Steps involved in Issue of New Shares

1. BY
ASSISTANT PROFESSOR
PG DEPARTMENT OF COMMERCE
ST.JOSEPH’S COLLEGE (ARTS & SCIENCE), KOVUR, CHENNAI – 128.

2. PROCEDUREOF ISSUEOF NEWSHARES
ISSUE OF PROSPECTUS: Before the issue of shares, comes the issue of the prospectus. The
prospectus is like an invitation to the public to subscribe to shares of the company. A prospectus contains
all the information of the company, its financial structure, previous year balance sheets and profit and
Loss statements etc.
RECEIVING APPLICATIONS :When the prospectus is issued, prospective investors can now apply
for shares. They must fill out an application and deposit the requisite application money in the schedule
bank mentioned in the prospectus. The application process can stay open a maximum of 120 days. If in
these 120 days minimum subscription has not been reached, then this issue of shares will be cancelled.
The application money must be refunded to the investors within 130 days since issuing of the prospectus.
ALLOTMENT OF SHARES : Once the minimum subscription has been reached, the shares can be
allotted. Generally, there is always oversubscription of shares, so the allotment is done on pro-rata bases.
Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract
between the company and the applicant, who will now be a part owner of the company.

3. IMPORTANT TERMS WITH EXPLANATION
MINIMUM SUBSCRIPTION:
 This is a minimum amount that must be raised when the shares are offered to the public during the
issue of shares. This minimum subscription is generally set by the Board of directors, but it cannot
be less than 90% of the issued capital.
 So at least 90% of the issued capital must receive subscriptions or the offer will be said to have
failed. In such a case the application money received thus far must be returned within the
prescribed time limit.
UNDER SUBSCRIPTION OF SHARES:
 A company offers shares to the public inviting applications for their subscription. When the
number of shares applied for by the public is less than the number of shares issued by the
company, it is a situation of under-subscription.
 Generally, a company that is newly set up or does not have a good reputation in the market
receives under-subscription. Usually, such companies opt for underwriting of the shares.

4. CONT…
OVERSUBSCRIPTION OF SHARES:
 When a company receives applications for shares more than the number of shares it has offered to
the public, it is known as over-subscription of shares. Usually, the companies with strong financial
background or good reputation in the market or profitable future prospects receive over-subscription
of shares.
 According to the guidelines of SEBI, a company cannot out-rightly reject any application. However,
it can do so where the information is incomplete, the signature is not there or the application money
is insufficient.
 In this case, it is not possible for the company to allot shares to every applicant in the number that he
desires. Thus, the company needs to allot the shares in a proper manner. The company has the
following three alternatives:
FULLALLOTMENT
SELECTIVE PARTIAL
ALLOTMENT
PRO – RATA ALLOTMENT

5. CONT…
PRO – RATA ALLOTMENT:
 Pro-rata allotment implies the allotment of shares in proportion of the
shares applied for. In the case of pro-rata allotment, the company
adjusts the excess money received at the time of application towards
the allotment and refund the excess.
 However, it can transfer the excess amount to Calls-in Advance A/c if
its articles of association permit and takes the consent of the
applicant by a separate letter or by inserting a clause in the
Prospectus.
 For example, JM Ltd. offers 20000 shares to the public. It receives
applications for 40000 shares. When the company decides to allot the
shares at pro-rata basis, then it has to allot 20000 shares to the
applicants of 40000 shares. Thus, the ratio will be 40000:20000 i.e.
2:1. Hence, each applicant for 2 shares will receive 1 share. This is
Pro-rata allotment.

6. CONT…
CALLS ON SHARES:
Reputed companies require the applicants to send the full value of the shares along with the
applications. This is because, the Companies Act does not prohibit companies to collect the
entire amount at the time of issue itself. But the usual practice of the companies is to collect
a certain percentage of the face value of the shares on application and allotment and the
balance in one or more installments known as calls.
PROCEDURE FOR MAKING CALLS:
 The power to make calls generally vests in the Board of Directors
 The calls should be made by passing a resolution at the meeting of the Board
 The call money should not exceed 50% of the face value of the share at one time.
However, companies may have their own Articles and raise this limit.
 There must be at least 30 days interval between two successive calls.
 When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to
all the shareholders of the same class.

7. methods of share issues
Public Issue - This involves a corporation making an invitation to the general public to subscribe or purchase its
shares. For instance, a listed company made a public issue of 1,000,000 New Ordinary Shares of Rs.1 each at an
issue price of Rs.1.20 per ordinary share payable in full on application.
Offers for sale - This method involves a corporation selling a new issue of share to an issuing house, and the
issuing house will bear the risks of selling shares to other investors.
Private Placing's - This method involves an issue of new shares to financial institutions and large private clients
rather than making an invitation to the general public to subscribe to shares.
Bonus issues - A listed company may capitalize part of its reserves by making a bonus issue to the existing
shareholders, and no cash will be paid to such issues. For instance, if a corporation declares a 1 for 5 bonus
issue, that means for every 5 shares held, an existing shareholder will receive 1 share for free.
Rights issue - A corporation may make a rights issue to its ordinary shareholders. Existing shareholders will be
given the rights to buy a new share at a price lower than that listed in the stock exchange.

8. THE DIFFERENT WAYS OF ISSUE OF SHARES

9. SIMPLE PROBLEMS WITH SOLUTIONS
 Prem Ltd. purchased assets of Rs. 1, 90,000 from Yogesh Ltd. It issued equity shares of Rs. 10
each fully paid in satisfaction of their claim. Show the journal entries if such issues are made:
(a) at par, (b) at a discount of 5% and (c) at a premium of 25%.

10. SIMPLE PROBLEMS WITH SOLUTIONS
A Company purchased land costing Rs. 2, 00,000 and in payment allotted 2,000
shares of Rs. 100 each, as fully paid. Give journal entries and Balance Sheet.

11. Punjab Steel Company Limited has been incorporated. Its capital is divided into 8,000 equity shares of Rs. 100. The company issued 6,000
shares to the public payable Rs. 30 per share on application, Rs. 20 per share on allotment, Rs. 30 per share on first call and the balance Rs. 20
on the final call. All money was duly received. Make journal entries to record the issue of shares. Also draw the balance sheet.