CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Call-in-arrear and interest thereon:

If a shareholder makes a default in sending the call money due on allotment or on any calls according to the conditions, the money not so sent is called calls-in-arrear. In other words, the portion of called up capital which is not paid by the shareholder within a specified time is known as calls-in-arrear. The company is authorised to charge interest at a specified rate on calls-in-arrear from the due date to the date of actual payment of the allotment money or the calls. But if the Articles of Association are silent, Table A shall be applicable which provides for interest at 5% per annum. However, the directors have the right to waive the payment of interest on call-in-arrear.

Accounting treatment of calls-in-arrear:

There are two methods of dealing with the accounting of calls-in-arrear:

1. By opening Calls-in-arrear Account: In such a case, a separate account for calls-in-arrear is opened. If the amount of calls has not been paid by some shareholders, such amount is transferred to newly opened ‘Calls-in-arrear Account’. Thus allotment and other call accounts will not show any balance but the Calls-in-arrear account will show a debit balance equal to the total unpaid on allotment / calls, which will be shown as deduction form the amount of the subscribed capital on the liabilities side of the Balance Sheet.

Accounting treatment:

For calls-in-arrear:

Bank A/c Dr

Calls-in-arrear A/c Dr

To Share allotment A/c

To Share call A/c

For receipt of arrear amount at subsequent date:

Bank A/c Dr

To Call-in-arrear A/c

On making the interest on call-in-arrear due:

Shareholder’s A/c Dr

To Interest on call-in-arrear A/c

For receipt of interest on calls-in-arrear:

Bank A/s Dr

To Shareholder’s A/c

For transferring interest on calls-in-arrear A/c to P/L A/c at the end of the accounting year:

Interest on calls-in-arrear A/c Dr

To Profit and Loss A/c

2. Without opening calls-in-arrear account: It is not necessary to open a separate account for calls-in-arrear. In that case, amount actually received from the shareholders is credited to the relevant allotment / call account and the various allotment / call accounts will show debit balance equal to the total unpaid amount of allotment / calls, which will be shown as deduction form the amount of the subscribed capital on the liabilities side of the Balance Sheet.

Accounting treatment:

For calls-in-arrear:

Bank A/c Dr

To Share allotment A/c

To Share call A/c

For receipt of amount at subsequent date:

Bank A/c Dr

To Share allotment A/c

To Share call A/c

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Calls-in-advance and interest thereon:

Calls-in-advance is just opposite to calls-in-arrear. When a company accepts money paid by some of its shareholders for the call not yet due, such amount is known as ‘Call-in-Advance’. It may also happen in case of partial or pro-rata allotment of shares when the company retains excess amount received on application of shares. Since the amount has not become due, hence, it is a liability of the company; therefore it is transferred to the credit of a newly opened account called ‘Calls-in-advance Account’. A company may, if authorised by its articles, accept calls in advance from its shareholders.

In case of calls-in-advance, the company must pay interest at the rate prescribed in its Articles of Association. However, in the absence of interest clause in the Articles of Association, the provisions of Table A of the Companies Act will apply according to which the company will have to pay interest @ 6% p.a. on calls-in-advance, from the date of receipt till the date when the call becomes due.

Accounting treatment:

For receipt of advance money:

Bank A/c Dr

To Share allotment A/c

To Share call A/c

To Calls-in-advance A/c

For adjustment of calls-in-advance:

Calls-in-advance A/c Dr

To Respective call A/c

On making the interest on call-in-advance due:

Interest on calls-in-advance A/c Dr

To Shareholder’s A/c

For payment of interest on calls-in-advance:

Shareholder’s A/c Dr

To Bank A/c

For transferring interest on calls-in-advance A/c to P/L A/c at the end of the accounting year:

Profit and Loss A/c Dr

To interest on calls-in-advance A/c

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Distinction between Calls-in-arrear and Calls-in-advance:

Basis of difference	Calls-in-arrears	Calls-in-advance
Meaning	Calls-in-arrear is the amount called up by the company, but not paid by the shareholders.	Calls-in-advance is the amount not called up by the company, but paid by the shareholders.
Interest	Interest is charged on calls-in-arrear.	Interest is allowed on calls-in-advance.
Rate of interest	5% - as per Table A.	6% - as per Table A.
Authority under Articles of Association	Articles of Association do not have any clause to this effect as non-payment is beyond the company’s control.	A company may accept calls-in advance only if Articles of Association authorise to do so.
Disclosure	Its amount is shown by way of deduction from the Subscribed-capital in the Balance Sheet.	Its amount is shown as separate item, under the head current liabilities.

