UGC NET COMMERCE UNIT-2: ACCOUNTING AND AUDITING

ISSUE, RE-ISSUE AND FOREFEITURE OF SHARES

Issue of Shares is the process in which companies allot new shares to shareholders. Shareholders can be either
individuals or corporates. The company follows the rules prescribed by Companies Act 2013 while issuing the shares.
Issue of Prospectus, Receiving Applications, Allotment of Shares are three basic steps of the procedure of issuing the
shares. The process of creating new shares is known as Allocation or allotment. Let us see the two types of shares of a
company and the procedure for issue of shares that a company must follow.
Nature and Classes of Shares
A share of a company is one of the units into which the capital of a company is divided. So if the total capital of a
company is 5 lakhs, and such capital is divided into 5000 units of Rs 100/- each, then this one unit of amount 100 is a
share of the company.
Thus a share is the basis of ownership of the company. And the person who holds such shares and is thus a member of
the company is known as a shareholder.
Now the Articles of Association will contain some essential information about shares and share capital, like the classes
of shares to be prescribed. In all, there are two types of shares a company can allot according to the Companies Act
2013. They have different natures, rights, and obligations. Let us take a look.
Difference between Equity Shares and Preference Shares
Preference Shares
A preference share is one which carries two exclusive preferential rights over the other type of shares, i.e. equity shares.
These two special conditions of preference shares are
 A preferential right with respect to the dividends declared by a company. Such dividends can be at a fixed rate
on the nominal value of the shares held by them. So the dividend is first paid to preference shareholders before
equity shareholders.
 Preferential right when it comes to repayment of capital in case of liquidation of the company. This means that
the preference shareholders get paid out earlier than the equity shareholders.
Other than these two rights, preference shares are similar to equity shares. The holders of preference shares can vote in
any matters directly affecting their rights or obligations.
Preference shares can actually be of various types as well. They can be redeemable or irredeemable. They can be
participating (participate in further profits after a dividend is paid out) or non-participating. And they may be
cumulative (arrears in demand will cumulate) or non-cumulative.
Equity Shares
Equity share is a share that is simply not a preference share. So shares that do not enjoy any preferential rights are thus
equity shares. They only enjoy equity, i.e. ownership in the company.
The dividend given to equity shareholders is not fixed. It is decided by the Board of Directors according to the financial
performance of the company. And if in a given year no dividend can be declared, the shareholders lose the dividend for
that year, it does not cumulate.
Equity shareholders also have proportional voting rights according to the paid-up capital of the company. Essentially it
is one share one vote system. A company cannot issue non-voting equity shares, they are illegal. All equity shares must
come with full voting rights.
Issue of Shares
When a company wishes to issue shares to the public, there is a procedure and rules that it must follow as prescribed by
the Companies Act 2013. The money to be paid by subscribers can even be collected by the company in installments if
it wishes. Let us take a look at the steps and the procedure of issue of new shares.
Procedure of Issue of New Shares
1] Issue of Prospectus

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Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation to the public to
subscribe to shares of the company. A prospectus contains all the information of the company, its financial structure,
previous year balance sheets and profit and Loss statements etc.
It also states the manner in which the capital collected will be spent. When inviting deposits from the public at large it is
compulsory for a company to issue a prospectus or a document in lieu of a prospectus.
2] Receiving Applications
When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and
deposit the requisite application money in the schedule bank mentioned in the prospectus. The application process can
stay open a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of
shares will be cancelled. The application money must be refunded to the investors within 130 days since issuing of the
prospectus.
3] Allotment of Shares
Once the minimum subscription has been reached, the shares can be allotted. Generally, there is always
oversubscription of shares, so the allotment is done on pro-rata bases. Letters of Allotment are sent to those who have
been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a
part owner of the company.
If any applications were rejected, letters of regret are sent to the applicants. After the allotment, the company can collect
the share capital as it wishes, in one go or in instalments.
Issue of Shares:
1) A company may issue shares at their face value or at a price other than the face value.
2) When shares are issued at a price equal to their face value it is termed as Shares, Issued at par.
3) When issue price of share is more than its face value it is known as share issued at a premium.
4) If the issue price of share is less than its face value it is called as shares issued at a discount.
5) The shares become fully paid up only on receipt of all the money due on them.
Issue of Shares at Premium:
 When the shares are issued at a premium, the amount of premium is credited to a new account named as share
premium or premium on issue of share account.
 Generally premium money is received alogwith allotment money.
 The Companies Act does not impose any restriction on the issue of shares at a premium.
 As per provisions of companies Act, the premium must be credited to a separate account called share premium
account.
Under section 78 of Act, the amount share premium can be used wholly or in part for:
1. Paying up unissued shares of the Company to be issued to members of the company as bonus shares.
2. Writing off the preliminary expenses of the company.
3. Writing off the expenses of or the commission paid or discount allowed on shares or debentures of the company.
4. Providing for the premium payable on the redemption of redeemable preference shared or debentures of the
company.
Issue of Shares at Discount:
A company can issue shares at a discount only when the following conditions are laid down in Companies Act is
satisfied.
1. The shares must belong to a class already issued.
2. The issue is authorized by an ordinary resolution in the general meeting and sanctioned by the company law
board.
3. The issue is made at a discount which is specified in the resolution but in no case the rate of discount should
exceed 10% or such higher percentage as the central government may permit.
4. At least one year has elapsed since the company became entitled to commence the business and
5. Issues are made within two months after receiving the sanction of the Company Law Board.

