Saturday, October 05, 2013

AHSEC/CBSE: Accounting for Share Capital

Company and Its features: 2001, 2009
A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 3 (1) of Indian Companies Act 1956 " Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Characteristics of a Company: Following are the salient features of A Company:
a)      Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
b)      Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
c)       Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members.
d)      Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.
e)      Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.
f)       Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.

Shares and Its Types: 2000, 2006
A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.
Section 2(46) defines a share as, “A share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”.
An exhaustive definition of share has been given by Farwell J. in Borland’s trustee v. steel bros. in the following words:
“A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the companies act”.
Thus a share
i) Measures the right of a shareholder to receive a certain proportion of the profits of the company while it is a going concern and to contribute to the assets of the company when it is being wound up; and
ii) Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

Types of shares:
According to section 86 of the companies act, a company can issue only two types of shares:
(a) Preference shares; and
(b) Equity shares.

Distinguish between
(a) Partnership Firm and Joint Stock Company
(b) Equity Shares and Preference Shares  1999, 2005, 2012
(c) Public Limited Company and Private Limited Company
(d) Shares and Debentures  2002, 2004, 2006, 2008, 2010, 2012
(e) Shareholders and Debenture holders
(f) Shares and Stock

(a) Difference between Partnership Firm and Joint Stock Company
Basis of Difference
Joint Stock Company
a)   Regulation
Partnership Firm is formed under Indian Partnership Act, 1932.
A Joint Stock Company is formed under Indian Companies Act, 1956.
b)   Number of persons

Minimum number of partners is 2 and maximum 10 in case of banking business and 20 in other kind of business.
Minimum numbers of members are 7 in case of a public company and there is no limit for maximum.  In a private limited company minimum number of members is 2 and 50 are maximum.
c)   Liability
Liability of a Partnership firm is unlimited.
Liability of members is limited to extent of shares held by him.
d)   Management
Every partner can take active part in the management of the firm.
Boards of Directors manage a company.
e)   Auditing
Auditing of books is not compulsory.
Auditing of books is compulsory.

(b)  Difference between Equity Shares and Preference Shares 
Equity Share: According to Indian Companies Act 1956 " an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Preference Share: A share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.      
(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.
Difference between Preference Share and Equity Share are given below:
Basis of Difference
Preference Share
Equity Share
a)      Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.
b)      Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
c)      Convertibility
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
d)      Voting Right
Preference shareholders do not carry the voting right. They can vote only in special circumstances.
Equity shareholders have voting rights in all circumstances.
e)      Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.

(C)  Difference between Public Limited Company and Private Limited Company
Basis of Difference
Private Company
Public Company
a)      Number of persons

Minimum number of members is 2 and the maximum 50, excluding its present or past employee members.
Minimum number of members is 7 and there is no limit as to maximum numbers.
b)      Issue of Prospectus
Prospectus need not be issued.
Prospectus or a Statement in lieu of Prospectus must be issued for inviting public to subscribe to its shares or debentures.
c)      Transfer of Shares
Transfer of shares is generally restricted by the articles of association of a private limited company.
The shares of a public company are freely transferable.
d)      Paid-up Capital
Minimum paid-up Capital should be
Rs. 1, 00,000.
Minimum paid-up Capital should be     Rs. 5, 00,000.
e)      Number of Directors
A Private Company must have at least two directors.
A Public Company must have at least three directors.

(d)  Difference between Shares and Debentures
Basis of Difference
a)            Ownership
Shareholders are the owners of the Company.
Debenture holders are the Creditors of the Company.
b)            Repayment

Normally, the amount of share is not returned during the life of the company.
Debentures are issued for a definite period.
c)             Convertibility
Shares cannot be converted into debentures.
Debentures can be converted into shares.
d)            Restrictions
There are legal restrictions to be fulfilled to issue shares at a discount.
There are no restrictions on the issue of debentures at a discount.
e)            Forfeiture
Shares can be forfeited for non-payment of allotment and call monies.
Debentures cannot be forfeited for non-payment of call monies.

(e)  Difference between Shareholders and Debenture holders
Basis of Difference
Debenture holders
a)     Status
Shareholders are the owners of the company.
Debenture holders are the creditors of the company.
b)     Return

A shareholder gets dividend.
A Debenture holder gets interest on his investment at the rate stated whether or not there is a profit to the company.
c)      Control
A shareholder has a right to control over the working of the company.
A Debenture holder has no such right to control.
d)     Risk
Shareholders are at a greater risk. Even they can lose the amount invested in the shares.
Debenture holders are relatively safe. Secured debenture holders have almost no risk.

(f)  Difference between Shares and Stocks
Basis of Difference
a)           Paid-up value
Shares may be fully paid up or partly paid up.
Stocks are fully paid up.
b)           Restriction on issue
Shares are issued when a company is incorporated.
Stock cannot be issued. Only fully paid shares can be converted into stock.
c)           Numbering
Shares are serially numbered.
Stocks are not numbered.
d)           Denomination
Shares are of equal nominal value.
Stocks may be divided into unequal amounts.
e)           Registration
Shares are always registered.
Stock may be registered or unregistered.
f)            Transfer
Shares are not transferable by mere delivery.
Unregistered stock can be transferred by mere delivery.

