- Undersubscription means fewer shares are applied for than offered.
- All applicants get a full allotment of the shares they applied for.
- A minimum subscription of 90% is required as per SEBI.
- If not received, the application money must be refunded.
- Separate accounts are used for equity and preference shares.
Definitions [2]
Definition: Share
As per Section 2(84) of the Companies Act 2013, “Share is the share in the capital of a company and includes stock as well.”
Definition: Debenture
- According to section 2(30) of the Companies Act, 2013, " Debenture includes debenture stock, bonds and any other securities of a Company, whether constituting a charge on the assets of the Company or not."
- “A Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by a charge." -Topham
- According to Evelyn Thomas, "a debenture is a document under the company's seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating change on the company's property or undertaking and which acknowledges a loan to the company".
Formulae [1]
Number of Debentures Issued
\[\text{Number of Debentures Issued}=\frac{\text{Purchase Consideration}}{\text{Issue Price of Debenture}}\]
Key Points
Difference Between Authorised Capital and Issued Capital
| Basis | Authorised Capital | Issued Capital |
|---|---|---|
| Meaning | Maximum capital a company can issue | Part of authorised capital offered to public |
| Disclosure | Stated in the Memorandum of Association | Stated in the Articles of Association |
| Limit | It is equal to or more than the issued capital. | It is equal to or less than the authorised capital. |
Key Points: Share Capital of a Company
- Share Capital is the total money raised by issuing shares, representing ownership in the company.
- Authorised Capital is the maximum amount a company can issue, as stated in its Memorandum of Association.
- Issued Capital is the part of the authorised capital offered to the public for subscription.
- Subscribed Capital is the portion of issued capital that investors agree to take.
- Called-up Capital is the amount demanded by the company, and Paid-up Capital is what shareholders actually pay; the difference is called Calls-in-Arrears.
- Reserve Capital is the part of subscribed capital to be called only during winding up.
- A Prospectus invites the public to buy shares, and the company must receive at least 90% subscription before allotting shares.
Journal Entries: Issue of Shares at Par
A. When the Issue Price is Payable in Lump Sum:
1. On Receiving Application Money:
Bank A/c ...Dr.
To Shares Application A/c / Shares Application and Allotment A/c
(Being the application money received in a lump sum)
Or if a joint account is used:
Bank A/c ...Dr.
To Shares Application and Allotment A/c
(Being the application and allotment money received in a lump sum)
2. On Allotment of Shares (Transfer of Application Money):
Shares Application A/c / Shares Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the transfer of application money to share capital on allotment)
Or (if joint account used):
Shares Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the application and allotment money transferred to share capital)
B. When Issue Price is Payable in Instalments:
1. On Receipt of Application Money:
Bank A/c ...Dr.
To Shares Application A/c
(Being the application money received)
2. On Allotment of Shares (Transfer of Application Money):
Shares Application A/c ...Dr.
To Share Capital A/c
(Being application money transferred to share capital on allotment)
3. On Amount Due on Allotment:
Shares Allotment A/c ...Dr.
To Share Capital A/c
(Being allotment money due)
4. On Receipt of Allotment Money:
Bank A/c ...Dr.
To Shares Allotment A/c
(Being the allotment money received)
5. On Amount Due on First Call:
Shares First Call A/c ...Dr.
To Share Capital A/c
(Being the amount due on the first call)
6. On Receipt of First Call Money:
Bank A/c ...Dr.
To Shares First Call A/c
(Being the amount received on the first call)
7. (Optional) On Amount Due on Second Call:
Shares Second Call A/c ...Dr.
To Shares Capital A/c
(Being the amount due on the second call)
8. Bank A/c ...Dr.
To Shares Second Call A/c
(Being the amount received on the second call)
C. Other Related Entries:
1. For Money Refunded on Rejected Application:
Share Application A/c ...Dr.
To Bank A/c
(Being refund of application money on rejected shares)
2. For Adjustment of Excess Application Money towards Allotment:
Share Application A/c ...Dr.
