ACCOUNTING FOR SHARE CAPITAL – CONCEPT & PROCESS

One of the alternatives before him is to raise money by issuing shares to the general public.

All the  steps have been discussed as under:

1. Issue of prospectus: A prospectus is a document that may be a notice, circular or advertisement issued for inviting deposits from the public for the subscription of any shares or debentures of a company. It is properly dated and signed by every director of the company, a copy of which is also filed with the Registrar of Companies. Each prospectus contains a printed application form and also specifies the amount per share payable on application, on the allotment and on calls. It also specifies the amount of minimum subscriptions.

The issue of shares starts with the issue of a prospectus and ends with the receipt of calls from the shareholders. The detailed procedure for the issue of shares consists of the following five steps:

The minimum subscription is the minimum amount which, in the opinion of directors, must be raised in cash by the issue of shares to provide for:

(i)  The purchase of any property

(ii)  Any preliminary or formation expenses/commission.

(iii)   The repayment of any borrowings

(iv) Working Capital

 

2. Receipt of Application Money: After the publication of the prospectus, all investors who want to be the shareholders of a company have to fill in the prescribed application form and send it to the banker of the company with an Account Payee cheque for the amount payable on application. The application money per share cannot be less than 5% of the nominal / face value of a share. All money received on the application are kept deposited in a scheduled bank until the certificate of commencement (required for a public company) is received or until the receipt of the minimum subscription stated in the prospectus. If the minimum subscription is not received within 120 days of the issue of the prospectus, all the application money received must be refunded without interest to the applicants within the next 10 days.

 

3.  Allotment of Shares: After the last date of application, the company’s banker forward all the applications to the company. Then the Board of Directors starts the process of allotment.

  • Allotment is the act of accepting those applications which are genuine and fulfill the conditions laid down in the prospectus.
  • A letter of allotment is sent to all those applicants whose applications are accepted by the Board of Directors.
  • An applicant who receives the letter of allotment becomes a member/ shareholder of the company from the date of posting of the letter.
  • On the other hand, a letter of regret is sent to those applicants whose applications are rejected. The application money received from such applicants are also refunded.
  •    Here it is to be noted that, no shares can be allotted unless the minimum subscription stated in the prospectus has been received in full.
  •     Besides a company cannot allot more shares than those stated in the prospectus.
  •     On allotment, a shareholder is also required to pay the allotment money due on allotted shares.

4.  Issue of Share Certificate: A share certificate is issued to each person whose name appears in the Register of Members. It is issued under the seal of the company and specifies the name, address and occupation of the holder along with the number of shares held and the amount paid-up thereon. It is prima facie evidence that its holder is a shareholder of the company.

Note: The company must issue a share certificate within three months of the allotment of shares.

5.  Calls on Shares: After the payment of application and allotment money the balance amount due from the shareholder may be demanded by the company in the form of calls. A call is simply an installment of payment. Generally, the prospectus specifies the number, dates and amount of calls to be made by a company. In case the prospectus is silent, the directors have the discretion to decide the number and date of calls and the amount payable in each call.

Note (1): Usually calls are numbered as a first call, second call, third call etc. The last call is named as final call. For example,  if the second call is the last call, then it is termed as “Second and Final call”.

Note (2): A call is a demand by a company on its shareholders to pay the whole or part of the balance remaining unpaid on each share. It may be made at any time during the lifetime of the company or during its winding-up.