Issue of Shares

The Issue of Shares is one of the most fundamental topics in the CS Executive accounting syllabus. When a company decides to raise capital, it does so by issuing shares — units of ownership that give the holder a residual claim on the company’s assets and earnings. The process of issuing shares, from receiving applications to calls on shares, is governed by the Companies Act, 2013, and requires meticulous journal entries at every stage. Mastering this topic is essential because it forms the foundation for understanding how sole proprietorship differs from partnership differs from corporate entity accounting.

For the CS Executive examination, questions on Issue of Shares appear frequently — both as theory questions (often 4–6 marks) and as numerical problems (5–8 marks). The numerical questions typically require you to journalise the entire process from the initial call to the final receipt of money, including handling excess application money and calls in arrears. Theory questions test your understanding of the legal provisions under the Companies Act, 2013 — particularly Section 39, Section 40, and the rules around minimum subscription and promoters’ liability.

The key to scoring well on this topic is two-fold: first, you must understand the legal framework around share issuance — who can issue shares, at what price, and what disclosures are required in the prospectus; second, you must be able to produce accurate, well-structured journal entries that correctly apply the principles of debit and credit under double-entry book-keeping. Both are tested independently in the CS Executive exam.

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🟢 Lite — Quick Review (1h–1d)

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The Three Stages of a Share Issue:

Every share issue goes through three stages, each generating a journal entry:

1. Application Stage — Shareholder applies and pays application money (e.g., ₹2 per share on a ₹10 face value share)

   • Bank A/c Dr. [Amount received]
     • To Share Application A/c [Amount received]
   • On rejection of excess applications: Share Application A/c Dr. → To Bank A/c

2. Allotment Stage — Company allots shares (e.g., ₹3 per share due on allotment, including premium if any)

   • Share Application A/c Dr. [Amount adjusted from application]
   • To Share Capital A/c [Face value received]
   • To Securities Premium A/c [Premium received, if applicable]

3. Call Stage — Company makes calls (e.g., ₹3 each on first call, ₹2 on final call)

   • Share Call A/c Dr. [Amount called up]
     • To Share Capital A/c
   • On receipt: Bank A/c Dr. → To Share Call A/c
   • On non-payment: Forfeiture rules apply — refer to standard treatment below

Key Rules to Remember:

• Application money must be at least 5% of nominal value
• Allotment money is due when the board passes a resolution
• Calls must be made with at least 14 days’ notice
• A company cannot levy interest on calls unless specified in Articles
• Shares can be forfeited for non-payment of calls after due notice

High-Yield Point: Excess application money is refunded, not carried forward — unless the company’s articles provide otherwise. Watch for the question variant where application money is partly adjusted against allotment.

⚡ Exam Tip: In the CS Executive exam, questions often combine Issue of Shares with Forfeiture and Reissue. The full sequence (issue → forfeiture → reissue) is a common 12–16 mark question. Practise the journal entries for forfeiture carefully — debit Share Capital with the called-up amount (not face value), and credit Share Forfeiture A/c with the amount received over the called-up portion.

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🟡 Standard — Regular Study (2d–2mo)

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Legal Framework Under the Companies Act, 2013:

The Companies Act, 2013 (Sections 39–40) governs the issue of shares in India. Key provisions:

• Section 39(1): All shares must be paid-up at the time of issue — the company cannot issue shares at a discount (except through sweat equity or under a scheme of debt-equity restructuring approved by a tribunal)
• Section 39(2): If shares are issued at a premium, the premium must be transferred to the Securities Premium Account, which can only be used for specific purposes (writing off share issue expenses, issuing fully paid bonus shares)
• Section 40: The prospectus (or red herring prospectus for a book-built issue) must disclose the minimum subscription — the minimum amount that must be raised for the issue to be valid. If minimum subscription is not received within the specified period, the company must refund all application money within the prescribed time

Types of Share Issues:

Issue Type	Description	Pricing
Par (Face Value) Issue	Shares issued at exactly face/nominal value	₹10 share issued at ₹10
Premium Issue	Shares issued above face value	₹10 share issued at ₹25 (₹15 premium)
Discount Issue	Shares issued below face value	Permissible only in specific cases under Companies Act
Sweat Equity	Shares issued to employees/directors at a discount	Regulated under S.54

The Journal Entries — Full Sequence:

Assumption: 10,000 shares of ₹10 each issued at a premium of ₹5. Application money ₹3 (including premium ₹1), Allotment ₹7 (including premium ₹4), First Call ₹3, Final Call ₹2.