To Share Allotment A/c
(Being excess application money adjusted towards allotment)
3. Combined Entry (Refund + Adjustment):
Share Application A/c ...Dr.
To Share Allotment A/c
To Bank A/c
(Being excess application money adjusted and balance refunded)
Key Points: Under Subscription of Shares
Format: Calculation of Amount Received on Allotment
Calculation of Amount Received on Allotment
| Particulars | ₹ |
|---|---|
| Total Amount Due on Allotment | xxx |
| (Total No. of Shares Allotted × Allotment money per share) | |
| Less: | |
| (i) Excess Application Money adjusted against Allotment Money | xxx |
| (ii) Allotment money not received from Shareholders | xxx |
| Amount Received on Allotment | xxx |
Key Points: Over Subscription of Shares
- Oversubscription means more shares are applied for than offered.
- It can be handled by rejecting extra applications, pro rata allotment, or both.
- In rejection, extra applications are refused, and money is refunded.
- In pro rata, shares are allotted in a fixed ratio and excess money is adjusted or refunded.
- In the combined method, some applications are fully accepted, some partially, and some rejected.
Journal Entries: Over Subscription of Shares
A. Over-Subscription of Shares:
1. When application money is refunded for rejected shares:
Share Application A/c ...Dr.
To Bank A/c
(Being refund of application money for rejected applications)
2. When excess application money is adjusted towards allotment:
Share Application A/c ...Dr.
To Share Allotment A/c
(Being excess application money adjusted against allotment)
3. When excess application money is adjusted towards allotment and calls:
Share Application A/c ...Dr.
To Share Allotment A/c
To Calls-in-Advance A/c
(Being excess application money adjusted towards allotment and calls)
B. Joint Application and Allotment Account
1. On receipt of application money:
Bank A/c ...Dr.
To Share Application and Allotment A/c
(Being application money received)
2. On transfer of application money and allotment due:
Share Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the transfer of application and allotment money to the share capital)
3. On refund of money for rejected applications:
Share Application and Allotment A/c ...Dr.
To Bank A/c
(Being refund of application money on rejected shares)
4. On receipt of the balance allotment money:
Bank A/c ...Dr.
To Share Application and Allotment A/c
(Being receipt of balance allotment money)
Format: Notes to Accounts of Forfeiture of Shares
Note to Accounts
| Particulars | ₹ |
|---|---|
| Authorised Capital | |
| ... Equity Shares of ₹ 10 each | ... |
| Issued Capital | |
| ... Equity Shares of ₹ 10 each | ... |
| Subscribed Capital | |
| Subscribed and fully paid-up: | |
| ... Equity Shares of ₹ 10 each | ... |
| Subscribed but not fully paid-up: | |
| ... Equity Shares of ₹ 10 each | ... |
| Less: Calls-in-Arrears | ( ... ) |
| Forfeited Shares A/c | ... |
Journal Entries: Forfeiture of Shares
A. Forfeiture of Shares (Issued at Par):
Share Capital A/c ...Dr. [With called-up amount till the stage of forfeiture]
To Forfeited Shares A/c [With the amount received on forfeited shares]
To Calls-in-Arrears A/c [With the amount not received on forfeited shares]
(Being forfeiture of shares for non-payment of call money)
Key Points: Debentures
- Debenture: A written promise by a company to repay a loan with interest.
- Legal View: Includes all debt instruments, as per the Companies Act, 2013.
- Key Features: Fixed interest, secured by assets, issued under seal, max 10-year term (30 for infrastructure).
- Debentureholders: They are lenders, not owners of the company.
- Bond vs Debenture: Bonds may have no fixed interest; debentures always do.
Journal Entries: Issue of Debentures For Consideration Other than Cash
A. Issue of Debentures to Promoters
1. When recording incorporation cost or preliminary expenses:
Incorporation Cost A/c or Preliminary Expenses A/c ...Dr.
