Company Accounts: Issue of Shares – Types, Accounting, and Real-World Impact

Key Concepts: What Are Shares and Why Issue Them?

Shares represent ownership in a company. When a company issues shares, it raises capital without taking loans (no interest or repayment pressure). Investors buy shares for dividends or capital appreciation.

Types of Shares

classDiagram
    class Share {
        <<abstract>>
        +face_value: NPR
        +issue_price: NPR
        +dividend: %
    }
    class OrdinaryShare {
        +dividend: variable
        +voting_rights: yes
    }
    class PreferenceShare {
        +dividend: fixed
        +voting_rights: no (unless unpaid)
        +priority: yes (on liquidation)
    }
    Share <|-- OrdinaryShare
    Share <|-- PreferenceShare

1. Issue of Shares: Step-by-Step Process

Companies issue shares in stages to ensure sufficient funds before full allotment. The typical stages are:

1. Application: Investors apply for shares.
2. Allotment: Company allots shares (may include discount/premium).
3. Call: Company calls remaining amount (e.g., final call).
4. Forfeiture/Refund: Unpaid shares are forfeited; excess applications are refunded.

Real-World Example: NEPSE IPOs

When Nepal Investment Bank Limited (NIBL) issued shares in 2018, it followed this process:

• Application: Rs. 100 per share (face value Rs. 10).
• Allotment: Rs. 50 (including Rs. 5 discount).
• Final Call: Rs. 40.
• Result: Oversubscription led to partial allotment.

2. Accounting Entries for Share Issue

Case 1: Issue at Par (No Discount/Premium)

Scenario: A company issues 10,000 shares of Rs. 100 each at par, calling Rs. 50 on application and Rs. 50 on allotment.

Journal Entries:

Case 2: Issue at Premium (Discount Not Allowed in Nepal)

Scenario: A company issues 5,000 shares of Rs. 100 at Rs. 120 (Rs. 20 premium), calling Rs. 60 on application (including premium) and Rs. 60 on allotment.

Journal Entries:

3. Oversubscription and Allotment

When more applications arrive than shares issued, the company uses a pro-rata allotment method.

Example: A company issues 10,000 shares at Rs. 100, receiving applications for 15,000 shares.

• Allotment: 10,000 shares (6,667 applicants get 1 share each; others get 2/3 share).
• Excess Applications: Refunded Rs. 50 (application money).

Journal Entry for Refund:

4. Forfeiture of Shares

If shareholders fail to pay calls, shares are forfeited. The company adjusts the Share Capital and transfers the forfeited amount to a Forfeiture A/c.

Example: A shareholder of 100 shares (Rs. 100 each) fails to pay the final call of Rs. 40.

• Forfeited Amount: Rs. 4,000 (100 × Rs. 40).
• Adjustment: Share Capital reduced by Rs. 4,000; Forfeiture A/c credited.

Journal Entry:

5. Re-issue of Forfeited Shares

Forfeited shares can be re-issued at a discount (but not exceeding unpaid calls).

Example: Re-issue 100 forfeited shares (originally Rs. 100) at Rs. 80.

• Discount Allowed: Rs. 2,000 (100 × Rs. 20).
• Journal Entry:

  Date	Particulars	L.F.	Dr (NPR)	Cr (NPR)
  2079/01/20	Bank A/c		8,000
  	Share Forfeiture A/c		2,000
  	To Share Capital A/c			10,000

In the Real World

1. NEPSE (Nepal Stock Exchange)

   • When Nabil Bank issued shares in 2021, it used a book-building method (similar to oversubscription allotment). Investors applied for shares at Rs. 100 (face value Rs. 10), with Rs. 50 called on application and Rs. 50 on allotment. The premium (Rs. 90) went to Securities Premium A/c.

2. Google (Alphabet Inc.)

   • Google’s IPO in 2004 issued 19.6 million shares at Rs. 85 (adjusted for inflation). The premium (Rs. 75 per share) funded R&D. Today, its Class A shares (voting rights) and Class C shares (no voting) reflect preference vs. ordinary share structures.

3. Khalti (Digital Payment App)

   • When Khalti raised Rs. 100 million via private equity, it issued preference shares to investors (e.g., Ant Group). These shares had fixed dividends (unlike ordinary shares) and priority in repayment if Khalti liquidated.

Worked Example: Kathmandu Retail Shop Ltd.

Scenario:

• Issue: 20,000 shares of Rs. 100 each at a 10% premium.
• Calls:
  • Rs. 30 on application (including premium).
  • Rs. 40 on allotment.
  • Rs. 30 on final call.
• Applications: 25,000 shares received.
• Allotment: 20,000 shares (pro-rata).

Step 1: Application Money Received

Explanation:

• 25,000 applicants × Rs. 30 = Rs. 7,50,000.

Step 2: Allotment (Pro-Rata)

• Allotted: 20,000 shares (80% of applicants).
• Refund: Excess Rs. 30 to 5,000 applicants (5,000 × Rs. 30 = Rs. 1,50,000).

Explanation:

• Share Capital: 20,000 × Rs. 100 = Rs. 20,00,000 (but only Rs. 30 called so far).
• Premium: 20,000 × Rs. 10 = Rs. 2,00,000 (but only Rs. 30 application includes Rs. 3 premium).

Step 3: Final Call

Final Ledger:

Comparison: Ordinary vs. Preference Shares

Exam Tip

1. Memorize the Order of Transactions: Application → Allotment → Call → Forfeiture/Refund. Always show journal entries for each stage.

2. Pro-Rata Allotment Calculation:

   • If 10,000 shares issued but 15,000 applied, allot 2/3 share to excess applicants.
   • Example: 5,000 applicants get 1 share; 10,000 get 2/3 share.

3. Premium/Discount Handling:

   • Premium goes to Securities Premium A/c (not Share Capital).
   • Discount (if allowed) reduces Share Capital.

4. Forfeiture Adjustments:

   • Forfeited shares reduce Share Capital and credit Forfeiture A/c.
   • Re-issue at discount? Debit Forfeiture A/c for the difference.

5. Common Mistakes to Avoid:

   • Forgetting to refund excess applications.
   • Incorrectly treating premium as part of Share Capital.
   • Miscounting pro-rata allotments.

Visual Summary of the Accounting Cycle for Share Issue: