Comprehensive Accounting for Share Capital and Companies Act 2013 Guidelines

Fundamental Characteristics of a Company

• Incorporation: A company is an entity incorporated under the Companies Act, $2013$ or any previous company law.
• Artificial Legal Person: It is defined as an artificial and intangible person in the eyes of the law.
• Separate Legal Entity: The entity of a company is entirely separate from its members.
• Perpetual Succession: A company has perpetual succession, meaning its existence is not affected by the death or insolvency of its members.
• Limited Liability: In a company limited by shares, the liability of its members is limited to the unpaid value of their shares.
• Transferability of Shares: Shares are freely transferable, except in the case of a private company where certain restrictions apply.
• Management and Control: The company is managed by a Board of Directors, who are elected by the shareholders.
• Common Seal: A company has a common seal, which acts as its official signature.

Kinds of Companies

One Person Company (OPC)

• Definition: According to Section $2(62)$ of the Companies Act, $2013$, a One Person Company means a company which has only one person as a member.
• Incorporation: This type of company is incorporated as a private company.
• Comparison with Sole Proprietary Firm: An OPC differs from a sole proprietary firm because in an OPC, the liability of the member is limited and it is a separate legal entity. In contrast, in a sole proprietary firm, the liability of the proprietor extends to both business assets and private assets.

Private Company

• Definition: According to Section $2(68)$ of the Companies Act, $2013$, a private company is one having a minimum paid-up share capital of $1$ lakh rupees ($1,00,000$) or such higher paid-up share capital as may be prescribed. It is characterized by its Articles of Association which:
  • (a) Restricts the right to transfer its shares.
  • (b) Limits the number of its members to $200$ (excluding one person companies).
  • (c) Prohibits any invitation to the public to subscribe for any securities of the company.
• Membership: A private company must have at least $2$ members.
• Naming Convention: The name of a private company must end with the words "Private Limited."

Public Company

• Definition: According to Section $2(71)$ of the Companies Act, $2013$, a public company is a company which:
  • (a) Is not a private company.
  • (b) Has a minimum paid-up share capital of $5$ lakh rupees ($5,00,000$) or such higher amount as may be prescribed.
  • (c) Requires seven ($7$) or more members to form.
  • (d) Includes a private company that is a subsidiary of a public company (deemed public company).
• Membership Limits: There is no restriction on the maximum number of members in a public company.
• Naming Convention: The name of a public company must end with the word "Limited."

Classification of Companies on the Basis of Liability

Company Limited by Shares

• Definition: According to Section $2(22)$ of the Companies Act, $2013$, this is a company where the liability of its members is limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
• Illustrative Example: If Ram holds $6000$ shares of $10$ each in X Ltd and has already paid $7$ per share, his remaining liability is limited to $3$ per share, totaling $(3 \times 6000) = 18,000$.

Company Limited by Guarantee

• Definition: Per Section $2(21)$ of the Companies Act, $2013$, the liability of members is limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.
• Obligation: Members cannot be called upon to pay any amount exceeding what is mentioned in the memorandum.

Unlimited Company

• Definition: According to Section $2(92)$ of the Companies Act, $2013$, an unlimited company is one not having any limit on the liability of its members.

Share Capital and Kinds of Shares

Concept of Share Capital

• Definition: Share capital refers to the amount a company can raise or has raised through the issue of shares. It is divided into units of small denominations, and each unit is called a share.
• Example: If a company's total capital is $1,00,00,000$ and it is divided into $10,00,00,000$ units of $10$ each, then each unit is a share of $10$. The nominal value of the share is $10$.

Kinds of Shares (Section 43)

Under Section $43$ of the Companies Act, $2013$, share capital can be of two types:

1. Preference Shares: These shares carry two preferential rights:

   • (i) Preferential right to receive a dividend as a fixed amount or calculated at a fixed rate (free of or subject to income tax) before any dividend is paid to equity shareholders.
   • (ii) Preferential right to the return of capital on winding up before equity shareholders.

