned transactions in the books of the company and prepare the balance sheet as at the end of the year.