Issuing new shares is a common way for companies to raise capital. When a company issues new shares, it must go through a process of allotment. Allotment is the process of allocating new shares to shareholders. The allotment process consists of several steps, including the issue of prospectus, application for shares, allotment of shares, and pro-rata allotment.
Issue of Shares:
The issue of shares refers to the process of creating and offering new shares to the public for subscription. The issue of shares can be done in two ways: by public issue and by private placement. Public issue is when shares are offered to the general public through a prospectus. Private placement is when shares are offered to a select group of investors, such as institutional investors or high net worth individuals.
1. Public Issue (Initial Public Offering – IPO / Further Public Offering – FPO)
A Public Issue is the process of offering shares to the general public for subscription to raise capital. When a company offers its shares to the public for the first time, it’s an IPO. A subsequent offering of new shares by a listed company is an FPO. These are governed by SEBI (ICDR) Regulations and require filing a Red Herring Prospectus (RHP). The process is lengthy, costly, and involves intermediaries like merchant bankers. It leads to listing on a stock exchange, providing liquidity to shareholders. It’s the primary method for large-scale capital raising.
2. Private Placement
A Private Placement is the allotment of shares or securities to a select group of investors (not exceeding 200 in a financial year, excluding QIBs and employees), without a public offering. It is faster, cheaper, and involves less regulatory compliance than a public issue. Governed by Section 42 of the Companies Act, 2013, it requires a Private Placement Offer Letter (PPM). It is commonly used by both private and public companies to raise funds from venture capitalists, private equity firms, or high-net-worth individuals. It does not result in public listing.
3. Rights Issue
A Rights Issue is an offer of new shares to the existing shareholders of the company in proportion to their current shareholding. It is a pre-emptive right, allowing shareholders to maintain their ownership percentage. The shares are usually offered at a price lower than the market price to incentivize subscription. The offer is made through a letter of offer, and shareholders can either accept, renounce (sell the rights), or forfeit the offer. It is a cost-effective way to raise equity capital from a loyal investor base, governed by SEBI regulations for listed companies.
4. Bonus Issue
A Bonus Issue is the capitalization of a company’s reserves (like retained earnings, securities premium) by issuing fully paid-up additional shares to existing shareholders for free. It is a pro-rata distribution, not a fresh capital raise. Shareholders receive shares in proportion to their current holdings. It increases the issued share capital without any cash inflow. The purpose is to reward shareholders and improve market liquidity by reducing the share price, making it more affordable. It requires sufficient authorized capital and is governed by SEBI (LODR) Regulations for listed companies.
5. Preferential Allotment
Preferential Allotment is the issuance of shares or convertible securities to a select group of identified persons (e.g., promoters, strategic investors) at a price determined as per SEBI/Companies Act guidelines. For listed companies, pricing is based on the volume-weighted average market price. It is a form of private placement but specifically to a pre-identified group, often used to bring in strategic partners or to fulfill obligations under schemes like debt restructuring. It requires a special resolution by shareholders. This method is quicker than a public issue but may dilute existing non-participating shareholders.
6. Employee Stock Option Plan (ESOP)
An ESOP is a scheme under which a company grants its employees and directors the option to purchase equity shares at a predetermined price (exercise price) in the future. It is a tool for employee retention, motivation, and aligning their interests with shareholders. The options vest over a specified period. Upon vesting, the employee can exercise the option and acquire shares. ESOPs are governed by SEBI (Share Based Employee Benefits) Regulations for listed companies and the Companies Act, 2013. The issuance is from a special pool of shares reserved for this purpose.
7. Sweat Equity Shares
Sweat Equity Shares are issued by a company to its directors or employees for providing know-how, intellectual property rights, or value additions. It is issued at a discount or for consideration other than cash, rewarding non-monetary contributions. Governed by Section 54 of the Companies Act, 2013, it requires a special resolution passed by shareholders. The valuation of the intellectual property or know-how is done by a registered valuer. It is a way to compensate and retain key personnel who contribute significant intangible value to the company, diluting existing shareholders’ equity.
Accounting Treatment of Issue of Shares:
1. Call Money
Call money is the amount demanded by a company from shareholders after allotment of shares. It may be first call or final call. Shareholders are required to pay call money within the given time. Call money increases paid up share capital and is recorded when it becomes due and when it is received.
