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Procedure of issue of shares


Procedure of issue of shares

When company has been registered, the following procedure is adopted by the company to collect money from the public by issuing of shares:


Issue of prospectus: When a Public company intends to raise capital by issuing its shares to the public, it invites the public to make an offer to buy its shares through a document called ‘Prospectus’. According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar for registration on or before the date of publication thereof. It contains the brief information about the company, its past record and of the project for which company is issuing share. It also includes the opening date and the closing date of the issue, amount payable with application, at the time of allotment and on calls, name of the bank in which the application money will be deposited, minimum number of shares for which application will be accepted, etc.


To receive application: After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along with application money must be deposited by the public in a schedule bank and get a receipt for the same. The company cannot withdraw this money from the bank till the procedure of allotment has been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to commence business is obtained and the amount of minimum subscription has been received). The amount payable on application for share shall not be less than 5% of the nominal amount of share.


Allotments of shares: Allotments of shares means acceptance by the company of the offer made by the applicants to take up the shares applied for. The information of allotment is given to the shareholders by a letter known as ‘Allotment Letter’, informing the amount to be called at the time of allotment and the date fixed for payment of such money. It is on allotment that share come into existence. Thus, the application money on the share after allotment becomes a part of share capital. Decision to allot the share is taken by the Board of Directors in consultation with the stock exchange. After the closure of the subscription list, the bank sends all applications to the company. On receipt of applications, each application is carefully scrutinised to ascertain that the application form is properly filled up and signed and the money is deposited with the bank.


To make calls on shares: The remaining amount left after application and allotment money due from shareholders may be demanded in one or more parts which are termed as ‘First Call’ and ‘Second Call’ and so on. A word ‘Final’ word is added to the last call. The amount of call must not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date which was fixed for the payment of the last preceding call, for which at least 14 days notice specifying the time and place must be given.

Modes of issue of shares:

A company can issue shares in two ways:

1. For cash.

2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or at a premium or at a discount. Such issue price may be payable either in lump sum along with application or in instalments at different stages (e.g. partly on application, partly on allotment, partly on call).

Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par. Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called premium. It is a capital profit for the company and will show credit balance; hence it will be shown in the liability side of the Balance Sheet under the heading ‘Reserves and Surplus’ in a separate account called ‘Security Premium Account’. Shares of those companies can be issued at premium which offer attractive rate of dividend on their existing shares, having a good profit track for last few years and whose shares are in demand. The amount of premium depends upon the profitability and demand of shares of such company.

Note: The Company may collect the amount of security premium in lump sum or in instalments. Premium on shares may be collected by the company either with application money or with the allotment money or even with one of the calls. In absence of any information, the amount of the premium is to be recorded with allotment.

Issue of shares at discount: Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 – Rs. 9)] is called as the amount of discount. Share discount account showing a debit balance denotes a loss to the company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of ‘Miscellaneous Expenditure’ in a separate account called ‘Discount on issue of Shares Account’.

Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act 1956:

(i) At least one year must have elapsed since the company became entitled to commence business. It means that a new company cannot issue shares at a discount at the very beginning.

(ii) The company has already issued such types of shares.

(iii) An ordinary resolution to issue the shares at a discount has been passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained.

(iv) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10% of the face value of the shares. For more than this limit, sanction of the Company Law Tribunal is necessary.

(v) The issue must be made within two months from the date of receiving the sanction of the Company Law Tribunal or within such extended time as the Company Law Tribunal may allow.

Forfeiture of shares:

When any company allots share to the applicants, it is done on the basis of a legal contract between the company and the applicant, which makes it binding upon the shareholders to pay the amount of allotment and calls whenever they are due. Now if any shareholder fails to pay the allotment and or call money due to him, the shareholder violates the contract and the company is entitled to take its share back, which is known as forfeiture of shares. The company can forfeit such shares if authorised by the Articles of Association. Forfeiture of share can be done according to the rules laid sown in the Articles and if no rules are given in Articles, the provisions of Table A, regarding forfeiture will apply. Forfeiture of shares means cancellation of allotment to defaulting shareholders and to treat the amount already received on such shares is not returnable to him – it is forfeited.

Procedure for forfeited shares:

The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice requiring him to pay the amount due on his shares along with interest on it stating that if he fails to pay the amount and the interest on it, the shares will be forfeited. Inspite of this notice, the shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit the shares and information will be given to the defaulting shareholder about the forfeiture his shares.

