Shares and Debentures
Issue of Share for Cash: Procedure
A Public limited company invites applications from the general public for cash collection.
- Share Application (first Installment): Public intend to purchase the share of that company, fill-up the form stating the number of shares likely to subscribe and send it along with the application money. Generally, the application money is deposited into the bank in the company’s bank account on the same day when applications are made for subscription.
- Share Allotment (Second Installment): After receiving application money, the company allots share to the applicants and transfer their application money to share capital. After allotting shares to the applicants, a company sends letters of allotment informing the number of shares allotted to them and the amount payable by them as allotment money i.e. the second installment.
- Shares Calls (third and fourth…… Installment): The balance amount of share, which is demanded after receiving share application and allotment money is called calls money. A company may demand such calls money in one or more installments. Each Installment is named as a first call, second call and so on and the last call is final call.
Issue of different type of shares
A company issues two types of shares
- equity shares
- preference shares
- Issues of shares at PAR: When a company offers shares to shareholders at their nominal value, it is known to be issued at face value or par value of shares
- Issues of shares at Discount: When a Pvt. Ltd issues its shares at less than face value, the share is said to be issued at discount. In Nepal, the company act has restricted issues shares at discount. Discount is given generally on allotment and call. Discount on the issue of shares is a capital loss.
- Issues of Shares at Premium: Some companies are successful to issue their share at more than its face value or par value, which is known as premium issue. Premium is capital gain of the company. Premium may be collected by the company along with the application, allotment, or even calls. However, in general practice, the company collects the premium along with allotment.
If any amount is not paid by shareholders on the fixed date, such unpaid amount is known as call-in-arrears. Amount may be called by the company either as allotment money or call money. Thus any default on account of not sending the call money is known as call in arrears. Calls-in-arrears is capital loss, so it is debited in journal entry and deducted from called-up capital in balance sheet.
Sometimes some allottees pay the uncalled amount of their holding in advance. When the company accepts this advance, it is called call-in-advance. it is a liability of the company and appears at the liability side of the balance sheet till it adjusted.
Minimum Subscription: Company may raise the minimum amount of capital to meet the need of business operation. Thus, the minimum subscription refers to the amount which must be raised by the issue of shares in order to provide the funds for purchasing property, payable to preliminary expenses, re-payment of any money borrowed by the company, to meet the requirement of working capital and other expenditure which are incurred in starting phase of company.
According to the Nepal Company Act 2063, a limited company must receive subscription for at least 5% of its issued capital as minimum subscription before allotment of shares. If the applications are received even for minimum subscription, the company has to refund all the application money to the applicants.
Under Subscription of Share: Sometimes, a company receives fewer share applications from public. For instance, a company-issued 20,000 shares to the public and the company received applications for 12,000 shares from the public. This situation is called under subscription.
Over subscription: Sometimes, a company receives applications for a larger number of shares than offered by it to public for subscription. The situation is termed as oversubscription. The company cannot allot more shares than the issue, even if there is mere demand for the shares. Since share applications are already received along with application money, it is necessary for the company to adopt any one of the following methods.
- Rejection of application or excess number of shares If a company rejects the excess number of applications, application money must also be returned to the applicants.
- Allotment of shares on a pro-rata basis Company can allot its issued shares to applied shareholders as their ratio of total issued shares and applied shares by company and outsiders respectively. For example, a company-issued 10,000 shares to shareholders and applied for 15,000 shares by shareholders. Now, on the pro-rata basis the ratio was made 10/15 for share allotted i.e. if one applies for 15 shares, only 10 shares are allotted.
- Rejection of some applications and allotted for remaining applicants on a pro-rata basis, For example, a company-issued 8,000 shares but received applications for 10,000 shares and money is returned for 1,000 shares. The remaining applications for 9,000 shares were allotted on pro-rata basis that is an application for 9 shares is allotted 8 shares.
- Rejection of some application acceptance some application in full and allotment to remaining applicants on pro-rata basis.
Forfeiture of Shares
If any shareholders become unable to pay the due amount to the company, the board of directors will decide to cancel and withdraw the share certificate. In this case, his shares may be forfeited. When shares are forfeited, the amount which was already paid by the defaulters to the company is not refundable. In such a situation, the share capital will be reduced. So, the share capital account will be debited with the called up amount or Par value of the share.
Re-Issue of Forfeited Shares
The forfeited shares will be re-issued by the company to the next person. The shares could be re-issued at Par, at Premium or at Discount that is dependent on market. Generally, the payment is made on a lump sum basis but not on installment basis.
Net Gain and Capital Reserve Account
Net gain is difference between credited and debited amount of forfeiture account. All type of capital gains is transfer to capital reserve account. The net gain on forfeiture and re-issue of shares is also capital gain. So it should be transferred to this account. In forfeiture entry, the amount on share forfeiture is credited to share forfeiture A/C. Any loss on re-issued shares is adjusted with other accounts and debited to the same account.
Issued of Shares to Promoters
Promoters Provided information related to technology, research and development, management layout from setting up a company. When company issues its shares to promoters for their services, it is called issues of shares to promoters.
Issues of Shares to underwriters as Commissions
A financial institution or person undertakes commission from a company by providing services to sell the shares to the public. If the public does not subscribe to such shares then the underwriters couldn’t receive their commission.
Shares issue for Consideration other than Cash
Companies mostly issue shares for cash but occasionally shares are issued for consideration other than cash. The consideration may be against purchase of assets, purchase of business, Compensation to its promoters for their services and to underwrites for their services.
Difference Between Shares and Debenture
|Basis of Differences||Shares||Debentures|
|Capital||Shares are securities representing a portion of the nominal capital of a company||A debenture is a form of debt or loan capital of company|
|Status||Shareholders are regarded as the owners of the company||debentures holders are regarded as the creditors of the company|
|Identity||A Person who holds share is known as shareholders||A person who holds debenture is called debenture holders|
|Return||Dividend is paid to shareholders out of the profits||Fixed rate of interest is paid to debenture holders|
|Rate of return||Rate of dividend is not fixed||Rate of interest is fixed|
|Security||It is not secured by the assets of the company in issuance||It is secured by the assets of the company in issuance|
Accounting Treatment for Debenture Issue:
- For Cash
- For Consideration Other than Cash
- As Collateral Security
Issue of Debenture for Cash: Debenture are Issued in the same way as shares are issued
Issue of Debenture at Par Value: When debentures are issued at face value or authorized rate is known as debenture issued at par.
Issues of Debenture at Discount: When debentures are issued at less than face value then it is turned as issue of debenture at discount.
Issue of Debenture at Premium: When debenture is issued at more than par is turned as issues of debenture at a premium. Premium is capital gain.
Issues of Debenture for consideration other than cash: A company can issues debenture for purchase of assets and repayment of loans. when the company issues debenture for assets and other than cash is called issues of debenture for consideration other than cash.
Issues of Debenture as collateral Security: When a company-issued debenture as a secondary deposit to take loan from the bank is called debenture issued as collateral security. If the company fails to repay the loan and interest the lender will become a debenture holder
Redemption of Debenture
Redemption debentures are issued with a maturity period. After the maturity of the period, the amount of debenture repaid to the debenture holders. The debenture can be issued at par or at premium or at discount.
Conversion of Debenture into Shares
Normally, a joint-stock company repays debenture in cash. But a company may offer fresh shares to its debenture holders instead of repaying their debenture in cash. The new debenture or shares can be issued at par or at premium or at discount.