Issue of Shares

The primary distinction between a 'Private Placement' and a 'Public Offer' of shares lies in the target audience and the regulatory framework governing them under the Companies Act, 2013, and SEBI regulations.

Public Offer:

• Definition: A public offer involves inviting the general public to subscribe to the company's securities through the issuance of a prospectus. This includes Initial Public Offers (IPOs) and Further Public Offers (FPOs).
• Target Audience: The offer is made to an unlimited number of potential investors from the general public.
• Regulation: Heavily regulated by SEBI, primarily under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), which mandate extensive disclosures and compliance requirements.
• Documentation: Requires the filing of a detailed prospectus with the Registrar of Companies (RoC) and SEBI.
• Advertising: Public advertising and marketing are permitted and common.

Private Placement:

• Definition: A private placement is an offer or invitation to subscribe to securities made to a select group of identified persons, rather than the general public.
• Target Audience: The offer is made to a maximum of 200 persons in the aggregate in a financial year for each kind of security (e.g., equity shares, preference shares, debentures). This limit excludes Qualified Institutional Buyers (QIBs) and employees offered securities under an Employee Stock Option Scheme (ESOS).
• Regulation: Governed by Section 42 of the Companies Act, 2013.
• Documentation: Requires the issuance of a Private Placement Offer Letter (Form PAS-4) to identified persons and filing of records of such offers in Form PAS-5. A special resolution from shareholders is typically required for each offer.
• Advertising: Public advertisement is strictly prohibited.
• Investment Size: The value of the offer or invitation per person must be not less than ₹20,000 of the face value of the securities.

In essence, public offers aim for broad capital mobilization with high regulatory oversight, while private placements are for targeted fundraising with comparatively fewer regulatory burdens, suitable for smaller capital needs or specific investor groups.

Forfeiture of shares occurs when a shareholder fails to pay the allotment money or call money within the due date, and the company cancels (forfeits) those shares.

Journal Entry for Forfeiture:
Debit: Share Capital A/c (with amount called up)
Debit: Securities Premium A/c (if premium was due but unpaid)
Credit: Share Allotment/Call A/c (amount unpaid)
Credit: Forfeited Shares A/c (amount already received)

Forfeited shares can later be re-issued at a discount, but the discount cannot exceed the amount credited to Forfeited Shares Account.

These terms define different aspects of a company's share capital: Authorized Capital (Nominal/Registered Capital): The maximum amount of share capital that a company is legally permitted to issue to shareholders, as stated in its Memorandum of Association. Issued Capital: The portion of the authorized capital that the company has offered to the public for subscription. Subscribed Capital: The portion of the issued capital for which applications have been received from the public and allotted. Called-up Capital: The portion of the subscribed capital that the company has formally demanded from its shareholders. Paid-up Capital: The portion of the called-up capital that has actually been paid by the shareholders.

The typical stages involved in the issue of shares include: 1. Application: Investors apply for shares by filling an application form and paying application money. 2. Allotment: After receiving applications and ensuring minimum subscription, the company allots shares to successful applicants as per SEBI guidelines (for public issues) and company policies. Allotment money is usually called at this stage. 3. Calls: The remaining amount on shares, if any, is called in installments known as 'call money' (e.g., First Call, Final Call).

Shares represent the smallest unit of ownership in a company. They are primarily of two types: Equity Shares and Preference Shares. Equity shares generally carry voting rights and fluctuating dividends, while preference shares have preferential rights regarding dividend payment and repayment of capital during winding up, but usually do not carry voting rights.

Issue at Premium: When shares are issued at a price higher than their face (nominal) value, the excess amount is known as share premium. This premium is credited to a 'Securities Premium Account'. As per Section 52 of the Companies Act, 2013, this amount is a capital receipt and can only be used for specific purposes, such as issuing fully paid bonus shares, writing off preliminary expenses, or providing for premium on redemption of preference shares. Issue at Discount: When shares are issued at a price lower than their face value. Section 53 of the Companies Act, 2013, generally prohibits the issue of shares at a discount, except in the case of sweat equity shares issued as per Section 54.

The Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating the public issue of shares in India. Its primary objectives include protecting the interests of investors, promoting the development of the securities market, and regulating the market. SEBI achieves this through comprehensive guidelines, most notably the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).

These guidelines are crucial for companies undertaking public issues (like Initial Public Offerings (IPOs) or Further Public Offerings (FPOs)) because they:

1. Ensure Transparency: Mandate detailed disclosures in the prospectus, including financial statements, risk factors, and the purpose of the capital raise, allowing investors to make informed decisions.
2. Protect Investors: Establish eligibility criteria for issuers, ensuring that only financially sound and compliant entities access the capital market, thereby safeguarding investors from undue risks.
3. Promote Fair Practices: Govern the entire issue process, from pricing to allotment, to prevent manipulation and ensure equitable treatment of all applicants.
4. Maintain Market Integrity: By enforcing strict compliance and disclosure norms, SEBI fosters confidence in the Indian capital market, which is essential for its growth and stability.

Par Value (Face Value): The nominal value printed on the share certificate. E.g., ₹10 per share.