To Promoters’ A/c
(Being cost of company incorporation payable to promoters)
2. When debentures are issued to promoters:
Promoters’ A/c ...Dr.
To...% Debentures A/c
(Being debentures issued to promoters)
B. Issue of Debentures to Underwriters
1. When underwriting commission becomes due:
Underwriting Commission A/c ...Dr.
To Underwriter’s A/c
(Being underwriting commission due)
2. When debentures are issued to settle the dues:
Underwriter’s A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued to underwriters)
C. Issue of Debentures to Vendors
1. On Purchase of Business or Assets:
(i) When Purchase Consideration = Net Assets:
Sundry Assets A/c ...Dr.
To Sundry Liabilities A/c
To Vendor’s A/c
(Being assets and liabilities taken over and balance payable to vendor)
(ii) When Purchase Consideration > Net Assets - (Excess debited to Goodwill A/c)
Sundry Assets A/c ...Dr.
Goodwill A/c ...Dr.
To Sundry Liabilities A/c
To Vendor’s A/c
(Being the excess purchase price over net assets treated as goodwill)
(iii) When Purchase Consideration < Net Assets - (Excess credited to Capital Reserve A/c)
Sundry Assets A/c ...Dr.
To Sundry Liabilities A/c
To Capital Reserve A/c
To Vendor’s A/c
(Being purchase consideration less than net assets; balance credited to capital reserve)
2. On Issue of Debentures to Vendors:
(i) When Debentures are issued at Par:
Vendor’s A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued at par to vendor)
(ii) When Debentures are issued at Premium:
Vendor’s A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
(Being debentures issued at premium)
(iii) When Debentures are issued at Discount:
Vendor's A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued at discount)
Journal Entries: Interest on Debentures
1. When Interest is Due:
Debentures' Interest or Interest on Debentures A/c ...Dr.
To Debentureholders' A/c
To TDS Payable A/c
(Being interest due on debentures and TDS deducted)
2. On payment to Debentureholders:
Debentureholders' A/c ...Dr.
To Bank A/c
(Being payment of interest to debentureholders)
3. On deposit of TDS in the Government Account:
TDS Payable A/c ...Dr.
To Bank A/c
(Being TDS deposited to the government)
4. On transfer of Interest to Statement of Profit & Loss at the end of the year:
Statement of Profit & Loss (Finance cost) ...Dr.
To Debentures' Interest or Interest on Debentures A/c
(Being interest charged to Profit & Loss Account)
Important Questions [10]
- The Debentures Which Are Convertible into Shares.
- Give the Word / Term Or Phrase Which Can Substitute the Following Statement. the Debentures Which Are Converted into Shares.
- Answer the following question in one sentence. What are ‘convertible debentures’?
- Mahakali Co. Ltd. Chandrapur Issued 1,000, 12% Debentures Of Rs.100 Each, Payable Rs. 20 on Application and the Balance on Allotment.
- The Debenture Holder is Owner of the Company.
- _______ is an Acknowledgement of Debt Under Common Seal of a Company.
- Write a Word / Term / Phrase as a Substitute of the Following Statement. the Acknowledgement of Debt Under Common Seal of Company.
- Joshi - Patil Ltd. Issued 2,000, 10% Debentures of Rs. 100 Each, Payable Rs. 20 on Application and the Balance on Allotment. Company Received Applications for 2,500 Debentures,
- The Issue of Debenture More than the Face Value is Termed as Issue of Debenture at Par.
- Cash Proceeds from the Issue of Debentures is a _______ Activity.
Concepts [12]
- Concept of Shares
- Shareholder's Fund> Share Capital of a Company
- Private Placement of Shares
- Terms of Issue of Shares> Issue of Shares at Par
- Under Subscription of Shares
- Over Subscription of Shares
- Types of Share Issue
- Forfeiture of Shares
- Concept of Debentures
- Terms of Issue of Debentures> Issue of Debentures at Par
- Issue of Debentures for Consideration Other than Cash
- Interest on Debentures