Effect of forfeiture of shares:

1.                  Termination of membership: The membership of the defaulting will be terminated and they lose all the rights and interest on those shares i.e. ceases to be the member / shareholder / owner of the company and his name will be removed from the Register of Members

2.                  Seizure of money paid: The amount already paid on the forfeited shares by the defaulting shareholders will be seized by the company and in no case will be refunded back to the shareholder.

3.                  Non payment of dividend: When shares are forfeited the shareholder remains no longer the member of the company therefore he looses the right to receive future dividend.

4.                  Reduction of share capital: Forfeiture of shares result in the reduction of share capital to the extent of amount called up on such shares.

Surrender of shares:

When a shareholder feels that he cannot pay further calls; he may himself surrender the shares to the company. These shares are then cancelled. Surrender of shares is a voluntary return of shares for the purposes of cancellation. The directors can accept the surrender of shares only when the Articles of Association authorise them to do so. Surrender is lawful only in two cases viz.

(a) where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture and

(b) where shares are surrendered in exchange for new shares of the same nominal value. A surrender will be void if it amounts to purchase of the shares by the company or if it is accepted for the purpose of relieving a member from his liabilities. Entries are passed just like forfeiture of shares.

Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the instance of company.

Re-issue of Forfeited of shares:

Shares forfeited becomes the property of the company and the directors of a company have an authority to re-issue the shares once forfeited by them in accordance with the provisions contained in Articles of Association. Table ‘A’ provides that “A forfeited shares may be sold or otherwise disposed off on such terms and in such manner as the Board thinks fit”. They can re-issue the forfeited shares at par, at premium or at discount. However, if the shares are re-issued at discount, the amount of the discount does not exceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount, the maximum permissible discount will be amount paid on such shares by the original shareholder plus the amount of original discount.

Over subscription of issue:

When the application received from the public are more than the shares issued by the company, this situation is called as over subscription of issue. The Board of Directors cannot allot shares more than that offered to the public, in such a condition the Directors of the company make the allotment of shares on the basis of reasonable criteria. Any allotment to be made by the company in case of over subscription should be according to the scheme, which is finalized with the consultation of Security and Exchange Board of India (S.E.B.I.) The journal entry for application money will be passed for all the shares applied for, but while transferring the application money to share capital account, only the application money on shares issued will be considered.

Under subscription of issue:

Shares are said to be under-subscribed when the number of shares applied for is less than the number of shares offered, but at least minimum subscription (According to the guidelines issued by S.E.B.I. minimum subscription means ‘If the company does not receive a minimum subscription of 90% of the issued amount within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount’) is received. For example, in case has offered 5,000 shares to public but the public applied for 4,500 shares only, it is called a case of under-subscription. Journal entries are passed on the basis of shares applied for.

Private placement of shares:

According to Section 81 (1A) of the Companies Act, 1956 private placement of shares implies issue and allotment of shares to a selected group of persons such U.T.I., L.I.C. etc. in other words; an issue which is not a public issue but offered to a select group of persons is called Private Placement of shares.

Preferential allotment:

A preferential allotment is one that is made at a pre-determined price to the preidentified people who wish to take a strategic stake in the company such as promoters, venture capitalists, financial institutions, buyers of companies products ore its suppliers. In other such a case, 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 the lock-in-period. The preferential allotment can take place only if three-fourths of the shareholders agree to the issue on preferential basis. S.E.B.I. has prescribed that the minimum price of such an issue has to be an average of highs and lows of the 26 week preceding the date on which the board resolves to make the preferential allotment.

Employee stock option plan:

In order to retain high caliber employees or to give them a sense of belonging, companies may offer their equity shares to be purchased at their will. Such scheme is called Employee stock option plan (ESOP). Following are the characteristics of this scheme:

1) ESOP implies the right, but not an obligation.

2) The employee has a right to exercise the option of purchase of shares within the vesting period, i.e., the time period during which the scheme remains in operation.

3) Any share issued under the scheme of ESOP shall be locked-in for a minimum period of one year from the date of allotment.

Buy-back of shares:

The term buy-back of share implies the act of purchasing its own shares by a company either from free reserves, securities premium or proceeds of any shares or securities. According to Section 77A of the Companies Act 1956, a company can buy its own shares either from the:

a) Existing equity shareholders on a proportionate basis.

b) Open market

c) Odd lot shareholders

d) Employees of the company pursuant to a scheme of stock option or sweat equity.

Right shares:

Under Section 81 of the Companies Act, the existing shareholders have a right to subscribe, in their existing proportion, to the fresh issue of capital or to reject the offer, or sell their rights. The existing shareholders can authorize the company by passing a special resolution to offer such shares to the public.

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