Issue of Shares

Issue of Shares

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Issue of Shares is the process by which a company raises its share capital by offering new equity or preference shares to the public, existing members, or private parties, governed by the Companies Act, 2013 (Sections 23–68) and SEBI (ICDR) Regulations for listed companies. The accounting covers share application, allotment, calls, forfeiture, reissue, and underwriting.

Term	Meaning
Authorised Capital	Maximum capital a company can issue as per MOA
Issued Capital	Portion of authorised capital offered to the public
Called-up Capital	Portion of face value actually called on shares
Paid-up Capital	Portion actually received (Called-up − Calls in Arrears)

Key formula: Securities Premium = (Issue Price − Face Value) × Number of Shares Allotted.

• Issue Price = Face Value + Premium (per share, in INR).
• Minimum Subscription must reach 90% of the issue; otherwise refund within 60 days (Sec. 39).
• Forfeiture entry debits Share Capital and unpaid Securities Premium, credits Calls in Arrears and Forfeited Shares A/c.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Types and Modes of Issue

A company may issue Equity Shares (with voting rights and variable dividend) or Preference Shares (with preferential dividend, fixed rate, and redemption clause). Modes include Public Issue, Rights Issue, Bonus Issue, Private Placement, Sweat Equity, and ESOP. Issue may be at par, at premium, or (exceptionally) at discount — discount is permitted only on sweat equity under Section 53 of the Companies Act, 2013.

Procedure of Issue

The company files a DRHP/RHP with SEBI, fixes the price band, opens the issue, and allots shares within 60 days of closure. Minimum Subscription is 90% of the offer; failure triggers full refund. Application money is first received, then transferred to Share Capital on allotment, and balance is collected through calls.

Calls in Arrears and Calls in Advance

Concept	Treatment
Calls in Arrears	Interest @ ≤12% p.a. on unpaid amount for defaulted period
Calls in Advance	Interest @ ≤12% p.a. paid to shareholder; shown as liability, not capital
Pro-rata Allotment	Excess application money transferred to Allotment/Calls account

Forfeiture and Reissue

When a shareholder fails to pay the call money, shares are forfeited (Sec. 50). The entry credits Forfeited Shares A/c with the amount actually received (excluding premium not received). On reissue, any discount allowed is debited to Forfeited Shares A/c, and the balance is transferred to Capital Reserve — never to Capital Redemption Reserve or Securities Premium.

Underwriting

Underwriting may be Firm (underwriter liable for the full agreed percentage) or Marked/Maximum (liability on under-subscribed marked portion). The net liability = Marked Liability − Firm Liability, then grossed up by the unmarked portion.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Accounting Entries — Full Life Cycle

Stage	Entry (per share, where applicable)
Application received	Bank A/c Dr → To Share Application A/c
Allotment	Share Application A/c Dr + Securities Premium A/c Dr → To Share Capital A/c, To Share Allotment A/c
Calls in Arrears	Shares are forfeited; Share Capital A/c Dr (FV) + Securities Premium A/c Dr → To Calls in Arrears A/c, To Forfeited Shares A/c
Reissue at discount	Bank A/c Dr + Forfeited Shares A/c Dr → To Share Capital A/c
Transfer to Capital Reserve	Forfeited Shares A/c Dr → To Capital Reserve A/c (profit only on reissued shares)

Edge Cases and Connections

Securities Premium (Sec. 52) can be used only for limited purposes — issuing bonus shares, writing off preliminary expenses, providing premium on buyback (Sec. 68), or writing off commission on issue. It is not a free reserve. Capital Reserve arising from forfeiture–reissue is a free reserve but cannot be used for dividend distribution under the Companies Act.

Schedule III disclosure requires the Balance Sheet to show Authorised, Issued, Subscribed and Paid-up capital split into Equity and Preference components. IEPF provisions apply to unclaimed dividends and shares after 7 years.

Common Mistakes in the Exam

1. Crediting the full forfeited amount to Capital Reserve instead of the proportionate gain on reissued shares.
2. Debiting Securities Premium for premium not received at forfeiture — premium not received must be ignored.
3. Treating Calls in Advance as part of Paid-up Capital before the call is made.
4. Confusing Underwriting marked liability with net liability — always deduct firm liability first.
5. Issuing shares at a discount assuming it is general practice — only sweat equity under Sec. 53 permits discount.

Practice Prompts

• A company issues 10,000 shares at ₹10 each at a premium of ₹5. Applications received for 12,000; pro-rata allotment is made. Pass journal entries and compute Securities Premium.
• 1,000 shares were forfeited for non-payment of allotment ₹3 and first call ₹2 (face value ₹10). 600 shares reissued at ₹8 as fully paid. Show the Capital Reserve transfer.

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