2. Equity Shares: According to the Act, equity/ordinary shares are those which are not preference shares. They are the most commonly issued. Holders are the real owners and assume maximum risks and rewards. Capital is refunded only after preference capital is redeemed during winding up.

Classes of Preference Shares

• Non-Cumulative: Holders do not have the privilege to receive arrears of dividends in future if the company lacks sufficient profit in a given year.
• Cumulative: Holders have the right to receive arrears of dividend before any payment to equity shareholders.
• Participating: Holders have the right to participate in surplus profits if permitted by the Articles of Association, after equity dividends are paid.
• Non-Participating: Holders do not share in the surplus profits left after paying equity dividends.
• Convertible: Holders have the right to convert their shares into equity shares within a certain timeframe.
• Non-Convertible: Holders do not have the right to convert their shares.
• Redeemable: Shares that can be redeemed (refunded) by the company on or before a specific date.
• Irredeemable: Shares redeemable only at the time of winding up. The Companies Act, $2013$ does not permit the issue of irredeemable preference shares.

Comparison Table: Equity vs. Preference Shares

• Rate of Dividend: Equity rates are decided by the Board and approved by shareholders (variable); Preference rates are pre-decided and fixed.
• Right of Dividend: Equity is paid after preference; Preference is paid before equity.
• Arrears of Dividend: Equity dividends are not accumulated; Preference arrears are paid only on cumulative shares.
• Convertibility: Equity shares are non-convertible; Preference shares may be convertible if terms provide.
• Redemption: Equity shares are irredeemable during the company's life (though buy-backs occur); Preference shares are redeemable after a specified period.
• Voting Rights: Equity holders have full voting rights; Preference holders generally have no voting rights.
• Refund of Capital: Equity is repaid last on winding up; Preference is repaid before equity.

Kinds of Share Capital (Schedule III, Part I)

1. Authorised/Nominal Capital (Section 2(8)): The maximum amount of share capital authorized by the memorandum.
2. Issued Capital (Section 2(50)): The portion of authorized capital issued by the company from time to time for subscription, including shares issued for cash or consideration other than cash.
3. Subscribed Capital (Section 2(86)): That part of the capital which is for the time being subscribed by the members.
4. Called Up Capital (Section 2(15)): That part of the capital which has been called for payment.
5. Paid Up Capital (Section 2(64)): The aggregate amount of money credited as paid-up, equivalent to the amount received in respect of shares issued.
6. Reserve Capital: The portion of uncalled capital reserved through a special resolution to be called up only in the event of winding up.

Accounting for Calls

• Calls in Arrears: The amount called by the company but not paid by shareholders. In Notes to Accounts, it is deducted from called-up capital. Under Table-F, interest on calls in arrears can be charged up to $10\%$ per annum.
• Calls in Advance: Amount accepted by the company in respect of uncalled capital if the Articles allow. This is shown under "Other Current Liabilities." Under Table-F, interest on calls in advance can be allowed up to $12\%$ per annum.

Balance Sheet Presentation (Schedule III, Part I)

Equity and Liabilities Section

1. Shareholder's Funds: Includes Share Capital, Reserves and Surplus, and Money received against share warrants.
2. Share Application Money Pending Allotment.
3. Non-current Liabilities: Includes Long term borrowings, Deferred Tax Liabilities (Net), Other long term liabilities, and Long term Provisions.
4. Current Liabilities: Includes Short term borrowings, Trade payables, Other current Liabilities, and Short term Provisions.

Assets Section

1. Non-current Assets: Includes Fixed Assets (Tangible, Intangible, Capital work-in-progress, Intangible Assets under Development), Non-current Investments, Deferred Tax Assets (Net), Long-term Loans and Advances, and Other Non-current Assets.
2. Current Assets: Includes Current Investments, Inventories, Trade Receivables, Cash and cash Equivalents, Short term Loans and Advances, and Other current Assets.

