GAUTAM

COMMERCE CLASSES

ISSUE, FORFEITURE & REISSUE OF SHARES

SHARE, SHARE CAPITAL & FACE VALUE
 The total capital of a limited company is divided into small parts, each with a fixed value
attached to it.
 Each of this small part is called a ‘share’ and the entire capital is called ‘share capital’.
 Therefore ‘share’ is defined as “ a share is a share in the share capital of the
company”.
 The fixed value attached to the share is called Face Value or Nominal Value.

ISSUE OF SHARES - MEANING

 The capital of a limited company is contributed by members from the general public.
 Depending on the amount contributed by a person and the ‘value’ of each share the company
gives a certificate to the contributor specifying the number of shares held by him. This
certificate is called ‘share certificate’.
 Nowadays physical shares are not issued by the company but the requisite number of shares
are credited to the contributors ‘demat’ a/c.
 This process of giving share certificate or crediting the demat a/c. is called ‘issue of
shares’.
 The contributor upon receiving the shares becomes the shareholder of the company.

ISSUE OF SHARES - PROCESS

 APPLICATION STAGE
 The process of issue of shares starts with the company issuing a ‘prospectus’.
 Prospectus is a statement specifying the total number of shares which the company wants to
issue and thereby an indicator of the capital required by the company. It also specifies the
proposed utilization of this capital.
 Prospectus is also an invitation to the public to apply for shares. The application made by
members of the public should be accompanied by application money which will be a part of
the issue price.
 Depending on the response of the public, the issue is said to be
 Fully subscribed - applications received = shares issued
 Under subscribed - applications received < shares issued
 Over subscribed - applications received > shares issued
 In case of over subscription, the excess applications are rejected and the application money
thereon is refunded.
 ALLOTMENT STAGE
 After rejecting the excess applications, the remaining applications are accepted. Acceptance
of application is known as ‘allotment of shares’.
 Upon allotment the shareholder has to pay another part of the issue price which is known as
‘allotment money’.
 CALL STAGE
 The balance of the issue price will be paid for by the shareholder in installments as and when
the company asks for it.
 These installments are known as ‘calls’ and the money paid thereon is known as ‘call money’.
 CALLS IN ARREARS
 When a shareholder fails to pay either the allotment money or the call money, the unpaid
amount is known as ‘calls in arrears’. Calls in arrears represents the amount receivable by the
company from the shareholders.
 FORFEITURE AND REISSUE OF SHARES
 After repeated reminders if the shareholder does not clear the calls in arrears, the
company cancels his shares and the amount already paid by him is not refunded back. Such
cancellation of shares is known as ‘forfeiture of shares’. The amount forfeited by the
company is a profit to the company.
 The forfeited shares are reissued by the company, generally at a discount. The company can
issue shares at a discount as it has already received some money from the previous
shareholder. Discount on reissue is a loss to the company.
 The discount offered on reissue cannot be greater than the amount forfeited from the
previous shareholder.
 The amount forfeited - discount on reissue is the net profit to the company and is to be
transferred to capital reserve.

PRO RATA ALLOTMENT

 In case of oversubscription allotment can also be made on a pro rata basis in which
applications are accepted partly and the excess application money is adjusted toward
allotment money due on the shares allotted. Super excess after adjusting allotment dues can
be either adjusted towards call money or can be refunded.

ISSUE OF SHARES - AT PAR, AT PREMIUM, AT DISCOUNT

 If the issue price of the shares is equal to the face value, it is said that the shares are
issued at par.
 If the issue price of the shares is greater than the face value, it is said that the shares are
issued at premium. The excess amount received is called share premium or securities
premium and is a profit to the company.
 If the issue price of the shares is less than the face value, it is said that the shares are
issued at discount. Discount offered on issue of shares is a loss to the company.
 Premium on issue can be collected with application money, or allotment money or call money.
 Discount on issue is always considered along with allotment.
FORMAT OF WORKING NOTE
BASIC
CATEGORY
PARTICULARS
I II III
Applied
Allotted
Excess (nos.)
Excess (Rs.)
Allotment money due
Excess – adjusted
Excess - refunded

CALLS IN ARREARS
STAGE NAME NO. OF SHARES WORKING C.I.A.

