How to Record Journal Entries for Issue of Shares with Examples
The issue of shares is a fundamental concept in Accounting and Business Studies. It refers to the process by which companies offer new shares to investors. These investors can be individuals or corporate entities who purchase shares at a specific price, thereby becoming shareholders and part-owners in the company. This process is governed by laws and guidelines to ensure fair distribution and protect investor interests.
A share acts as a unit of ownership in a company and is considered an asset. Shareholders may receive a share of the company’s profits as dividends. Companies issue shares to raise funds for various business needs, such as expanding operations, repaying borrowings, or acquiring new businesses.
The Companies Act sets out the steps that companies must follow to issue shares to the public. The main types of shares are ordinary (equity) shares, which grant voting rights, and preference shares, which offer preferred dividends but typically no voting rights. Other types include redeemable, deferred, non-voting, management, and alphabet shares, each with distinct features and rights for shareholders.
Meaning and Example of Issue of Shares
When a company issues shares, it distributes portions of ownership to those who invest money. For example, if Company XYZ has a capital of ₹6,00,000 divided into 6,000 shares of ₹100 each, anyone wishing to invest can buy one or more shares at ₹100 each and become a shareholder.
Key Steps in the Issue of Shares
The issue of shares generally follows these steps:
- Issue of Prospectus: The company issues a prospectus announcing its need for funds and inviting the public to apply for shares. The prospectus contains details of the company's objectives, financials, and terms of the offer.
- Receiving Applications: Investors fill out applications and deposit the required money in a scheduled bank. The details of application amounts and procedures are given in the prospectus.
- Allotment of Shares: Once the minimum subscription is achieved, shares are allotted to applicants. If there is over-subscription, shares may be allotted on a pro-rata basis. Applicants who receive shares get a letter of allotment.
Why Companies Issue Shares
Companies issue shares mainly to raise capital for business growth, repay borrowings, or make acquisitions. Sometimes shares are issued in situations like:
- Raising new funds for business expansion
- Funding acquisitions or purchases of other companies
- Strengthening the company’s financial position after economic slowdowns
- Providing shares in place of dividends (scrip dividend)
- Allotting to employees or directors as part of incentive schemes
Types of Shares Commonly Issued
| Type of Share | Key Features |
|---|---|
| Ordinary (Equity) Shares | Carry voting rights and variable dividends linked to profits |
| Preference Shares | Get fixed dividends, paid before equity shares; usually no voting rights |
| Deferred Shares | Limited rights; dividends paid only after preference and ordinary shareholders |
| Redeemable Shares | May be bought back by the company after some period |
| Non-voting Shares | Do not allow holders to vote, but give ownership and possible dividends |
| Management Shares | Carry special voting privileges for company management |
| Alphabet Shares | Different classes of shares with varying rights, often labeled A, B, etc. |
Step-by-Step Legal Procedure for Issue and Allotment of Shares
- Board Resolution: The company’s board agrees to issue new shares.
- Passing Special or Ordinary Resolution: Required as per company law and Articles of Association.
- Filing of Necessary Forms: Company files statutory forms and returns as per regulations.
- Approval of Registrar of Companies (ROC): ROC grants approval and the shares are officially allotted.
Minimum Subscription and Dilution of Ownership
A public issue of shares must receive a minimum subscription, typically set at 90% of the total issue amount. If not met, the company refunds the application money to investors. When new shares are issued, existing shareholders' ownership percentage may decrease unless they buy new shares, a process known as dilution.
Rights Issue and Private Placement
A Rights Issue allows existing shareholders to purchase additional shares in proportion to their holding, usually at a discount, to protect against ownership dilution. Private placement is the offer of shares to a select group of investors, not the general public, typically making the process quicker and requiring less compliance.
Summary Table: Key Differences Between Equity and Preference Shares
| Particulars | Equity Shares | Preference Shares |
|---|---|---|
| Voting Rights | Yes | No (generally) |
| Dividend | Variable | Fixed, priority |
| Repayment Priority | After preference shares | Before equity shares |
| Redemption | Not redeemable | Can be redeemable |
Practical Example: Share Issue Process
Suppose a company issues 5,000 shares at ₹10 each. The company receives applications for all shares, collects application money, then allots shares and sends out allotment letters. If some shares are not subscribed, but the minimum subscription is reached, only those who apply are allotted shares.
Next Steps for Learners
- Review more solved examples and stepwise processes on share issue and allotment.
- Practice journal entries based on real scenarios and share types.
- Explore additional resources on class notes and solved questions on Accountancy and related Commerce subjects.
Understanding the issue of shares helps you analyze real-world company practices, prepare for exams, and build foundational knowledge for business management and finance.
FAQs on Issue of Shares in Company Accounts for Class 12
1. What are the methods of issue of shares?
There are several methods of issue of shares:
- public offer through prospectus,
- private placement,
- rights issue to existing shareholders,
- bonus shares from reserves,
- preferential allotment to select investors.
2. What does it mean if you issue shares?
If a company issues shares, it means it is offering part ownership to investors in exchange for money. This process raises capital for business operations, expansion, or other needs, and the new shareholders gain certain rights and responsibilities within the company.
3. Are issued shares fully paid?
Issued shares may be either fully paid or partly paid.
- Fully paid shares
- Partly paid shares (amount due in installments)
4. Why is issuing shares bad?
Issuing shares may be viewed as negative because it leads to ownership dilution. Original owners or shareholders may lose some control. Additionally, increased number of shareholders means sharing profits and sometimes more complicated decision-making within the company.
5. What is a rights issue of shares?
A rights issue of shares is when a company offers existing shareholders the right to buy additional shares at a fixed price, usually at a discount, before offering them to the public. This method helps companies raise more funds while rewarding loyal shareholders.
6. Can a company issue shares at a discount?
Generally, companies are not allowed to issue shares at a discount under most laws, except in specific cases like the issue of sweat equity shares to employees. The typical rule is shares must be issued at par or premium to protect investor interests.
7. What is the difference between issued and subscribed share capital?
Issued share capital is the total value of shares offered to investors, while subscribed share capital is the value of shares investors have agreed to purchase. Sometimes, all issued shares are subscribed, but not always.
8. How does bonus issue of shares work?
A bonus issue of shares gives free additional shares to existing shareholders by converting company reserves into equity. There is no cash payment involved. This increases the number of shares owned but does not change each shareholder’s overall ownership percentage.
9. What is private placement of shares?
Private placement of shares means issuing shares to a small group of selected investors, such as institutional buyers or wealthy individuals, rather than the general public. This method raises funds quickly and with less regulatory paperwork compared to public offerings.
10. What are partly paid shares?
Partly paid shares are shares where the investor has only paid a portion of their face value at the time of issue. The company may call for the remaining amount later. These shares provide flexibility in collecting capital from shareholders.
11. What is the formula to calculate share capital?
To find the share capital, multiply the number of issued shares by the face value per share: $$\text{Share Capital} = \text{Number of Shares} \times \text{Face Value per Share}$$ This amount represents the total capital raised through shares.
12. Why do companies issue shares?
Companies issue shares to raise capital for their business needs. This can include funding new projects, expansions, or repaying debt. Issuing shares allows companies to access funds without taking on loans or increasing financial risk.
