Issue of Shares - Comprehensive Notes

Meaning of Company

• The word "company" is of Latin origin, derived from "com" (with or together) and "panis" (bread).
• Originally, it referred to a group of persons or merchants discussing matters and sharing food.
• It now denotes a group of persons that, upon registration under the Companies Act, becomes a corporate body.
• A company has perpetual succession and a common seal.
• It is a voluntary and autonomous association with capital divided into transferable shares, formed for a specific purpose.
• It is an artificial person created by law to achieve its objectives.
• Section 2(20) of the Companies Act, 2013 defines a company as one formed and registered under this Act or any former Companies Act.

Characteristics of a Company

• Distinct Legal Person: A company exists independently of its members.
• Limited Liability: Members' liability is limited to the face value of their shares.
• Perpetual Succession: The company's continuity is unaffected by changes in membership.
• Transferability of Shares: Shares are freely transferable, except in private limited companies.
• Property Ownership: A company can own, enjoy, and dispose of property in its own name.
• Right to Sue and Be Sued: A company can sue and be sued in its own name.
• Management by Directors: A company acts through human directors, leading to a separation of ownership and management.
• Voluntary Association: It is a voluntary association of persons, usually for profit.

Implications of Company Structure

• Members may change, but the company continues indefinitely.
• Transferability of shares ensures perpetual succession.
• A company is a separate legal entity from its members.
• A company generally cannot buy its own shares.
• Shareholders are not agents of the company and cannot incur debts binding the company.
• A person can be both a shareholder and a creditor of the company.
• Ownership is separate from management, with a Board of Directors elected by shareholders managing the company.

Types of Companies Based on Number of Members

• Private Company:
  • Minimum of 2 members, maximum of 200.
  • Membership can be held by individuals or corporate bodies, including foreign nationals and NRIs.
• One Person Company (OPC):
  • A type of Private Company with only 1 member.
  • The member must be an individual and an Indian resident.
• Public Company:
  • No maximum limit on the number of members.
  • Minimum of 7 members.
  • Listed on stock market.
  • Can raise funds from the public through IPOs or FPOs.

Types of Companies Based on Liability

• Company Limited by Shares:
  • Capital is divided into shares, representing the shareholder's interest.
  • Ownership is measured by the number of equity shares held.
• Company Limited by Guarantee:
  • Can be private or public.
  • Capital is introduced as a guarantee by members.
  • Ownership is based on the amount guaranteed.
  • Members introduce capital when required.
  • Liability is limited to the amount of guarantee.
  • May also issue shares, with shareholders liable up to the unpaid amount on shares but shareholding doesn't decide ownership.
• Unlimited Company:
  • Members' liability is unlimited, extending to their personal assets.
  • Rarely chosen by entrepreneurs today.

Other Types of Companies

• Foreign Company:
  • Owned by foreigners, registered when foreign shareholding exceeds 50%.
  • A common way for businesses registered outside India to set up business in India.
• Section 8 Company:
  • Registered under Section 8 of the Companies Act for charitable purposes as a non-profit organization.
  • Enjoys special status and exemptions.
  • Requires special approval from authorities for registration.
• Producer Company:
  • Deals with primary production related to farming.
  • Objectives include production, selling, and exporting.
  • Registered with ten or more member producers, two or more producer institutions, or a combination.
  • Liability is limited to the unpaid share capital.
  • Deemed to be a private limited company, but the threshold of the number of members does not apply.
• Small Company:
  • A special status given to registered companies based on financial position.
  • Conditions:
    • Not a Public Company
    • Paid-up share capital not exceeding $50,00,000$
    • Turnover not exceeding $2,00,00,000$, as per profit and loss account for the immediately preceding financial year.
• Subsidiary Company:
  • A company controlled by another company (holding company) through its Board of Directors' composition or more than 50% of voting powers.
  • A Wholly Owned Subsidiary (WOS) has 100% voting powers held by a single holding company.
• Holding Company:
  • Has controlling power or majority of voting powers of a subsidiary company.
  • Also called a parent company.

Statutory Books

• Limited companies must maintain these at their registered office.
  • Register of Investments held and their names
  • Register of charges
  • Register of Members
  • Register of debenture holders
  • Annual returns
  • Minutes books
  • Register of contracts
  • Register of Directors
  • Register of shareholdings of the directors
  • Register of loans to companies under the same management
  • Register of Investment in the shares of other companies.

Books of Account

• Every company must keep books of account at its registered office to disclose:
  • Sums of money received and expended, and the matters related to the receipt and expenditure.
  • All sales and purchases of goods.
  • All assets and liabilities.