Allotment

Ist call

IInd call

CAPITAL RESERVE
WORKING
NAME AMOUNT
(called up + premium not recd – CIA) x sh reissued/sh forfeited)

Total forfeited amount on reissued shares

Less: Discount on reissue
Amount to be transferred to Capital Reserve
PROFORMA JOURNAL ENTRIES
1. For application money received
Bank a/c. Dr. appl recd x appl money
To Equity share application a/c.

2. For application adjusted

Equity share application a/c. Dr. ( appl recd x appl money)
To Equity share capital a/c. sh allotted x appl money
To Share premium a/c.
To Equity share allotment a/c. (A) excess adjusted
To Bank a/c. super excess refunded

3. For allotment money due

Equity share allotment a/c. (B) Dr.
To Equity share capital a/c.
To Share premium a/c.

4. For allotment money received

Bank a/c. Dr.
Calls in arrears a/c. Dr.
To Equity share allotment a/c. (B – A)

5. For call money due

Equity share call a/c. Dr.
To Equity share capital a/c.
To Share premium a/c.

6. For call money received

Bank a/c. Dr.
Calls in arrears a/c. Dr.
To Equity share call a/c.

7. For forfeiture of shares

Equity share capital a/c. Dr. (called up amount)
Share Premium a/c. Dr. (amt not received)
To Calls in arrears a/c. (from W N)
To Share forfeiture a/c. (bal. fig)

8. For reissue of shares

Bank a/c. Dr. (amount received)
Share forfeiture a/c. Dr. (discount)
To Equity share capital a/c. (amt credited as paid)

9. For transfer to capital reserve

Share forfeiture a/c. Dr.
To Capital reserve a/c.
 SHARE CAPITAL

Authorised Issued Subscribed Called up Paid up Reserve

Maximum capital Shares actually Shares actually Portion of Part of called Capital that
a company can issued. subscribed by Face value up amount can be
issue. Also the public. actually actually paid called only
known as called by by the on winding.
Nominal Capital Company. shareholders.

Called up - CIA

DIVIDEND
It is that part of the profit that is distributed among the shareholders of the company. It is
paid as a percentage of the paid up value of the shares.

TYPES OF SHARE CAPITAL

Preference Shares Equity Shares

Shares which get priority over equity shares Shares which get dividend and are entitled
for receiving dividend and repayment of to repayment of capital only after the
capital in the event of liquidation. same is paid to preference shares.

Dividend on preference shares is paid at a Dividend on equity shares depends on the

fixed percentage. available profits after paying dividend to
the preference shareholders.
TYPES OF PREFERENCE SHARES
Cumulative Preference Shares
In case of such shares, dividend not paid in a particular year due to inadequacy of profits
will be paid out of profits of the subsequent year/s.

Non Cumulative Preference Shares

In case of such shares, dividend not paid in a particular year due to inadequacy of profits
will lapse and will not be paid later.

Participating Preference Shares

In case of such shares, after receiving dividend at a fixed rate the preference
shareholders are entitled to share (participate) a pre determined proportion of surplus as
well once the equity shareholders have been paid dividend at a stipulated rate.
Similarly, in the event of winding up of the company, this type of shares carries the right
to receive a pre determined proportion of surplus as well once the equity shareholders
have been paid.

Non Participating Preference Shares

In case of such shares, the preference shareholders over and above their preferential
fixed dividend are not entitled to any additional sharing rights. Similarly, in the event of
winding up of the company, this type of shares carries the right to receive only the paid up
capital and premium if any.

Redeemable Preference Shares

In case of such shares, the capital raised by the company by issuing such shares will be
refunded by the company on a stipulated date at a stipulated rate. The refund process is
known as redemption and is to be done in accordance with the conditions specified in
Sec.80 of The Companies Act, 1956.
A limited company cannot issue preference shares which are irredeemable.

Convertible Preference Shares

In case of such shares, the preference shares will be converted into equity shares in
accordance with the terms and conditions stipulated at the time of issue.

Non Convertible Preference Shares

In case of such shares, the preference shares will not be converted into equity shares.

