KANO STATE POLYTECHNIC

SCHOOL OF MANAGEMENT SCIENCE

LECTURE NOTE ON ISSUE OF SHARES

Meaning of Shares

Section 2(84) of the Companies Act, 2013 defines share as a share in the share capital of a
company and it includes stock. The share capital of a company is divided into units of smaller
denominations. Each such unit is called a Share. It entitles the holder to ownership in the
company.

Shares are the units into which the absolute share capital of a firm is split into or divided into.
Therefore, the share is a fractional portion of the share capital and comprises the ground of
ownership interest in a company. The persons who contribute money through shares are called
shareholders.

Types of Shares

Most classes of share will fall into one of the below categories of types of share:

While there are a few conventions which are best followed to avoid any misunderstandings a
company can call shares by whatever name it likes. That said, you cannot simply assume that
shares called ordinary in one company will have exactly the same rights as the ordinary shares
in another company. Indeed the only way to ascertain what rights go with a particular share
class is to read the articles of association of that company.

The reasons why a company would want to have different share classes will generally fall into
one of the below categories:

● To attract investment
● To push dividend income in a certain direction
● To remove (or enhance) voting powers of certain individuals
● To motivate staff (to remain as employees)

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Provided it follows due process, and subject to any restrictions in its articles of association, a
company can create a new share class at any time. When it needs a new share class a
company can choose to either create a new share class in addition to an existing class or
convert an existing share class into one or more new share classes.

It is the articles of association which set out the division of shares into their different classes.
The articles will also detail the precise rights attaching to each class. Most classes of share will
fall into one of the below categories of types of share:

Ordinary shares

These carry no special rights or restrictions. They rank after preference shares as regards
dividends and return of capital but carry voting rights (usually one vote per share) not normally
given to holders of preference shares (unless their preferential dividend is in arrears).

Deferred ordinary shares

A company can issue shares which will not pay a dividend until all other classes of shares have
received a minimum dividend. Thereafter they will usually be fully participating. On a winding up
they will only receive something once every other entitlement has been met.

Non-voting ordinary shares

Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting
rights if certain conditions are met. Alternatively, they may carry no voting rights at all. They
may also preclude the shareholder even attending a General Meeting. In all other respects they
will have the same rights as ordinary shares.

Redeemable shares

The terms of redeemable shares give the company the option to buy them back in the future;
occasionally, the shareholder may (also) have the option to sell them back to the company,
although that’s much less common.

Preference shares

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These shares are called preference or preferred since they have a right to receive a fixed
amount of dividend every year. This is received ahead of ordinary shareholders. The amount
of the dividend is usually expressed as a percentage of the nominal value. So, a £1, 5%
preference share will pay an annual dividend of 5p.

Cumulative preference shares

If the dividend is missed or not paid in full then the shortfall will be made good when the
company next has sufficient distributable reserves. It follows that ordinary shareholders will not
receive any dividends until all the arrears on cumulative preference shares have been paid.

Redeemable preference shares

Redeemable preference shares combine the features of preference shares and redeemable
shares. The shareholder therefore benefits from the preferential right to dividends (which may
be cumulative or non-cumulative) while the company retains the ability to redeem the shares on
pre-agreed terms in the future.

Difference between Equity Shares and Preference Shares

Preference Shares

A preference share is one which carries two exclusive preferential rights over the other
type of shares, i.e. equity shares. These two special conditions of preference shares are

● A preferential right with respect to the dividends declared by a company. Such

dividends can be at a fixed rate on the nominal value of the shares held by them.
So the dividend is first paid to preference shareholders before equity
shareholders.
● Preferential right when it comes to repayment of capital in case of liquidation of
the company. This means that the preference shareholders get paid out earlier
than the equity shareholders.

Equity Shares

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Equity share is a share that is simply not a preference share. So shares that do not
enjoy any preferential rights are thus equity shares. They only enjoy equity, i.e.
ownership in the company.

The dividend given to equity shareholders is not fixed. It is decided by the Board of
Directors according to the financial performance of the company. And if in a given year
no dividend can be declared, the shareholders lose the dividend for that year, it does
not cumulate.

Issue of Shares
When a company wishes to issue shares to the public, there is a procedure and rules that it
must follow as prescribed by the Companies Act 2013. The money to be paid by subscribers
can even be collected by the company in installments if it wishes. Let us take a look at the steps
and the procedure of issue of new shares.

Procedure of Issue of New Shares

1] Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an
invitation to the public to subscribe to shares of the company. A prospectus contains all the
information of the company, its financial structure, previous year balance sheets and profit and
Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits from
the public at large it is compulsory for a company to issue a prospectus or a document in lieu of
a prospectus.

2] Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill
out an application and deposit the requisite application money in the schedule bank mentioned
in the prospectus. The application process can stay open a maximum of 120 days. If in these
120 days minimum subscription has not been reached, then this issue of shares will be

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cancelled. The application money must be refunded to the investors within 130 days since
issuing of the prospectus.

3] Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there
is always oversubscription of shares, so the allotment is done on a pro-rata basis. Letters of
Allotment are sent to those who have been allotted their shares. This results in a valid contract
between the company and the applicant, who will now be a part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment,
the company can collect the share capital as it wishes, in one go or in instalments.

Types of Issue of Shares

Public Issue

Public issue is an issue where shares or convertible securities are issued by a company in the
primary market with the help of its promoters. Under this type of issue, shares are offered to the
general public for raising the needed funds by the enterprise.

Right Issue

Right issue refers to selling of shares or convertible securities to present shareholders by

companies. This issue is made at a concessional rate on specified time set by the company
itself. Right issue is done for raising additional amounts of funds via issuing shares to existing
equity shareholders in proportion to their shareholdings in place of doing a fresh issue.

Bonus Issue

Bonus issues refer to offering of free shares by the company to current shareholders in addition
to shares held by them. These shares are issued in proportion to fully-paid up equity shares
held by shareholders. Bonus shares are issued free of any cost and are made out of free
reserves or securities premium accounts of the company.

Issue Of Shares At Par, At Premium And At Discount

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A company may issue shares at par, or at a premium, or at a discount.

Issue At Par: Shares are deemed to have been issued at par when subscribers are required to
pay only the amount equivalent to the nominal or face value of the shares issued.

Par Value Of Shares: ‘Par value’ is the notional face value of the shares which a company
issues to its investors.

Issue At A Premium: If the buyer is required to pay more than the face value of the share,
then the share is said to be issued or sold at a premium. The premium cannot be treated as profit
and, therefore, cannot be distributed as dividend. The amount of premium received in cash and
the equivalent of it received in kind must be kept in a separate bank account known as the
‘Securities Premium Account’. As per SEBI guidelines, 2000 every company entitled to make a
public issue can offer its shares at par or premium.

Issue At A Discount: If the buyer of shares is required to pay less than the face value of the
share, then the share is said to be issued or sold at a discount. Certain conditions subject to which
shares can be issued at a discount: It is authorized by a resolution, that is,

1. The issue must be of a class of shares already issued

2. The maximum rate of discount must not exceed 10 per cent

3. Not less than one year has, at the date of issue, elapsed since the date on which the company was
entitled to commence business.

4. Issued within two months of the sanction by the Company Law Board.

5. Every prospectus must mention particulars of the discount allowed on the issue of shares.

Illustration 1

Shipping Limited makes an issue of 10,000 Equity Shares of $25 each payable $5 on application,
$10 on Allotment and $10 on First and Final Call. All the shares are subscribed and the amount
duly received. Pass the journal entries.

Illustration 2

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A Limited Company issued 25,000 Ordinary Shares of Rs. 25 each payable Rs. 5 on application,
Rs. 10 on allotment and Rs. 5 each on subsequent calls, 20,000 shares were fully- subscribed and
money duly received. You are required to give journal entries, Cash Book and Balance Sheet of
the company.

Illustration 3

X Ltd. makes an issue of 20,000 Equity Shares of Rs.10 each at Rs. 11 on 1st March
payable as follows:

Rs. 2 on Application

Rs. 3 on allotment

Rs. 6 on First and Final Call (3 months after allotment)

Applications were received for 26,000 shares. The Directors made the allotment in fill to the
Application demanding 10 or more shares and returned money to the applicants for 6,000 shares.

One shareholder who was allotted 40 shares paid the first and final call money along-with
allotment money and another shareholder who was allotted 60 shares did not pay allotment
interest money but paid along-with first and final call money. The Directors deeded to change
and allow interest, as the case may be, on calls-.in-advance and calls-in-arrears.

Illustration 4

X Co. Ltd. forfeited 100 shares of Rs. 10 each fully called up, held by Mr. Arun for non-payment
of allotment money of Rs. 3 per share and first and final call of Rs. 4 per share. He paid
application money @ Rs. 3 per share. These shares were reissued @ Rs. 9 per share as fully paid.

Pass forfeiture and reissue journal entries.

Illustration 5

Glamour Limited invited applications for 15,000 shares of Rs. 10 each issued at Rs. 11.50
payable as follows:

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On application 1st July Rs. 7.50 per share

On allotment on 31st July Rs. 2.00 per share

On First and Final Call on 31st Aug. Rs. 2.00 per share

Applications were received for 18,000 shares and it was decided to deal the same as follows
in arrangement with Stock Exchange authorities:

(a) To refuse allotment to applicants for 800 shares

(b) To give full allotment to applicants for 2,200 shares

(c) To allot the remaining shares pro-rata among other applicants

(d) To utilise the surplus received on application in part payment of amounts due on allotment.
An applicant to whom 40 shares were allotted, failed to pay the amount due on the First and final
Call and his shares were forfeited on 31st Oct. These shares were reissued on 5th Nov. as fully
paid at Rs. 9 per share.

Give journal entries including those relating to cash to record the above transactions.