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

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.

Accounting Entries:

Since the company issue shares at par, at premium, or at discount. As such the accounting entries for forfeiture of shares in all the above the cases are different, which are as following:

Forfeiture of shares issued at Par:

If calls-in-arrear account is opened

Share capital A/c Dr

To Calls-in-arrear A/c

To Share forfeiture A/c

With the called up amount

With the amount of arrear on shares forfeited

With the amount paid by the shareholder

If call-in-arrear account is not opened:

Share capital A/c Dr

To Share allotment A/c

To Share call A/c

To Share forfeiture A/c

With the called up amount

With the amount of arrear on allotment

With the amount arrear on call

With the amount paid by the shareholder

Forfeiture of shares issued at Premium:

If calls-in-arrear account is opened:

Share capital A/c Dr

Security Premium A/c Dr

To Calls-in-arrear A/c

To Share forfeiture A/c

With the called up amount excluding premium amount

If amount of premium is not paid

With the amount of arrear on shares forfeited

With the amount paid by the shareholder

If call-in-arrear account is not opened:

Share capital A/c Dr

Security Premium A/c Dr

To Share allotment A/c

To Share call A/c

To Share forfeiture A/c

With the called up amount excluding premium amount

If amount of premium is not paid

With the amount of arrear on allotment

With the amount arrear on call

With the amount paid by the shareholder

Forfeiture of shares issued at Discount:

If calls-in-arrear account is opened:

Share capital A/c Dr

To Calls-in-arrear A/c

To Discount of shares A/c

To Share forfeiture A/c

With the called up amount

With the amount of arrear on shares forfeited

With discount on shares forfeited

With the amount paid by the shareholder

If calls-in-arrear account is not opened:

Share capital A/c Dr

To Discount of shares A/c

To Share allotment A/c

To Share call A/c

To Share forfeiture A/c

With the called up amount

With discount on shares forfeited

With the amount of arrear on allotment

With the amount arrear on call

With the amount paid by the shareholder

1 Like

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Forfeiture of fully paid up shares:

Usually the shares are forfeited for non-payment of the calls. But at the same time fully paid up shares can be forfeited in such cases as default in fulfilling any agreement between the members or on expulsion of members where the articles specifically provide for such details.

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.

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

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.

Accounting treatment for re-issue of forfeited shares: Following are the journal entries for re-issue of forfeited shares:

Re-issue of forfeited shares at par:

Bank A/c Dr

To Share Capital A/c

With the amount received on re-issue

With the amount credited as paid-up / called up

Re-issue of forfeited shares at premium:

Bank A/c Dr

To Share capital A/c

To Security premium A/c

With the amount received on re-issue

With the amount credited as paid-up / called up

With the amount of premium on re-issue

Re-issue of forfeited shares at discount:

Bank A/c Dr

Discount on shares A/c Dr

Share forfeiture A/c Dr

To Share Capital A/c

With the amount received on re-issue

With the amount of original discount

With the excess of re-issue discount

With the amount credited as paid-up / called up

Note: If after re-issue of shares there is still a profit, it should be credited to the Capital Reserve Account. Following entry will be passed for this:

Share forfeiture A/c Dr

To Capital reserve A/c

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Over subscripttion of issue:

When the application received from the public are more than the shares issued by the company, this situation is called as over subscripttion 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 subscripttion 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.

Following three alternatives are available to deal with the situation of oversubscripttion:

Alternative 1

Course of action

Journal entry

To reject the excess applications

and to allot in full to other applicants

Letter of regret along with the refund of application Letters of regret along with the refund of application money are sent to the applicants of rejected applications and letters of allotment are sent to applicants of accepted applications.