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Oversubscription of the Issue of Shares:

When shares are oversubscribed in certain cases application may be rejected and application money refunded and in
certain other cases allotment may be made for fewer shares than applied for.
Forfeiture of Shares:
If a shareholders does not pay the allotment money or call money in time, the company, in accordance with the
provisions of the articles of association, may proceed to forfeit the shares held by such a defaulting shareholders
upon forfeiture of shares by the company, the person ceases to be the shareholders of the company and the money
paid by him on the shares is forfeited to the company.
Forfeiture of Shares which were issued at Discount: When shares which are issued at discount are forfeited, the
discount allowed on the issue of shares has to be cancelled, which is done by crediting the discount on issue of
shares account.

Forfeiture of Shares which were issued at Premium: Share premium money is strictly regulated by the provisions
of section 78 of Companies Act. Accordingly, premium money once collected cannot be cancelled even if that
shares is forfeited later on. But if a share, on which premium money has become due but has not been received is
forfeited then any credit given to share premium account at the time of issue of shares must be cancelled on the
forfeiture of shares by debiting share premium account.
Reissue of Forfeited Shares: The forfeited shares can be reissued by the company at any price. But in no cases the
amount collected on the reissue of such shares plus the amount already forfeited be less than the amount credits as
paid upon reissue of shares.
Purchase of Business:
Accounting problem in acquisition / purchase of Business are discussed as:
A. When New Set of Books are opened:
i. Calculation of Purchase consideration, - is the amount which is paid by the company for the
purchase of Business.
ii. Calculation of Goodwill or Reserve.
B. When same set of books are continued:
i. Revaluation of assets and liabilities.
ii. Close assets / liabilities are not taken over by the purchasing company.
iii. Distribution of reserves and losses
iv. Close the Capital Accounts.
v. Prepare the revised balance sheet.
Types of Shares

1. Ordinary Shares

This is the most commonly issued share type, essentially the same as common stock in U.S. equities. Ordinary
shares carry voting rights, but not usually any special rights beyond that. Ordinary shares may be subdivided into
different classes such as A or B and have different share prices.

2. Cumulative Preference Shares

This share type roughly corresponds to preferred stock shares of U.S. companies. Like U.S. preferred stock, they
come with the stipulation that any scheduled dividends that cannot be paid when due are carried forward and
must be paid before the company can pay out ordinary share dividends.

3. Preference Shares

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This is a slightly less preferred share type. Preference shareholders have the right to be paid dividends prior to
dividends being paid for other share types. Preference shares do not typically carry voting rights.

4. Bearer Shares

Bearer shares are most commonly in the form of warrants – a legal document certifying that the bearer is entitled
to own the shares designated in the warrant. The warrants usually come with vouchers enabling the bearer to
claim any due dividends. Warrants are completely transferable.

5. Redeemable Shares

As the name implies, redeemable shares are issued with the shareholder agreeing that the shares can be
redeemed – bought back by the company – either after a certain time period or on a given date. Redeemable
shares can vary according to which party, either the company or the shareholder, has the option to exercise the
company buyback provision.

6. Non-Voting Shares

These shares are like ordinary shares except that they carry no voting rights. This type of share is usually issued to
employees so that part of their compensation can be paid in the form of dividends. This arrangement usually
provides tax benefits for the company and the employees.