Issue of Shares

• Shares are units of small denomination into which the capital of the company is divided.
• Sec. 2(46) of the Companies Act defines a share as a share in the share capital of a company.
• Shareholders are persons owning shares of the company.
  *For example: If the authorised capital $Rs.10,00,000$ is divided into $1,00,000$ units of $Rs.10$ each, then each unit of $Rs.10$ is called a share of $Rs.10$ each. Thus, in the above case, the company is said to have $1,00,000$ shares of $Rs.10$ each.
• Shareholders are part owners and risk bearers of the company.
• They receive income in the form of dividends, which are a part of the company's profits distributed among shareholders.

Classes of Shares

• Public joint stock companies can issue two classes of shares:
  • Equity Shares
  • Preference Shares

Equity Shares

• Shares that are not preference shares.
• Equity shareholders receive dividends from the remaining profit after preference dividends are paid.
• In case of winding up, equity shareholders receive the remaining assets after creditors and preference shareholders are paid.

Preference Shares

• Also owners' capital but has a maturity period.
• In India, preference shares must be redeemed within a maximum period of 20 years from the date of issue.
• The dividend rate is fixed.
• Preference shares have two preferences:
  • Preference in payment of dividend.
  • Preference in repayment of capital during liquidation.

Difference between Equity and Preference Shares

Share Capital

• Share capital means the capital raised by a company by the issue of shares.

Divisions of Share Capital

• Nominal or Authorized Capital:
  • The amount of capital with which the company intends to be registered.
  • It is the maximum amount which the company is authorized to raise by way of public subscription.
  • There is no legal limit on the extent of the amount of authorized capital.
• Issued Capital:
  • That part of the authorized capital which is offered to the public for subscription.
• Subscribed Capital:
  • That part of the issued capital for which applications are received from the public.
• Called up Capital:
  • The amount on the shares which is actually demanded by the company to be paid.
• Paid up Capital:
  • The part of the called up capital which is offered and is actually paid by the members.
  • The sum which is still to be paid is known as calls in arrears.
  • $Paid up capital = Called up capital – Calls in arrears$

Solved Problem

A Company has been incorporated with an authorised capital of $Rs.20,00,000$ divided into $2,00,000$ shares of $Rs.10$ each. It offered $1,90,000$ shares to the public, but only $1,80,000$ shares were subscribed for. The directors called for an amount of $Rs.6$ per share. All the amounts were received except the call money of $Rs.2$ on $1,000$ Shares. Calculate the amount of different categories of share capital.

Solution

Issue of Shares for Cash

• Shares can be issued for consideration other than cash or for cash.

Procedure for Issuing Shares for Cash

1. Issue of Prospectus:
   • Shares issued to the public for cash must comply with the Companies Act and SEBI guidelines.
   • Every public issue must be accompanied by a prospectus stating the terms and conditions of the issue.
2. Receipt of application money:
   • Advertisements appear in newspapers.
   • Interested individuals obtain an application form and prospectus.
   • Applicants remit application money (at least 5% of the nominal value of the share as per Sec 69(3), but as per SEBI guidelines, the minimum application should be 25% of its issue price) along with the filled-in application form to the specified bank branches.

Terms of Issue

Share issued by a company at different values are as follows:

1. Issue of shares at par (Issue price = Face value or Nominal price).
2. Issue of shares at premium (Issue price ≥ Face value).
3. Issue of shares at discount (Issue price ≤ Face value).

Issue of Shares at Par

• If the issue price equals the face value, it is issued at par.
• Example: Shares of $Rs. 10$ (face value) issued at $Rs. 10$.

Accounting Entries for Issue of Shares at Par

Solved problem

Bharat Limited had an authorised capital of $Rs.4,00,000$ divided into shares of $Rs.100$ each. It offered to the public $3,000$ shares payable as follows.
On Application $Rs.30$
On Allotment $Rs.20$
On First Call $Rs.25$
On Second Call $Rs.25$
The shares were duly subscribed for by the public and all money was received. Pass journal entries to record the above transactions.

Solution

Under-Subscription

• When not all shares offered are taken up by the public due to poor response.
• Shares cannot be allotted if the minimum subscription is not received.
• Under-subscription does not require any special treatment; journal entries are made based on shares applied for.
• $Under Subscription = (Shares offered ≥ Shares Applied or Subscribed)$

Example

Govindha Ltd., offered 10,000 shares of Rs.100 each to the public on the following terms:
Rs. 30 on application
Rs. 20 on allotment
Rs. 20 on first call and
Rs. 30 on final call
The public applied for 9,000 shares which were allotted. All money due was received. Pass journal entries.

Solution

Journal in the Books of Govindha Limited

Over-Subscription

• Occurs when applications received exceed the number of shares issued to the public.
• A company cannot allot more shares than offered in the prospectus.
• Allotment must follow SEBI guidelines to ensure proportional (Pro-rata) allotment.
• Alternatives for handling over-subscription:
  1. Rejection of shares: Some applicants may not be allotted any shares.
  2. Pro-rata allotment: Some applicants may be allotted fewer shares than applied for.
  3. Full allotment: Some applicants may be allotted the full number of shares applied for.