Premium: When shares are issued at a price higher than face value. E.g., share of ₹10 issued at ₹15 means ₹5 premium. Premium is credited to Securities Premium Reserve (as per Section 52 of Companies Act).

Discount: When shares are issued at a price lower than face value. E.g., share of ₹10 issued at ₹9 means ₹1 discount. Discount on Issue of Shares is debited. (Note: Issue at discount is restricted under the Companies Act, 2013.)

Forfeiture of shares is the compulsory cancellation of shares by the company and the seizure of the amount already paid by a shareholder, typically due to non-payment of allotment money or call money. This action can only be taken if authorized by the company's Articles of Association and after providing due notice to the defaulting shareholder. The amount received on forfeited shares is credited to a 'Share Forfeiture Account' and represents a capital profit for the company.

Forfeited shares can be re-issued by the company to new or existing shareholders. These shares can be re-issued at par, premium, or even at a discount. However, the discount allowed on re-issue cannot exceed the amount originally forfeited on those specific shares. The amount received on re-issue is credited to Share Capital. Any surplus remaining in the 'Share Forfeiture Account' (i.e., the forfeited amount less any discount allowed on re-issue) related to the re-issued shares is considered a capital profit and must be transferred to the 'Capital Reserve Account'.

A company can forfeit shares when a shareholder fails to pay the 'call money' or any other installment due on partly paid-up shares, as per the terms of issue or the company's Articles of Association. The procedure for forfeiture typically involves issuing a notice to the defaulting shareholder, giving them a minimum of 14 days to pay the outstanding amount along with any interest, and warning that failure to pay will result in forfeiture. If the payment is not made, the Board of Directors can pass a resolution to forfeit the shares.

Accounting Implications:

• Forfeiture: The Share Capital account is debited with the called-up amount per share. The Calls-in-Arrears account (or individual call accounts) is credited with the unpaid amount. The amount already received from the defaulting shareholder is credited to a 'Share Forfeiture Account' (or Forfeited Shares Account).
• Re-issue: Forfeited shares can be re-issued by the company. The re-issue price can be at par, at a premium, or at a discount. However, the discount allowed on re-issue cannot exceed the amount originally received on the forfeited shares (i.e., the balance in the Share Forfeiture Account for those shares). Upon re-issue, the Bank account is debited with the re-issue price, and the Share Capital account is credited with the paid-up value of the re-issued shares. If shares are re-issued at a discount, the Share Forfeiture Account is debited with the discount amount. Any remaining balance in the Share Forfeiture Account pertaining to the re-issued shares, representing a capital profit, is then transferred to the Capital Reserve account.

When a company issues shares at a price higher than their face value, the excess amount received is termed as 'Securities Premium'. This amount is a capital receipt and must be transferred to a separate account called the 'Securities Premium Account' (also known as Securities Premium Reserve). Section 52(2) of the Companies Act, 2013, strictly regulates the application of this reserve, permitting its use only for the following specific purposes:

1. Issuing fully paid bonus shares to the members of the company.
2. Writing off the preliminary expenses of the company.
3. Writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.
4. Providing for the premium payable on the redemption of any redeemable preference shares or debentures of the company.
5. For the purchase of its own shares or other securities under Section 68 (buy-back of shares).
   It is crucial to note that the Securities Premium Reserve cannot be used for distributing dividends to shareholders or for covering general business expenses.

Calls in Arrears: This refers to the unpaid amount on shares that a shareholder has failed to pay by the due date, after the company has made a call. It is shown as a deduction from 'Called-up Capital' to arrive at 'Paid-up Capital' in the Balance Sheet. The company's Articles of Association may allow for charging interest on calls in arrears. Calls in Advance: This occurs when a shareholder voluntarily pays the amount not yet called up by the company. It is treated as a current liability and shown under 'Other Current Liabilities' in the Balance Sheet. The company may pay interest on calls in advance as per its Articles of Association.

The issue of shares by public companies in India is primarily governed by: 1. Companies Act, 2013: This Act provides the foundational legal framework, including provisions related to types of shares, issue at premium/discount (Sections 52, 53), further issue of share capital (Section 62), and other procedural aspects. 2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations): These regulations are crucial for public issues, rights issues, and other capital-raising activities by listed companies or companies intending to list, ensuring transparency and investor protection. 3. Accounting Standards issued by ICAI: While the Companies Act provides the legal basis, the accounting treatment and presentation are guided by Accounting Standards (e.g., AS 1 for disclosure of accounting policies) issued by the Institute of Chartered Accountants of India (ICAI).

In India, a company limited by shares can primarily issue two types of share capital: Equity Share Capital and Preference Share Capital. Equity shares represent the ownership interest in the company, carrying voting rights and a claim on the residual profits and assets after all other claims, including those of preference shareholders, are settled. The dividend rate on equity shares is not fixed and depends on the company's profitability and board decisions. Preference shares, on the other hand, carry preferential rights regarding the payment of dividends (usually at a fixed rate) and the repayment of capital in the event of winding up of the company. Preference shareholders generally do not have voting rights, except in matters directly affecting their rights. These classifications are governed by Section 43 of the Companies Act, 2013.