Procedure for Issue of Shares

Procedure for Issue of Shares

The company while issuing shares for public follows the rules prescribed by The Companies Act 2013. This process of Issue of Shares to General public is divided into three basic steps. First step is Issue of prospectus, while the second and third steps are Receipt of Application and Allotment of shares. If a company wants to create new share the process is called Allocation and Allotment. We are discussing main three steps in this article which are as follows:

Issue of Prospectus

A formal legal document contain offer details which is used by a corporate company for inviting offers from the general public to purchase shares and securities. All the public companies are entitled to issue the prospectus to sell its shares and debentures. A valid prospectus must contain essential requirements and must be registered. If prospectus is un- registered then it is considered as invalid. The role of a prospectus is very important for public companies.

Receipt of applications

When a valid prospectus is issued to the general public, interested investors can apply or submit their applications through a given form along with application money. Investors need to submit their applications before the closing date mentioned in prospectus. They can deposit the same with a scheduled bank as specified in the prospectus.

Company has to get applications for minimum shares (minimum fund raised to meet the minimum requirements of the company) within the period of 120 days from the date of issue of prospectus. If company is not able to receive the same within the said time limit, it cannot proceed for allotment of shares and application money which is received by the company should be returned to the subscribers within 130 days from the date of issue of prospectus.

Allotment of Shares

This is the process under which the subscribers take their shares from a company. Allotment of shares is the end of this process of issue of shares. After receiving the minimum subscription and fulfilling other legal formalities a company may proceed for allotment of shares to its subscribers as per their individual applications. Now after completing the second step company can issue letter of allotment to those whom shares have been allotted and letter of regret can be issued to those whom no allotment of shares has been made. Allotment of shares results in a valid contracts between the company and the applicant who now become companies shareholder.

Shares issued at Par

Company can issue share either at par or at premium, shares are to be issued at par when issue price of shares is equal to their nominal value.

Shares issued at Premium

When shares are issued more than its nominal value or face value, excess amount is called the premium. As discussed above the share capital of a company may be collected in installments payable at different stages as and when needed by the company.

Accounting Treatment

Let us now discuss the accounting treatment of the process of issue of shares. At different stages of the process journal entries have been made in the accounting books. These journal entries for accounting purposes are as follows at different stages:

On Application

The contribution made by subscribers to share capital with various installments should be credited in the share capital. In the beginning of the process individual accounts are opened for every installment. A separate account is opened in a scheduled bank to deposit all the money received along with application money. Journal entry for this is

Bank Account                                             Dr.
           To Share Application Account

Narration: Amount received on applications for____ shares at Rs____

On Allotment

After receiving minimum subscriptions and completing all the legal formalities according to the Companies Act, the allotment of shares has been made after compiled with the directors of the company. At the time of the allotment of shares a contract implies between the company and its applicants who become a member or shareholders of the company. Journal entries at the time of allotment of shares are:

1. For transfer of Application money to Share Capital

Share Application Account                       Dr.
           To Share Capital Account

Narration: Application money for ___ shares Allotted/Transfer to Share Capital

2. For Money refunded for rejected Applications

Share Application Account                       Dr
           To Bank Account

Narration: Application money returned to applicants on rejected applications for ____ shares

3. For Amount of Shares Due on Allotment

Share Allotment Account                           Dr
           To Share Capital Account

Narration: Allotment money due on ___ shares

4. Amount Adjustment of Excess Application Money

Share Application Account                        Dr
           To Share Allotment Account

Narration: Application money on__ shares at Rs __each is adjusted to the amount due on allotment

5. For Receipt of Allotment Money

Bank Account                                                  Dr
           To Share Allotment Account

Narration: Allotment money received for ___ shares at Rs. ___ each

Combined Journal entry can be passed for adjustment of Excess application Money and amount refunded for rejected application

Share Application Account                         Dr
             To Share Allotment Account
             To Bank Account

Narration: Excess Application amount adjusted and balance refunded to subscribers.

Combined Account Journal Entries

Reason for opening a combined account is that allotment without application is not possible while there is no meaning of application without allotment. Both are stages of share capital are related to each other. That’s why sometimes a combined account of Share application and Share allotment is opened as “Share application and Allotment account”. For this the journal entries are recorded as follows:

1. For receipt of Application and allotment money

Bank Account                                                                     Dr
            To Share Application and Allotment Account

Narration: Amount received on applications for shares at Rs.___ each

2. For Transfer Due amount of Application and Allotment

Share Application and Allotment Account              Dr
             To Share Capital Account

Narration: Amount of application transfer to Share Capital Account for amount due or allotment of___ Shares at Rs. ___ per share

3. For Money Refunded for Rejected Applications

Share Application and Allotment Account              Dr
             To Bank Account

Narration: Amount of Rejected applications refunded for ___ shares at Rs.___ per share

4. On Receipt of Allotment Money

Bank Account                                                                       Dr
             To Share Application and Allotment Account

Narration: Balance amount of allotment received.

On Calls

To make shares fully paid up and for release of full amount of shares from shareholders, the role of calls is very important in the whole process. When shares are not fully called up till the completion of allotment, the directors have the authority to ask for the balance amount on shares as and when they need funds. The timing of the payment of calls is sometimes mentioned in the prospectus or may be determined at the time of issue of shares to the shareholders.

As per article provided by the Association of the company there are two points regarding the calls of shares which are very important. First point is the amount should not exceed 25% of the face value of shares at any call and second point is there must be an interval of at least one month between making of two calls.

When a call is made and amount for the same is received, journal entries are as under:

1. For calls amount due

Share Call Account                                   Dr.
             To Share Capital Account
Narration: Call money due for ___ Shares at Rs. ___ per share

2. For receipt of the Call Amount

Bank Account                                              Dr
               To Share Call Account
Narration: Call Amount Received

To identify the Calls made by the company time to time the word First, Second and third must be inserted between the word “Share” and “Call”. Example: if company made first call then it will be termed as “Share First Call Account”, for Second Call it will be “Share Second Call Account” and so on. In case of last call the word “and Final” will be added. Example: if second call is the last call made by the company it will be as “Second and Final Call Account” and if it is the third call which is final then it will be termed as “ Third and Final Call Account”. If the whole amount of share is collected at the time of first call, then the first call will be called as “First and Final Call Account”

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