Share application a/c Dr

To Bank A/c

To Share capital A/c

With the total amount

received on application

With the amount refunded

on applications rejected

With the application money

on shares issued

Alternative 2

Course of action

Journal entry

To reject the excess applications and to allot in full to other applicants

Letters of allotment are sent to all the applicants and excess application money received is adjusted towards the amount due on allotment, calls of shares allotted and the balance application money left after adjustment will be refunded.

Share application a/c Dr

To Share allotment A/c

To Calls-in-advance A/c

To Bank A/c

With the total amount

received on application

With the amount retained for allotment

With the amount retained for calls

With the amount refunded on applications rejected

Alternative 3

Course of action

Journal entry

Ay combination of the above two alternatives such as:

a) To reject some of the applications and make pro-rata allotment to remaining applicants.

b) To allot in full to some of the applicants and make pro-rata allotment to remaining applicants

c) To reject some of the applications allot in full to some of the applications and make pro-rata allotment to remaining applicants

Letters of regret along with the refund of application money are sent to the applicants of rejected applications and letters of allotment are sent to the applicants and excess application money received is adjusted towards the amount due on allotment, calls of shares allotted and the balance application money left after adjustment will be refunded

Share application a/c Dr

To Share allotment A/c

To Calls-in-advance A/c

To Bank A/c

With the total amount

received on application

With the amount retained for allotment

With the amount retained for calls

With the amount refunded on applications rejected

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Under subscripttion 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 subscripttion (According to the guidelines issued by S.E.B.I. minimum subscripttion means ‘If the company does not receive a minimum subscripttion of 90% of the issued amount within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscripttion 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-subscripttion. Journal entries are passed on the basis of shares applied for.

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

Difference between over-subscripttion and under-subscripttion:

Basis	Under-subscripttion	Over-subscripttion
Shares applied	Number of shares applied is less than the shares offered for subscripttion.	Number of shares applied is more than the shares offered for subscripttion.
Acceptance	All the applicants for shares are accepted, i.e. full allotment is made.	All the applications are not accepted. Some are rejected. Alternatively, shares are allotted on pro-rata basis.
Refund	As all the applications are accepted, there is no excess money to be refunded.	Excess application money is to be refunded or adjusted towards allotment.
Minimum subscripttion	The company may face the problem of ‘Minimum Subscripttion’.	The company does not face such a problem.

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 06 February 2010

MISCELLANEOUS TERMS

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 pre-identified 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.

Nikhila (ca final student) (187 Points)
Replied 07 February 2010

Thanks for sharing sir its very usefull

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 11 February 2010

Here is the whole document

Attached File : 12 issue of shares.doc downloaded: 346 times

3 Like

(Guest)

thnx brother for your valuable articles

Niki Shingade (Company Secretary) (83 Points)
Replied 20 February 2010

Thank u sir for the valuable info. Can u also please enlighten on the stamp duty for allotment of shares?

CA LOKESH (Chartered Accountant) (63 Points)
Replied 10 April 2010

Yaa

very good work sir & Thanks for sharing

Regards

Srikanth

ALL on SHARES and SHARE CAPITAL

Call-in-arrear and interest thereon:

Accounting treatment of calls-in-arrear:

Accounting treatment:

Accounting treatment:

Online classes for CA CS CMA. Professional courses for GST, Tally, Others & Books

Calls-in-advance and interest thereon:

Distinction between Calls-in-arrear and Calls-in-advance:

Forfeiture of shares:

Procedure for forfeited shares:

Accounting Entries:

Forfeiture of shares issued at Par:

Forfeiture of shares issued at Premium:

Forfeiture of shares issued at Discount:

Forfeiture of fully paid up shares:

Surrender of shares:

Re-issue of Forfeited of shares:

Re-issue of forfeited shares at par:

Re-issue of forfeited shares at premium:

Re-issue of forfeited shares at discount:

Over subscripttion of issue:

Under subscripttion of issue:

Difference between over-subscripttion and under-subscripttion:

MISCELLANEOUS TERMS

Private placement of shares:

Preferential allotment:

Employee stock option plan:

Buy-back of shares:

Right shares:

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