Journal Entries
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Call A/c Dr | Call amount | – |
| To Share Capital A/c | – | Call amount |
| Bank A/c Dr | Amount received | – |
| To Share Call A/c | – | Amount received |
2. Share Premium
Share premium is the excess amount received over the face value of shares. It is a capital profit and shown under equity. Share premium cannot be distributed as dividend. In India, its use is strictly regulated by the Companies Act 2013.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Total amount | – |
| To Share Capital A/c | – | Face value |
| To Securities Premium A/c | – | Premium amount |
3. Share Discount
Shares issued at discount means shares are issued at a price lower than face value. Issue of shares at discount is generally not allowed except in special cases as per Companies Act 2013. Discount is treated as capital loss.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Amount received | – |
| Discount on Issue of Shares A/c Dr | Discount | – |
| To Share Capital A/c | – | Face value |
4. Forfeiture of Shares
Forfeiture of shares occurs when a shareholder fails to pay allotment or call money. The company cancels such shares and the amount already received is retained. Forfeiture results in reduction of share capital.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Capital A/c Dr | Called up amount | – |
| To Share Forfeiture A/c | – | Amount received |
| To Share Call or Allotment A/c | – | Unpaid amount |
5. Surrender of Shares
Surrender of shares is a voluntary return of shares by shareholders to the company. It is treated like forfeiture and usually happens to avoid legal action. Accounting treatment is same as forfeiture.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Capital A/c Dr | Called up value | – |
| To Share Forfeiture A/c | – | Amount received |
6. Redemption of Shares
Redemption of shares means repayment of share capital to shareholders. It generally applies to preference shares. Redemption reduces share capital and is done as per Companies Act 2013 rules.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Preference Share Capital A/c Dr | Face value | – |
| To Bank A/c | – | Amount paid |
7. Calls in Advance
Calls in advance refer to the amount received from shareholders before it is called by the company. It is not part of share capital and shown as a liability until calls are made.
Journal Entries
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Amount received | – |
| To Calls in Advance A/c | – | Amount |
| Calls in Advance A/c Dr | Adjusted amount | – |
| To Share Capital A/c | – | Adjusted amount |
8. Calls in Arrears
Calls in arrears mean unpaid call money by shareholders even after it becomes due. It is deducted from called up share capital in the balance sheet.
Journal Entry
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Calls in Arrears A/c Dr | Unpaid amount | – |
| To Share Call A/c | – | Unpaid amount |
Pro-rata Allotment
Pro-rata allotment is a method of allocating shares to subscribers when the number of shares applied for is greater than the number of shares available for allocation. Pro-rata allotment ensures that each subscriber receives a fair share of the available shares. The pro-rata allotment method can be used in two ways: by a full pro-rata allotment or by a partial pro-rata allotment.
- Full Pro-rata Allotment:
Full pro-rata allotment is when the company allocates shares to each subscriber based on the number of shares applied for and the number of shares available. For example, if a subscriber applies for 100 shares and the company has 1,000 shares available for allocation, the subscriber will receive 10% of the available shares, or 100 shares.
- Partial Pro-rata Allotment:
Partial pro-rata allotment is when the company allocates shares to each subscriber based on the number of shares applied for and the number of shares available, but the allocation is less than the number of shares applied for. For example, if a subscriber applies for 100 shares and the company has 500 shares available for allocation, the subscriber may receive only 50 shares, or 50% of the shares applied for.
Accounting Treatment of Pro-rata Allotment of Shares:
1. Receipt of Share Application Money
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Application money received | – |
| To Share Application A/c | – | Application money |
2. Transfer and Adjustment of Application Money
Excess application money adjusted towards allotment
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Application A/c Dr | Total application money | – |
| To Share Capital A/c | – | Amount for shares allotted |
| To Share Allotment A/c | – | Excess application money |
3. Share Allotment Due
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Share Allotment A/c Dr | Allotment amount due | – |
| To Share Capital A/c | – | Allotment amount |
4. Receipt of Allotment Money
After adjusting excess application money
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A c Dr | Balance amount received | – |
| To Share Allotment A/c | – | Balance amount |