Share Capital and Its various categories:
The capital of a joint stock company is divided into shares which are collectively called ‘Share Capital’. Share capital refers to the amount that a company can raise or has raised by the issue of shares. The share capital may be classified as below:
a)      Nominal/Authorized/Registered Capital: This is the amount of the capital which is stated in Memorandum of Association and with which the company is registered. Nominal capital is the maximum amount which the company is authorised to raise from the public.

b)      Issued Capital: Issued capital is that part of the nominal capital, which is offered to the public for subscription. The balance of the nominal capital, which is not offered to the public for subscription, is called unissued capital.

c)       Subscribed Capital: Subscribed capital is that part of the issued capital, which is applied for by the public. The balance of the issued capital, which is not subscribed for by the public is called, unsubscribe capital.

d)      Called up Capital: This is the amount of the capital that the shareholders have been called to pay on the shares subscribed for by them. The amount of the subscribed capital, which is not called, is known as uncalled capital.

e)      Paid up Capital: This represents that part of the called up capital, which is actually received by the company. The amount of the called-up capital, which not paid by the shareholders, is called as unpaid capital or calls in arrears.

f)       Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.

Issue of shares at Premium and purpose for which the amount of Securities Premium can be utilized: 2003, 2008,2012, 2013,
If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act 1956 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.
Under Section 78 of the Company Act 1956, the amount of security premium may be used only for the following purposes:
a)      To write off the preliminary expenses of the company.
b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d)      To issue fully paid bonus shares to the shareholders of the company.
e)      In purchasing its own shares (buy back).

Can a company issue shares at discount: 2003
As a general rule, a company cannot ordinarily issue shares at a discount, except in case of ‘reissue of forfeited shares’ and in accordance with the provisions of Companies Act.
But according to Section 79 of company act 1956, a company is permitted to issue shares at discount provided the following conditions are satisfied: -
a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b)      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 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c)       At least one year must have elapsed since the company was entitled to commence the business.
d)      The shares are of a class, which has already been issued.
e)      The shares are issued within two months from the date of sanction received from the Government.

Reserve Capital Vs Capital Reserve:
Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.
Capital Reserve: It is that part of reserves which is create out of capital profits and normally not available for distribution as dividend.

Basis of Difference
Reserve Capital
Capital Reserve
a)            Meaning
Reserve Capital is the part of uncalled capital, which shall not be called except in the event of winding up of the company.
It is that part of the reserves which is not free for distribution as dividend.
b)            Creation
It is created out of uncalled capital.
It is created out of capital profits.
c)            Optional/ Mandatory
It is not mandatory to create Reserve Capital.
Capital Reserve is mandatory to be created in case of profit on reissue of forfeited shares.
d)            Disclosure
It is not to be disclosed in the Balance Sheet of the company.
Capital Reserve is to be shown in liability side of the balance sheet of the company under the heading of ’Reserve and Surplus.’
e)            Writing of Capital Losses
Reserve Capital cannot be used to write off capital losses.
Capital Reserve is used to write off capital losses and to issue bonus shares to shareholder.

Forfeiture of shares: 2012

A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.
Before the shares are forfeited the shareholder:
i) Must be served with a notice requiring him to pay the money due on the call together with interest;
ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;
iii) There must be a proper resolution of the board;
iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.
A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.

Statutory and Statistical Books Maintained by Company:  2004, 2008
Statutory book: Such books are those which a limited company is under statutory obligation to maintain at its registered office with a view to safeguard the interests of shareholders and creditors. Main statutory books are:
a.       Register of investments held and their names
b.      Register of charges
c.       Register of members
d.      Register of debenture holders
e.      Annual returns
f.        Minute books
g.       Register of contracts
h.      Register of directors
i.         Register of director’s shareholdings
j.        Register of loans to companies under the same management
k.       Register of investment in the shares and debentures of other companies
l.         Register of fixed deposits
m.    Index of members where the number is more than fifty unless register of members itself affords an index
n.      Index of debenture holders where the number is more than fifty, unless the register of debenture holders itself affords an index
o.      Foreign register of members and debenture holders, if any
p.      Register of renewed and duplicate certificates.

Statistical Books:
In order to keep a complete record of numerous details of certain transactions and activities of the company the following statistical books are usually maintained by joint stock companies in addition to statutory books. The keeping of such books are optional. The main books are:
a.       Share application and allotment book
b.      Share calls book
c.       Share certificate book
d.      Debenture application and allotment book
e.      Debenture calls book
f.        Register of share transfers
g.       Dividend book
h.      Debenture interest book
i.         Register of documents sealed
j.        Register of share warrants
k.       Dividend mandates register
l.         Register of debenture transfers
m.    Register of powers of attorney
n.      Agenda book
o.      Register of lost share certificates
p.      Register of director’s Attendance