Issue of Shares – At Par, Premium & Discount

Introduction

A company raises capital by issuing Shares to the public. The money is collected in installments: Application, Allotment, First Call, and Final Call.

1. Terms of Issue

A. Issue at Par

Issued at Face Value (Nominal Value). E.g., Share of ₹10 issued at ₹10.

B. Issue at Premium

Issued at higher than Face Value. E.g., Share of ₹10 issued at ₹12.

• The extra ₹2 is profit, credited to "Securities Premium A/c".
• Usage (Sec 52): Can be used ONLY for:
  1. Issuing Bonus Shares.
  2. Writing off preliminary expenses.
  3. Writing off commission/discount on issue.
  4. Providing premium on redemption of Preference Shares/Debentures.
  5. Buyback of own shares.

C. Issue at Discount (Section 53)

Strictly Prohibited: A company CANNOT issue shares at a discount (below Face Value).

• Exception: Sweat Equity Shares issued to employees/directors for know-how/IP rights.

2. Journal Entries (Basic)

Example: 10,000 Shares of ₹10 each. Application ₹3, Allotment ₹4, First & Final Call ₹3.

Step 1: Application Money Received

Bank A/c ...Dr                         (Amount Received)
    To Share Application A/c               (Amount Received)

Step 2: Transfer to Capital (Allotment Due logic start)

Share Application A/c ...Dr            (Amount)
    To Share Capital A/c                   (Face Value)

Step 3: Allotment Due

Share Allotment A/c ...Dr              (Total Due)
    To Share Capital A/c                   (Face Value)
    To Securities Premium A/c              (If Premium)

Step 4: Allotment Money Received

Bank A/c ...Dr                         (Amount Recd)
Calls in Arrears A/c ...Dr             (If unpaid)
    To Share Allotment A/c                 (Total Due)

Step 5: Call Money Due

Share First Call A/c ...Dr             (Amount Due)
    To Share Capital A/c                   (Amount Due)

Step 6: Call Money Received

Bank A/c ...Dr                         (Amount Recd)
Calls in Arrears A/c ...Dr             (If unpaid)
    To Share First Call A/c                (Amount Due)

3. Difference: Calls in Arrears vs Calls in Advance

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Exam Notes: Writing the Answer

Question: "Explain the utilization of Securities Premium Account." (5 Marks)

Model Answer:

As per Section 52 of Companies Act 2013, Securities Premium is a restricted reserve. It can be used only for:

1. Issuing fully paid Bonus Shares.
2. Writing off Preliminary Expenses.
3. Writing off expenses on issue of shares/debentures (e.g., Understanding Commission).
4. Providing for Premium on Redemption of Preference Shares or Debentures.
5. Buyback of own shares (Sec 68).

Note: It cannot be used for paying dividends.

Summary

• Stages: App -> Allot -> Calls.
• Discount: Prohibited (Sec 53).
• Premium: Allowed (Sec 52). Used for specific purposes only.
• Arrears: Debit it. Interest 10%.
• Advance: Credit it. Interest 12%.

Quiz Time! 🎯

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