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.
Prospectus:
A prospectus is a legal document that provides information about the company and the proposed issue of shares. The prospectus includes details about the company’s business, financial performance, management team, and the terms of the issue of shares. The prospectus must be filed with the regulatory authority in the jurisdiction where the company is incorporated.
Application for Shares:
Once the prospectus is filed, investors can apply for shares in the company. The application for shares includes the number of shares the investor wishes to subscribe to and the price at which the shares will be purchased. The company may also require a deposit from investors to confirm their subscription.
Allotment of Shares:
The allotment of shares is the process of allocating the shares to the subscribers. The allotment is made based on the number of shares applied for and the number of shares available for allocation. If the number of shares applied for is greater than the number of shares available, the company may use a pro-rata allotment method to allocate the shares.
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 for Issue and Pro-rata Allotment of Shares:
The accounting treatment for issue and pro-rata allotment of shares includes the following steps:
Recording the Application Money:
When investors apply for shares, they are required to pay an application fee. The application fee is recorded as a liability in the books of accounts until the allotment is made. The accounting entry for recording the application money is:
- Bank Account Debit
- Application Money Received Account Credit
Recording the Allotment of Shares:
Once the allotment is made, the shares are recorded in the books of accounts. The accounting entry for recording the allotment of shares is:
- Share Capital Account Debit
- Share Allotment Account Credit
The share capital account represents the value of the shares issued, while the share allotment account represents the number of shares allocated to each shareholder.
Recording the Receipt of Share Money:
After the allotment is made, shareholders are required to pay the share money. Share money is the amount payable on the shares allotted. The accounting entry for recording the receipt of share money is:
- Bank Account Debit
- Share Allotment Account Credit
The share allotment account is credited to reduce the liability of the company for the allotment of shares.
Recording the Unpaid Share Money:
If a shareholder does not pay the share money on the shares allotted, the amount unpaid is recorded as a liability in the books of accounts. The accounting entry for recording the unpaid share money is:
- Share Allotment Account Debit
- Calls in Arrears Account Credit
The share allotment account is debited to reduce the liability of the company for the allotment of shares, while the calls in arrears account is credited to record the amount unpaid by the shareholder.
Recording the Forfeiture of Shares:
If a shareholder does not pay the share money on the shares allotted within the prescribed time, the company may forfeit the shares. The forfeiture of shares is recorded in the books of accounts. The accounting entry for recording the forfeiture of shares is:
- Forfeited Shares Account Debit
- Share Allotment Account Credit
The forfeited shares account represents the value of the shares forfeited, while the share allotment account is credited to reduce the liability of the company for the allotment of shares.
Recording the Reissue of Forfeited Shares:
After the forfeiture of shares, the company may reissue the shares. The reissue of shares is recorded in the books of accounts. The accounting entry for recording the reissue of shares is:
- Bank Account Debit
- Forfeited Shares Account Credit
The bank account is debited to record the receipt of money for the reissue of shares, while the forfeited shares account is credited to reduce the liability of the company for the forfeited shares.
Issue and Pro-rata allotment of shares example
Authorized Share Capital: 1,00,000 equity shares of Rs. 10 each
Issued Share Capital: 50,000 equity shares of Rs. 10 each
Paid-up Share Capital: Rs. 8 per share
Issue Price: Rs. 12 per share
ABC Limited decides to issue 20,000 new equity shares of Rs. 10 each at a premium of Rs. 2 per share. The shares are issued on a pro-rata basis to the existing shareholders. The following table shows the details of the issue and pro-rata allotment of shares:
Stage | Amount (Rs.) | Dr. Account | Cr. Account |
Application Stage | 20,000 | Bank A/c | Share Application A/c |
Allotment Stage | 20,000 | Share Allotment A/c | Share Application A/c |
40,000 | Share Allotment A/c | Share Capital A/c | |
4,000 | Share Premium A/c | Share Capital A/c | |
Call Money Stage | 20,000 (Rs. 2 per share) | Share Allotment A/c | Share Call A/c |
20,000 (Rs. 2 per share) | Share Call A/c | Bank A/c | |
Final Stage | – | Share Call A/c | Share Capital A/c |
– | Share Premium A/c | Share Capital A/c |
Explanation:
Application Stage:
ABC Limited receives applications for 20,000 equity shares at Rs. 12 per share. The company records the receipt of the application money in the bank account and the liability for share applications in the share application account.
Allotment Stage:
The company allots 20,000 equity shares to the applicants on a pro-rata basis. The company records the allotment of shares in the share allotment account and reduces the liability for share applications in the share application account. The company also records the receipt of the share money in the share allotment account and increases the share capital account and share premium account.
Call Money Stage:
ABC Limited calls for Rs. 2 per share as the first and final call on the shares allotted. The company records the receipt of the call money in the share allotment account and creates a new liability for the call money in the share call account. The company then receives the call money from the shareholders and records it in the bank account.
Final Stage:
After receiving the full payment of the call money, ABC Limited records the transfer of the share call account to the share capital account and the share premium account. This completes the issue and pro-rata allotment of shares process.