Forfeiture of Shares:
Sometimes, when a shareholder finds that he is unable to pay the calls made on him, he may voluntarily surrender
shares to the company. The effect of surrender of shares is the same as that of forfeiture. The difference is that in
case of surrender, the shareholder himself takes the initiative and the company is saved from the formalities of
serving a notice and waiting till the period of the notice is over.
Journal Entries on Forfeiture (or Surrender) and Reissue of Shares:
When Shares have been Issued at Par:
When shares which have been issued at par are forfeited, first find out the amount with which Share Capital Account
has been credited in respect of forfeited shares; debit Share Capital Account with this amount. Now, this amount can
be split in two parts; the amount which has been received and the amount which has not been received and because
of which the shares have been forfeited.
The amount which has been received is a capital gain to the company and is credited to Forfeited Shares Account (or
Share Forfeiture Account or Shares Forfeited Account). The amount which has not been received may be lying in
Calls in Arrear Account or if the company has not opened Calls in Arrear Account, in Share Allotment Account or
different call accounts.
Credit Calls in Arrear Account or Share Allotment Account and various call accounts as may be appropriate in the
particular case with the amount not received. Suppose, a company issues equity shares of Rs 10 each at par.
Further assume that the application and allotment moneys @ Rs 2,50 and @ Rs 2.50 per share respectively are
received in respect of all the shares, but the first call and the second call @ Rs 3 and @ Rs 2 per share respectively
are not received in respect of 500 shares which are therefore forfeited.
The following will be the entry on forfeiture of these shares if Calls in Arrear Account has not been opened:—

Equity Share Capital Account Dr. 5,000

To Equity Share First Call Account 1,500

To Equity Share Second Call Account 1,000

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To Forfeited Shares Account 2,500

Forfeiture of 500 equity shares, on which amount @ Rs 5 per share has been received as application and allotment
moneys for non-payment of the first call @ Rs 3 per share and the second and final call @ Rs 2 per share.

If the amounts not received on the two calls have been transferred to Calls in Arrear Account, Equity Share First
Call Account and Equity Share Second Call Account will stand closed and will be represented by Calls in Arrear
Account.

In this case, the entry on forfeiture of shares will be as follows:

Equity Share Capital Account Dr. 5,000

To Calls in Arrear Account 2,500

To Forfeited Shares Account 2,500

When shares have been issued at a Premium

If shares issued at a premium are forfeited, find out whether the premium on forfeited shares has been
realised or not. If premium on forfeited shares has been received, Securities Premium Account must not be debited
on forfeiture of shares. It is obligatory because of legal restrictions placed by section 78 of the Companies Act on the
uses of securities premium received.
It means that securities premium once received is not to be written back even if shares are forfeited subsequently.
Entry on forfeiture will therefore be passed as if the shares had been issued at par and no premium had been
received.
However, if the premium on forfeited shares has not been received but it has been credited to Securities Premium
Account and debited to Share Allotment Account (or a Call Account) at the time of the premium becoming due; on
forfeiture, Securities Premium Account will be debited and Share Allotment Account (or Call Account) will be
credited with the premium not received.
If the company credits Securities Premium Account only when the premium has been received, then the question of
debiting Securities Premium Account on forfeiture will not arise.
On reissue, Securities Premium Account will not be credited if the premium had been received in respect of the
shares before forfeiture. Of course if the reissue price exceeds the paid up value of reissued shares, Securities
Premium Account will have to be credited with such an excess.
If shares on which securities premium had not been received till forfeiture are reissued, Securities Premium Account
will be credited with the amount of securities premium in respect of reissued shares and the amount to be debited to
Forfeited Shares Account will be calculated after taking this credit into consideration.
Forfeiture (or Surrender) and Reissue:
When shares have been issued at a discount: If shares which have been issued at a discount are forfeited shares and
the discount in respect of forfeited shares has been debited to Discount on Issue of Shares Account, on forfeiture
while passing the entry for forfeiture, the amount of such discount is credited to Discount on Issue of Shares
Account.
On reissue of these shares, Discount on Issue of Shares Account is once again debited with the amount of the
discount originally allowed on the shares reissued provided the amount received on reissue of these shares is less
than the paid up value of these shares by at least the amount of such discount.
Illustration
A Ltd. invited applications for 1,00,000 shares of Rs 100 each at a discount of 6% payable as follows:
On Application Rs 25
On Allotment Rs 34

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On First and Final Call Rs 35

The applications received were for 99,000 shares and all of these were accepted. All moneys due were received
except the first and final call on 100 shares which were forfeited. 50 shares were re-issued @ Rs 90 as fully paid.
Assuming that all requirements of the law were complied with, pass entries in the Cash Book and Journal of the
company. Also show how these transactions will be reflected in the company’s balance sheet. [C.S. (Inter) June,
1998 Modified]

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