Chapter 1 — Accounting for Share Capital

The chapter covers the nature and features of a joint stock company, kinds of companies, categories of share capital, classes of shares (preference and equity), and the full accounting treatment for issue of shares at par and premium, calls in arrears and advance, over- and under-subscription, forfeiture of shares, and reissue of forfeited shares.

Authorised capital (also called nominal or registered capital) is the maximum amount a company is permitted to issue as stated in its Memorandum of Association. Paid-up capital is the portion of called-up capital actually received from shareholders; it equals called-up capital minus calls in arrears.

Under Section 43 of the Companies Act, 2013, a company can issue preference shares and equity shares. Preference shares carry a preferential right to dividend at a fixed amount or rate and to repayment of capital on winding up, while equity shares do not enjoy these preferential rights.

Application money must be at least 5% of the face value of the share. If the company fails to receive minimum subscription (not less than 90% of the issued amount as per SEBI guidelines) within 120 days of the prospectus, it cannot proceed with allotment and must refund application money.

Calls in arrears (also called unpaid calls) is the amount not paid by shareholders on allotment or on any call by the due date. Table F of the Companies Act provides that interest on calls in arrears shall not exceed 10% per annum for the period from the due date to the date of actual payment.

Calls in advance is the amount paid by shareholders before the relevant call is made by the directors. It is a liability of the company, credited to Calls in Advance Account, and shown under current liabilities in the balance sheet. Table F provides for interest on calls in advance at a rate not exceeding 12% per annum.

Securities Premium Reserve can be used only for five purposes: (a) issuing fully paid bonus shares, (b) writing off preliminary expenses, (c) writing off expenses, commission, or discount on any securities, (d) paying premium on redemption of preference shares or debentures, and (e) buy-back of the company's own shares.

On forfeiture, Share Capital Account is debited with the called-up amount, Share Forfeiture Account is credited with the amount already received, and the unpaid call accounts (or Calls in Arrears Account) are credited with the amount not received. All entries relating to the forfeited shares are reversed except those relating to premium already received.

When forfeited shares are reissued, the discount allowed on reissue is debited to Share Forfeiture Account. The balance remaining in Share Forfeiture Account in respect of the reissued shares — which is the capital profit — is transferred to Capital Reserve Account.

When a company issues shares to vendors in exchange for assets rather than cash, the asset account is debited and the vendor's account is credited at the agreed amount. The vendor's account is then debited and Share Capital Account (and Securities Premium Reserve, if issued at premium) is credited on issue of shares.

Reserve capital is a portion of uncalled capital that a company reserves to be called only in the event of winding up. It is available solely to creditors on winding up and cannot be called during the normal existence of the company.

Directors may (1) accept some applications in full and totally reject the others, refunding the rejected application money; (2) make a pro-rata allotment to all applicants, adjusting excess application money towards allotment; or (3) combine both — reject some applications outright and make pro-rata allotment to the remaining applicants.

As a general rule, a company cannot issue shares at a discount. The Companies Act permits issue at a discount only in the case of reissue of forfeited shares (where the discount cannot exceed the amount already received on those shares) and issue of sweat equity shares.

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