Issue, forfeiture and reissue of shares

A company collects its capital in small equal units called shares, often in instalments. Each instalment has its own pair of entries.

Share capital

The capital of a company is divided into units of small value called shares. A person who holds shares is a member (shareholder). Under the Companies Act, 2013 a company limited by shares may issue two kinds:

Preference shares: carry a preferential right to a fixed dividend and to repayment of capital on winding up.
Equity shares: all shares that are not preference shares. Equity shareholders are paid after preference shareholders and bear the risk and reward of ownership.

Categories of share capital

Term	Meaning
Authorised (nominal) capital	The maximum capital the company may issue, as stated in its memorandum of association
Issued capital	The part of authorised capital offered for subscription
Subscribed capital	The part of issued capital taken up by the public
Called-up capital	The part of the face value that the company has asked shareholders to pay
Paid-up capital	Called-up capital less calls in arrears
Reserve capital	Uncalled capital that the company has resolved to call only on winding up

Issue of shares for cash

Shares may be issued at par (at face value) or at a premium (above face value). Section 53 of the Companies Act, 2013 prohibits the issue of shares at a discount, except sweat equity shares. The price is usually collected in stages: on application, on allotment and on one or more calls. The amount payable on application must be at least 5% of the nominal value of the share (section 39).

Stage	Entries
Application money received	Bank A/c Dr. To Share Application A/c
Application money transferred on allotment	Share Application A/c Dr. To Share Capital A/c
Allotment money due	Share Allotment A/c Dr. To Share Capital A/c (and To Securities Premium A/c)
Allotment money received	Bank A/c Dr. To Share Allotment A/c
Call money due	Share Call A/c Dr. To Share Capital A/c
Call money received	Bank A/c Dr. To Share Call A/c

Securities premium

The amount received above face value is credited to Securities Premium Account and shown under Reserves and Surplus. Under section 52 it can be used only for:

issuing fully paid bonus shares to members;
writing off preliminary expenses;
writing off the expenses of, or commission paid or discount allowed on, an issue of shares or debentures;
providing for the premium payable on redemption of preference shares or debentures;
buying back the company's own shares.

Solved example

Narmada Ltd. invited applications for 10,000 equity shares of ₹10 each at a premium of ₹2 per share, payable ₹3 on application, ₹5 on allotment (including the premium) and ₹4 on first and final call. All the shares were applied for and allotted. All money was received except the call on 200 shares held by Rohit. His shares were forfeited and later reissued at ₹8 per share, fully paid.

Journal of Narmada Ltd.
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	30,000
To Equity Share Application A/c		30,000
(Application money on 10,000 shares at ₹3)
Equity Share Application A/c Dr.	30,000
To Equity Share Capital A/c		30,000
(Application money transferred to share capital)
Equity Share Allotment A/c Dr.	50,000
To Equity Share Capital A/c		30,000
To Securities Premium A/c		20,000
(Allotment due: ₹3 capital and ₹2 premium on 10,000 shares)
Bank A/c Dr.	50,000
To Equity Share Allotment A/c		50,000
(Allotment money received)
Equity Share First and Final Call A/c Dr.	40,000
To Equity Share Capital A/c		40,000
(Call due on 10,000 shares at ₹4)
Bank A/c Dr.	39,200
Calls in Arrears A/c Dr.	800
To Equity Share First and Final Call A/c		40,000
(Call received on 9,800 shares; ₹800 unpaid by Rohit)
Equity Share Capital A/c Dr.	2,000
To Share Forfeiture A/c		1,200
To Calls in Arrears A/c		800
(Forfeiture of 200 shares for non-payment of the call)
Bank A/c Dr.	1,600
Share Forfeiture A/c Dr.	400
To Equity Share Capital A/c		2,000
(Reissue of 200 shares at ₹8 as fully paid)
Share Forfeiture A/c Dr.	800
To Capital Reserve A/c		800
(Gain on reissue of forfeited shares transferred)
Total	2,44,800	2,44,800

The forfeiture and reissue explained

Forfeiture. Share Capital is debited with the amount called up on the forfeited shares: 200 × ₹10 = ₹2,000. Share Forfeiture is credited with the amount already received towards capital: 200 × (₹3 + ₹3) = ₹1,200. The unpaid call, ₹800, is cancelled.
Premium. The premium of ₹2 on these shares was received at allotment, so Securities Premium is left untouched. Premium is reversed on forfeiture only if it was not received.
Reissue. Forfeited shares can be reissued below face value. The discount (here ₹2 a share, ₹400) is charged to Share Forfeiture. It cannot be more than the amount forfeited on those shares.
Gain. The balance left in Share Forfeiture for the reissued shares, ₹1,200 − ₹400 = ₹800, is a capital profit and goes to Capital Reserve.

Check: total cash received = ₹30,000 + ₹50,000 + ₹39,200 + ₹1,600 = ₹1,20,800 = Share capital ₹1,00,000 + Securities premium ₹20,000 + Capital reserve ₹800.

Over-subscription and pro-rata allotment

When more shares are applied for than offered, the company may reject some applications and refund their money, allot in full to some, or allot to all in proportion (pro rata). Under pro-rata allotment, the excess application money is kept and adjusted towards allotment.

Example. For the issue above, suppose applications were received for 15,000 shares and allotment was made pro rata to all. The ratio is 15,000 : 10,000, that is 3 : 2. An applicant for 300 shares is allotted 200. He paid 300 × ₹3 = ₹900 on application; ₹600 is needed for 200 shares; the surplus ₹300 is adjusted against the ₹1,000 due from him on allotment, so he pays ₹700 more.

Journal
Particulars	Dr. (₹)	Cr. (₹)
Equity Share Application A/c Dr.	45,000
To Equity Share Capital A/c		30,000
To Equity Share Allotment A/c		15,000
(Application money on 15,000 shares: ₹30,000 to capital, ₹15,000 adjusted towards allotment)

Calls in arrears and calls in advance

Calls in arrears are amounts called up but not paid; they are deducted from called-up capital in the balance sheet. Calls in advance are amounts received before they are called; they are a liability until the call is made. Where the company's articles are silent, Table F of the Act applies: interest may be charged on calls in arrears at not more than 10% a year and paid on calls in advance at not more than 12% a year.

Issue for consideration other than cash

Shares may be issued to a vendor in payment for assets. Example: machinery worth ₹4,40,000 is bought from Vindhya Machines and paid for by issuing equity shares of ₹10 each at a premium of 10%. Number of shares = ₹4,40,000 ÷ ₹11 = 40,000.

Journal
Particulars	Dr. (₹)	Cr. (₹)
Machinery A/c Dr.	4,40,000
To Vindhya Machines		4,40,000
(Machinery purchased)
Vindhya Machines Dr.	4,40,000
To Equity Share Capital A/c		4,00,000
To Securities Premium A/c		40,000
(40,000 shares of ₹10 issued at ₹11 in payment)
Total	8,80,000	8,80,000

How share capital appears in the company's balance sheet is shown on the financial statements of a company page.

Questions students ask

Can a company issue shares at a discount?

No. Section 53 of the Companies Act, 2013 prohibits it, except for sweat equity shares. Forfeited shares, however, can be reissued below face value within the amount forfeited.

What happens to securities premium when shares are forfeited?

If the premium was already received on those shares, the Securities Premium Account is not touched. If it was not received, it is debited to cancel it.

Where is the gain on reissue of forfeited shares transferred?

To the Capital Reserve Account, because it is a capital profit and not available for dividend.