In the absence of any information preference share are considered as:

Cumulative, Non Participating, Redeemable, Non convertible.

UNDERWRITERS AND UNDERWRITING COMMISSION

UNDERWRITERS
They are people who do the job of underwriting. They guarantee minimum subscription to a
company in return of some consideration.
UNDERWRITING COMMISSION
It is the commission given by the company to the underwriters.
It is generally paid as % of the issue price.
The maximum commission that can be paid by the company is 5% of the issue price in case of
shares and 2.5% of the issue price in case of debentures.

OTHER POINTS
No allotment can be made unless the company receives subscription including from
underwriters equal to 90% of the entire issue.
There has to be a gap of at least two months between two calls.
Shares have to be made fully paid within 12 months from the date of allotment.
Minimum application money to be paid by the applicant should not be less than 25% of the
face value of the shares.
When shares are issued at a discount:
 Discount should not be greater than 10% of the face value.
 One year must have passed since the company was entitled to commence business.
 The shares are of a class which has already been issued.
Discount on issue of shares is disclosed in the balance sheet on the asset side under the
head ‘miscellaneous expenditure’ and is to be written off over a period of years.
Share premium is disclosed in the balance sheet under the head ‘reserves and surplus’ and
is used for adjusting:
 Discount on issue of shares and debentures.
 Preliminary expenses.
 Underwriting commission.
 Premium on redemption or buy back of shares or debentures.
Amount paid by shareholders before it is called by the company is known as ‘calls in
advance’.
Memorandum of Association of a company is a document which specifies the name, capital,
objects etc of the company.
Articles of Association of a company is a document which defines the internal organization
of a company and lays down the internal rules of the company.
Table A refers to model set of articles which can be adopted by a company.
As per Table A
 Interest on Call in arrears @ 5% p.a.
 Interest on Calls in advance @ 6% p.a.
When shares of a higher denomination are converted into shares of smaller denomination
with the total capital remaining same, it is known as sub division of shares.
When shares of a smaller denomination are converted into shares of higher denomination
with the total capital remaining same, it is known as consolidation of shares.
PREFERENTIAL ALLOTMENT
A preferential allotment is one that is made at a predetermined price to predetermined
people (< 50) who wish to take a strategic stake in the company such as promoters, venture
capitalists, financial institutions, buyers of company’s products or is suppliers.
In case of preferential allotment, the allottees will not sell their securities in the open
market for a minimum period of three years from the date of allotment. This period is
known as “lock in period”.
In case of pre issue of share capital of an unlisted company the lock in period is one year
from the date of commencement of commercial production or the date of allotment in the
public issue whichever is earlier.
The preferential allotment can take place only if three-fourths of the shareholders agree
to the issue on preferential basis.
SEBI has prescribed that the minimum price of such an issue has to an average of highs
and lows of the 26 weeks preceding the date on which the board resolves to make the
preferential allotment.

SWEAT EQUITY
Sweat Equity Shares are those which are issued by the company to its employees or directors
at a discount or for consideration other than cash for providing know – how or making available
rights to use intellectual property. According to Sec. 79A of The Companies Act,
notwithstanding anything contained in Sec.79, a company may issue sweat equity shares of a
class of shares already issued if the following conditions are fulfilled:
a) the issue of Sweat Equity Shares is authorized by a special resolution passed by the
company at the general meeting.
b) the resolution specifies the number of shares, current market price, consideration, if
any, and the class or classes of directors or employees to whom such shares are issued.
c) not less than one year has elapsed since the date of commencement of business.
d) the sweat equity shares of a company, whose equity shares are listed on a recognized
stock exchange, are issued in accordance with the regulation made by SEBI in this
behalf.

PRIVATE PLACEMENT OF SHARES

A private placement is an issue of shares or of convertible securities by a company to a select
group of persons (< 50) under Section 81 (1A) of The Companies Act, 1956 which is neither a
rights issue nor a public issue.
A private placement of shares or of convertible securities by a listed company is generally
known by name of preferential allotment.
All SEBI guidelines concerning preferential issue are applicable to private placement of shares
as well. In order to issue shares through this route, a company should pass a special resolution
to this effect. Where no such resolution is passed but the votes for are more than the votes
against, the company can make an application to the Central Govt for obtaining consent for such
an issue.
EMPLOYEE STOCK OPTIONS PLAN (ESOP)
Sec. 2(15A) of The Companies Act 1956 defines ESOP as: “ employee stock option means that
option given to the whole time directors, officers or employees of a company which gives such
directors, officers or employees the benefit or right to purchase or subscribe at a future date,
the securities offered by the company at a predetermined price.