Procedures and Journal Entries for Issuing Shares

Issue of Shares for Consideration Other Than Cash

• Purchase of Assets:     $\text{Individual Assets A/c} \dots \text{Dr.}$$\text{To Vendor's A/c}$
• Issue at Par:     $\text{Vendor's A/c} \dots \text{Dr.}$$\text{To Share Capital A/c}$
• Issue at Premium:     $\text{Vendor's A/c} \dots \text{Dr.}$$\text{To Share Capital A/c}$$\text{To Securities Premium A/c}$
• Calculation of Shares to Issued:     $\frac{\text{Purchase Consideration}}{\text{Issue Price of a Share}}$
• Issue to Promoters:     $\text{Incorporation Expenses/Goodwill A/c} \dots \text{Dr.}$$\text{To Share Capital A/c}$

Procedure for Public Issue

1. Issue of Prospectus: An invitation to the public to purchase securities, containing company history, objects, and project details (Section $2(70)$).
2. Application: Interested subscribers deposit application money. Per Section $39(2)$, min application money is $5\%$ of nominal amount. SEBI regulations specify the amount should not be less than $25\%$ of the issue price.
3. Allotment: Distribution of shares among applicants.
   • Minimum Subscription (Section 39(1)): At least $90\%$ of the whole issue must be subscribed as per SEBI Guidelines before allotment.
   • Separate Account: Monies must be kept in a scheduled bank (Section $40(3)$).
   • Time Period: Minimum subscription must be received within $30$ days of prospectus issue, otherwise, money must be returned (Section $39(3)$).
4. Dispatch of Allotment Letters: Sent to successful applicants. Regret letters and refunds are sent to unsuccessful applicants.
5. Filing Return of Allotment: Must be submitted to the Registrar within $30$ days of allotment.
6. Share Certificate: Evidence of title issued under common seal (Section $46(1)$).

Rules for Calls on Shares (Table-F)

• At least one month gap between two consecutive calls.
• Call amount shall not exceed $25\%$ of the nominal value.
• $14$ days' notice must be given to shareholders before the payment due date.
• Call amounts must be equal for all shares within a category.

Utilization of Securities Premium (Section 52(2))

Securities Premium may be used exclusively for:

1. Issuing fully paid bonus shares.
2. Writing off preliminary expenses.
3. Writing off expenses, commissions, or discounts on the issue of shares or debentures.
4. Providing for premium payable on the redemption of preference shares or debentures.
5. Buy-back of the company's own shares.

Over-Subscription and Pro-rata Allotment

• Over-subscription: When applications exceed shares offered. Options include: full allotment to some + refund to others, pro-rata allotment to all, or a combination.
• Pro-rata Allotment: Allotting shares in a ratio. Example: Applications for $15000$ for an offer of $10000$ leads to a $3:2$ ratio.
• Surplus Application Money: Utilized for adjustment toward allotment or calls. Listed companies require stock exchange permission; non-listed companies can adjust against allotment first, then refund the rest unless specified for calls.

Special Share Schemes and Debt Instruments

Sweat Equity Shares (Section 2(88) and 54)

• Issued to directors/employees at a discount or for non-cash consideration for providing know-how or intellectual property rights.
• Requires a special resolution, specifying current market price and consideration.
• Cannot be issued if less than one year has elapsed since the company commenced business.

Right Shares (Section 62)

• Offered to existing equity shareholders in proportion to their paid-up capital.
• Notice must specify shares offered and allow a time of $15$ to $30$ days for acceptance.
• Includes a right to renounce shares in favor of another person unless articles state otherwise.

Employee Stock Option Plan (ESOP - Section 2(37))

• Company grants options to directors/officers/employees to subscribe to shares at a price lower than market value.
• Shares cannot be sold in the open market within one year of allotment.

Escrow Account

• A bank account where money/securities are deposited with a third party as a guarantee during buy-backs.
• Deposit requirements: $25\%$ of consideration if total is $\le 100$ Crores; $10\%$ of the balance if total exceeds $100$ Crores.

Debentures

• Definition (Section 2(30)): A written acknowledgement of debt issued under common seal, including debenture stock and bonds.
• Features:
  • Acknowledges debt.
  • Specifies mode and period of principal repayment.
  • Fixed interest rate paid at regular intervals.
  • Holders have no voting rights.
  • Recognized as long-term borrowings.
  • May be secured by a charge on assets.