1. On Receipt of Application Money (10,000 × ₹3):

Bank A/c                 Dr.    30,000
   To Share Application A/c          30,000

2. On Allotment (adjust full application money; balance due):

Share Application A/c     Dr.    30,000
   To Share Capital A/c           10,000   [10,000 × ₹1 face value]
   To Securities Premium A/c       20,000   [10,000 × ₹2 from application]

[Allotment due: 10,000 × ₹7 = ₹70,000 — application money already received and applied]
[No separate entry needed at this stage if application money is adjusted against allotment]

Share Application A/c    Dr.    10,000   [excess refund — assuming 10,000 applied, 10,000 alloted]
   To Bank A/c                     10,000

3. On First Call (10,000 × ₹3):

Share First Call A/c      Dr.    30,000
   To Share Capital A/c           30,000

On receipt: Bank A/c Dr. 30,000 → To Share First Call A/c 30,000

4. On Final Call (10,000 × ₹2):

Share Final Call A/c      Dr.    20,000
   To Share Capital A/c           20,000

On receipt: Bank A/c Dr. 20,000 → To Share Final Call A/c 20,000

Forfeiture of Shares (for non-payment of calls):

If a shareholder fails to pay a call, the company may forfeit the shares after giving due notice. The journal entry:

Share Capital A/c          Dr.    [Called-up amount on forfeited shares]
Share Forfeiture A/c       Dr.    [Amount received over called-up portion at time of issue]
   To Share Call A/c               [Amount of unpaid call]
   To Outstanding Call A/c        [If not yet due at forfeiture]

The Share Forfeiture A/c is a capital reserve — it represents profits previously earned on those shares. When the forfeited shares are reissued, if they are reissued at a discount, the discount is debited to Share Forfeiture A/c. Any excess over the discount is credited to Capital Reserve.

⚡ Study Strategy: Practise the full sequence from application to calls minimum 5 times before the exam. Then add forfeiture and reissue — this is the most common full-scope question and typically worth 12–16 marks.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Detailed Legal Provisions:

Section 39 — Allotment of Shares:

• Allotment is valid only when the minimum subscription is received
• The board must not allot shares unless the minimum subscription has been received
• If minimum subscription is not received, application money must be refunded within 70 days of the issue
• Allotment must be made within 60 days of receipt of applications

Section 40 — Prospectus Requirements:

• Every prospectus must state the minimum subscription
• The minimum subscription cannot be less than 90% of the offer
• If the issue fails to achieve minimum subscription, the company cannot proceed with the allotment

Pro-Rata Allotment:

When applications are oversubscribed, the company may make a pro-rata allotment — allotting fewer shares than applied for, with excess application money adjusted against allotment. The key journal entry question in pro-rata situations:

• When pro-rata allotment is made and excess application is adjusted: No refund entry, just adjust the application money against allotment
• When the company refunds excess: Bank A/c Dr. → To Share Application A/c

Calls in Arrears:

When a shareholder does not pay a call, the company can:

1. Charge interest if the Articles of Association permit (typically at 5–10% p.a. from the due date to the date of actual payment)
2. Forfeit the shares if notice with 14 days’ default period is served and the shareholder still fails to pay
3. Reissue the forfeited shares at a discount (maximum discount = amount forfeited + any loss on reissue, limited by Share Forfeiture A/c balance)

Over-Subscription and the Treatment of Excess Application Money:

A classic CS Executive variant: What happens when a company receives applications for 15,000 shares but only allots 10,000 on a pro-rata basis? The usual treatment:

• Applications for 15,000 shares received @ ₹3 each = ₹45,000 received
• Application money received: ₹3 × 15,000 = ₹45,000
• Amount adjustable against allotment: 10,000 × (₹3 + ₹X allottment due) — as per terms of issue
• Excess to be refunded: ₹45,000 minus amount adjusted

Numerical Problem Template:

“XYZ Ltd. issued 50,000 equity shares of ₹10 each at a premium of ₹5 per share. The issue was payable as: ₹3 on application, ₹7 on allotment (including premium), ₹3 on first call, and ₹2 on final call. Applications were received for 70,000 shares and the company made a pro-rata allotment to all eligible applicants. The excess application money was refunded. All calls were duly received except for 500 shares on which the first call remained unpaid. These 500 shares were forfeited and later reissued at ₹8 per share fully paid.”

Required: Journalise all transactions.

Approach: Draw a timeline, calculate amounts at each stage, identify the debit/credit accounts, then write entries. The key insight for forfeiture entries: the Share Capital A/c is debited with the called-up amount (₹10 per share × 500 shares = ₹5,000) not the face value × number of shares.

Common Mistakes to Avoid:

1. Confusing “called-up capital” with “paid-up capital” — called-up is what the company has asked for; paid-up is what has actually been received
2. Forgetting that securities premium is a separate reserve and cannot be used for dividend distribution
3. Recording the wrong amount in Share Forfeiture A/c — it should equal the amount received over the called-up portion at the time of original issue
4. In pro-rata situations, incorrectly calculating the excess to be refunded — always work from the gross amount received