SEBI issued Employees Stock Option Scheme guidelines in 1999 and revised them in 2009.

Definitions as per SEBI guidelines:

1. Option: An option is a right but not an obligation granted to an employee under the ESOP
to apply for and be allotted shares of the company at a price determined earlier, during or
within a specified period of time, subject to the requirements of vesting.
2. Grant: Grant is a process by which an employee is given an option. It is the delivering of
the options to the employee. The grant shall specify the number of options given, the time
of vesting etc.
3. Vesting: Vesting means the process by which the employee gets the right to apply for and
be issued shares of the company under the options granted to him. Till the vesting takes
place, the employee does not have a right to apply for the shares. Upon vesting, the
employee gets an unfettered right to apply for the issue of shares upon fulfillment of the
conditions. In the event of an employee resigning from the services of the company or his
employment being terminated for whatsoever reasons, all unvested options shall expire as
on that date, but the employee would, subject to conditions, retain all the vested options.
4. Vesting Period: Vesting period means the period over which the vesting of the options of
the employee takes place. Vesting period can be a single time period or a series of time
periods. In other words, vesting can take place in one stroke or in staggered time periods.
For example, an employee may become entitled to have 500 options vested in him at the
end of three years or of the 500 options granted to him, have 100 options vested in him at
intervals of 12 months each.
5. Exercise: The act of exercise implies an application being made by the employee to the
company to have the options vested in him issued as shares upon payment of the option
price. Exercise can take place as specified after vesting.
6. Exercise Period: Exercise period means the time period after vesting within which the
employee should exercise his right to buy the shares by payment of the option price on the
options vested in him. If the exercise period lapses the vested option lapses and no right
shall accrue to the employee thereafter. The employee may exercise all the options vested
in him in one stroke or choose to exercise a number of options within the exercise period.
Unless shares are issued on exercise, the employee shall have no right to receive any
dividend or to vote or in any manner enjoy the benefits of a shareholder.

SHAREHOLDER APPROVAL
1. The ESOP shall be approved by the shareholders by a special resolution. The
resolution shall contain terms and conditions of the Plan which inter-alia shall include
 the following:
a. Identification of classes of beneficiaries entitled to participate in the ESOP.
b. Vesting of the Stock Option
c. Period of exercise and process of exercise.
d. Exercise price or pricing formula.
e. The appraisal process for determining the eligibility of employees to the Stock Option
Plan.
f. Upper limit on the quantum of stock options to be issued in the aggregate.
g. The special resolution shall also state that the company shall conform to the
accounting policies.
2. Specific shareholder approval shall be obtained in the case of grant of stock options to
employees of subsidiary /holding company
3. Grant of stock options to specific employees, during any one year, equal to or exceeding 1%
of the issued capital (excluding outstanding warrants and conversions) of the company at the
time of grant shall be subject to approval by the shareholders by way of separate resolution.
4. In extra ordinary situations, the company in general meeting may by special resolution
vary the terms of options granted but not yet exercised in a manner not prejudicial to
the interests of the option holders. The notice for such resolution shall provide full details
of the beneficiaries of such variation of terms and the rationale therefor. The provisions of
2.2.2 and 2.2.3 shall apply to such variation of terms as they do to the original grant of
options.

LOCK-IN PERIOD, VESTING AND EXERCISE OF OPTIONS

1. There should be a minimum period of one year between the grant of options and vesting.
2. There should be a maximum period of eight years between the grant of options and vesting.
3. Employee options must be exercised within a maximum period of five years from the date of
vesting.
4. Shares issued in exercise of options shall not be subject to any lock-in period.

