CORPORATE ACCOUNTING NOTES

1. Accounts for Companies - I
R.ARUNPRAKASH
ASSISTANT PROFESSOR
SRI RAMAKRISHNA COLLEGE OF ARTS & SCIENCE
COIMBATORE

2. Meaning & Definition
SHARES DEFINITION:
• Shares, also known as stocks or equity,
represent ownership in a company. When an
individual or entity holds shares of a company,
they become shareholders and have certain
rights, such as voting on important matters
and receiving a portion of the company's
profits in the form of dividends.

3. REASONS FOR ISSUING SHARES
• Capital Raising: One of the primary reasons for issuing
shares is to raise capital. Companies may need funds
for various purposes, such as research and
development, expansion, acquisitions, or debt
repayment.
• Employee Stock Options: Companies often issue
shares as part of employee compensation packages to
attract and retain talent. This is typically done through
stock options or other equity-based incentives.
• Mergers and Acquisitions: In the case of mergers and
acquisitions, companies may issue shares as a part of
the deal to acquire another company or merge with it.

4. Issue of shares
• ISSUED AT PAR:
– When shares are issued at par, it means they are sold at their nominal or face
value. The nominal value is the minimum price at which a share can be issued
according to the company's charter or the regulatory framework. It's
essentially the original cost of the share as stated in the company's records.
– For example, if a company issues shares with a face value of ₹10 at par,
investors would purchase each share for ₹10. The company receives $10 in
cash for each share issued.
• ISSUED AT PREMIUM:
– When shares are issued at a premium, it means they are sold at a price higher
than their nominal or face value. This premium is an additional amount per
share that investors pay on top of the face value.
– For instance, if a company issues shares with a face value of ₹10 at a premium
of ₹5, investors would pay ₹15 per share. The company receives ₹10 as the
face value and an additional ₹5 as the premium.

5. Subscription of shares
• Under Subscription:
– Under subscription occurs when the demand for a
securities offering is less than the number of securities
available for subscription. In other words, the
investors are not willing to buy all the shares or
securities that the company is offering.
• Over Subscription:
– Over subscription, on the other hand, happens when
the demand for a securities offering exceeds the
number of securities available. In this case, investors
are willing to buy more shares than the company
initially intended to offer.

6. Pro-rata allotment
• Pro rata allotment is a mechanism used when there is
oversubscription. In this situation, the company cannot satisfy the
demand of all investors fully because the number of applied shares
exceeds the number of shares available. To allocate shares fairly in
proportion to the investors' original subscription requests, the
company uses the pro rata allotment method.
• The pro rata allotment ensures that each investor receives a portion
of the shares they applied for based on the total demand and the
number of shares available. For example, if a company is
oversubscribed by 50%, each investor may be allotted 50% of the
shares they applied for.
• Pro rata allotment helps maintain fairness and equity among
investors in situations where the demand exceeds the supply of
securities.

7. Forfeiture and Re issue of shares
• Forfeiture of Shares:
– Forfeiture is the process by which a company cancels the shares owned by a shareholder who
fails to meet certain obligations, such as making required payments (e.g., calls on unpaid
shares). The shareholder essentially loses ownership of the forfeited shares, and the company
may seize these shares.
– Common reasons for the forfeiture of shares include non-payment of calls (additional
payments required on shares) or failure to fulfill other obligations outlined in the company's
articles of association.
– Once shares are forfeited, the shareholder no longer has any rights to the forfeited shares, and
the company may sell or reissue them to new shareholders.
• Reissue of Shares:
– After the forfeiture of shares, the company may choose to reissue these shares to new
shareholders. This process involves selling the forfeited shares to new investors.
– The reissue of shares provides the company with an opportunity to raise additional capital by
bringing in new shareholders. However, the reissue is typically done at the discretion of the
company's board of directors and in accordance with relevant legal and regulatory
requirements.
– The new shareholders who acquire the reissued shares will have full ownership rights and
responsibilities associated with those shares.

8. SURRENDER OF SHARES & RIGHT
ISSUES
• Surrender of Shares:
– Surrender of shares refers to the voluntary return or relinquishment of shares by a shareholder to the
issuing company. Shareholders may choose to surrender their shares for various reasons, such as reducing
their investment in the company or addressing specific corporate actions.
– Companies may have policies and procedures in place for the surrender of shares, and the process may
involve formal documentation and approval from the company's board of directors.
• Rights Issue:
– A rights issue is a method through which a company offers its existing shareholders the right to buy
additional shares in proportion to their current holdings. This is a way for the company to raise additional
capital from its existing investor base.
– In a rights issue, shareholders are given the opportunity to subscribe to new shares at a predetermined
price. This allows existing shareholders to maintain their proportional ownership in the company.
– Shareholders can choose to exercise their rights, purchase additional shares, or sell their rights in the
market.
• Bonus Issue:
– A bonus issue, also known as a scrip issue or a capitalization issue, involves the issuance of additional shares
to existing shareholders without any cash payment. These shares are issued as a bonus based on the
number of shares the shareholder already holds.
– The purpose of a bonus issue is to capitalize a portion of the company's reserves or accumulated profits,
converting them into share capital.
– While bonus issues increase the number of shares outstanding, they do not dilute the proportional
ownership of existing shareholders since they receive additional shares without any cash outlay.

9. Underwriting of shares
• Agreement:
– The issuing company and the underwriter enter into an underwriting agreement. This agreement outlines
the terms and conditions of the underwriting, including the number of shares to be issued, the price at
which they will be offered to the public, and the underwriter's compensation.
• Purchase of Shares:
– The underwriter agrees to purchase the entire issue of shares from the issuing company at a predetermined
price, known as the underwriting price. This price is often slightly lower than the expected market price to
provide an incentive for the underwriter to take on the risk.
• Risk Transfer:
– By purchasing the shares from the issuer, the underwriter assumes the risk of being unable to sell the shares
to investors at a profit. The underwriter is essentially taking on the risk of market fluctuations and the
demand for the shares.
• Resale to Investors:
– After acquiring the shares, the underwriter then resells them to investors through the public markets. This
can involve selling the shares to individual investors, institutional investors, or a combination of both.
• Underwriter's Compensation:
– The underwriter receives compensation for assuming the risk and facilitating the issuance. The
compensation is typically in the form of a fee or a percentage of the total value of the shares issued.
• Stabilization:
– In some cases, the underwriter may engage in stabilization activities to support the market price of the
newly issued shares. This can involve buying additional shares in the open market to prevent the price from
falling below the underwriting price.