NON TRANSFERABILITY OF STOCK OPTIONS

1. Options shall not be transferable, and only the employee shall be entitled to exercise the
options. They can not be pledged, hypothecated, mortgaged or otherwise alienated in any
other respect. However, the company may allow cashless system of exercise under which
empanelled stock brokers (or, subject to company law requirements, the company itself) may
fund the exercise price of the options against the sale proceeds of part or whole of the
shares arising out of the exercise.
2. In the event of the death of the employee, while in employment, all the options granted to
him as on the date of death shall pass along his estate and shall be fully vested in his estate
as on that date and may be claimed by his legal heirs.
3. In the event that the employee suffers a permanent incapacity while in employment, all the
options granted to him as on the date of permanent incapacitation, shall fully vest in him on
such date.

ACCOUNTING POLICIES FOR ESOS:

(a) In respect of options granted during any accounting period, the accounting value of the
options shall be treated as another form of employee compensation in the financial statements
of the company.
(b) The accounting value of options shall be equal to the aggregate, over all employee stock
options granted during the accounting period, of the intrinsic value of the option or, if the
company so chooses, the fair value of the option.

Accounting Value of Option = No. of Options x (Market Price -

Exercise Price)
J.E. Deferred Employee Compensation a/c. Dr.
To ESOP Outstanding a/c.
(c) Where the accounting value is accounted for as employee compensation in accordance with
clause (b), the amount shall be amortised as under :
(i) Where the scheme does not provide for graded vesting, the amount shall be amortised
on a straight-line basis over the vesting period.
(ii) Where the scheme provides for graded vesting -
(1) the vesting period shall be determined separately for each separate vesting
portion of the option, as if the option was, in substance, multiple option and the
amount of employee compensation cost shall be accounted for and amortised
accordingly on a straight-line basis over the vesting period;
or
(2) the amount of employee compensation cost shall be accounted for and
amortised on a straight-line basis over the aggregate vesting period of the entire
option (that is, over the vesting period of the last separately vesting portion of the
option):
Provided that the amount of employee compensation cost recognized at any date at
least equals the fair value or the intrinsic value, as the case may be, of the vested
portion of the option at that date.”
J. E. Employee Compensation Expense a/c. Dr.
To Deferred Employee Compensation Expense a/c.
(d) When an unvested option lapses by virtue of the employee not conforming to the vesting
conditions after the accounting value of the option has already been accounted for as employee
compensation, this accounting treatment shall be reversed by a credit to employee
compensation expense equal to the amortized portion of the accounting value of the lapsed
options and a credit to deferred employee compensation expense equal to the unamortized
portion.
J.E. Employee Stock Options Outstanding a/c. Dr.
 To Employee Compensation Expense a/c.
To Deferred Employee Compensation Expense a/c.
(e) When a vested option lapses on expiry of the exercise period, after the fair value of the
option has already been accounted for as employee compensation, this accounting treatment
shall be reversed by a credit to employee compensation expense.
J.E. Employee Stock Options Outstanding a/c. Dr.
To Employee Compensation Expense a/c.
(f) When the employee exercises his option the accounting will be to debit Cash/Bank with the
exercise price and Employee Stock Options Outstanding with the value of the option. The credit
will be to Equity Share Capital a/c. with the face value and Share Premium a/c. for the
difference.
J.E. Cash/Bank a/c. Dr.
Employee Stock Options Outstanding a/c. Dr.
To Equity Share Capital a/c.
To Share Premium a/c.
Q1 Hindustan Lever Limited granted 500 options on April 1, 1999 at Rs.40 (nominal value
Rs.10 each) when the market price was Rs.160, the vesting period was two and half years.
The maximum exercise period was one year. On May 1, 2001, 150 unvested options lapsed
and 300 options were exercised on June 30, 2002 and remaining 50 options lapsed at the
end of exercise period. Pass Journal Entries.
Q2 A company has its share capital divided into shares of Rs.10 each. On 1st April, 2005 it
granted 10,000 employees stock options at Rs.40, when the market price was Rs.130. The
options were to be exercised between 16th December, 2005 and 15th March, 2006. The
employees exercised their options for 9,500 shares only, the remaining options lapsed.
The company closed a/c on 31st March. Pass Journal Entries.