Company Features, Shares vs Debentures, Share Issue Process

Key Concepts & Definitions

1. What is a Company?

A company is a legal entity formed by individuals or groups to carry out business activities. It has a separate legal existence from its owners (shareholders) and can own assets, incur liabilities, and sue/be sued in its own name.

classDiagram
    class Company {
        +Legal Person
        +Separate from Owners
        +Limited Liability
        +Perpetual Existence
        +Transferable Shares
    }
    class Shareholder {
        +Owns Shares
        +Limited Liability
        +Voting Rights
    }
    Company "1" *-- "many" Shareholder : Owned By

2. Features of a Company

In the Real World

• NEPSE (Nepal Stock Exchange) uses share capital to fund listed companies like Nabil Bank and Global IME. When you buy shares of Nabil Bank, you become a partial owner, and your liability is limited to your investment.
• Khalti and eSewa operate as companies with limited liability, meaning if they face legal issues, their shareholders (like investors in Khalti’s parent company) are not personally liable beyond their share value.
• Daraz Nepal (owned by Alibaba) issues debentures (loan certificates) to raise funds without diluting ownership. These are repaid with interest, unlike shares which represent ownership.

3. Private vs. Public Company

Example:

• Nepal Investment Bank Ltd. is a private company where shares cannot be publicly traded.
• Nabil Bank Ltd. is a public company where shares are traded on NEPSE, allowing investors like you to buy/sell them easily.

4. Shares vs. Debentures

Real-World Tie-In:

• When Nabil Bank issues shares, it raises equity capital. If you buy a share for Rs. 1000, you become a part-owner and may receive dividends if the bank profits.
• When Global IME issues debentures, it borrows money. Investors earn fixed interest (e.g., 10% per year) but do not own the company.

5. Share Issue Process (Step-by-Step with Example)

A company issues shares in three stages:

1. Application (subscribers apply for shares)
2. Allotment (company allots shares, may include discounts)
3. Call (company calls remaining amount in installments)

Example: Nepal Star Company

• Authorized Capital: 200,000 shares of Rs. 100 each
• Issued Capital: 100,000 shares (only half issued to public)
• Calls:
  • Rs. 30 on application
  • Rs. 40 on allotment (including Rs. 10 discount)
  • Rs. 30 on final call

Scenario:

• Applications received: 120,000 shares (excess of 20,000)
• Board rejects: 20,000 shares (pro-rata allotment for remaining)

Journal Entries

1. Application Received (Excess Applications)

Application A/c (Dr)       |   Bank A/c (Cr)
Rs. 3,600,000 (120,000 × 30) | Rs. 3,600,000

2. Allotment (Pro-Rata Basis)

• Allotted: 100,000 shares (original issue) + 0 (since excess was rejected)
• Discount: Rs. 10 per share (only for allotted shares)
• Amount Due: Rs. 40 – Rs. 10 = Rs. 30 per share

Share Allotment A/c (Dr)   |   Application A/c (Cr)
Rs. 4,000,000 (100,000 × 40) | Rs. 3,000,000 (100,000 × 30)
                           |   Discount A/c (Cr)
                           |   Rs. 1,000,000 (100,000 × 10)

3. Final Call

• Amount Due: Rs. 30 per share
• Total Received: Assume all shareholders pay

Share Capital A/c (Dr)     |   Bank A/c (Cr)
Rs. 3,000,000 (100,000 × 30) | Rs. 3,000,000

4. Unpaid Shares (If Any)

If shareholders fail to pay the final call, the company can:

• Forfeit shares (cancel unpaid shares)
• Re-issue at discount (sell forfeited shares later)

Share Forfeiture A/c (Dr)   |   Share Capital A/c (Cr)
Rs. X (unpaid amount)       |   Rs. X

6. Worked Example: Kathmandu Retail Shop Ltd.

Scenario:

• Authorized Capital: 50,000 shares of Rs. 100 each
• Issued: 40,000 shares
• Calls:
  • Rs. 20 on application
  • Rs. 30 on allotment (including Rs. 5 discount)
  • Rs. 50 on final call
• Applications: 45,000 shares (excess of 5,000)
• Board rejects: 5,000 shares (pro-rata allotment for remaining)

Step-by-Step Solution

1. Application Received

Application A/c (Dr)       |   Bank A/c (Cr)
Rs. 900,000 (45,000 × 20)  |   Rs. 900,000

2. Allotment (Pro-Rata)

• Allotted: 40,000 shares (original issue)
• Discount: Rs. 5 per share
• Amount Due: Rs. 30 – Rs. 5 = Rs. 25 per share

Share Allotment A/c (Dr)   |   Application A/c (Cr)
Rs. 1,200,000 (40,000 × 30) |   Rs. 800,000 (40,000 × 20)
                           |   Discount A/c (Cr)
                           |   Rs. 200,000 (40,000 × 5)

3. Final Call

• Amount Due: Rs. 50 per share
• Total Received: Assume all pay

Share Capital A/c (Dr)     |   Bank A/c (Cr)
Rs. 2,000,000 (40,000 × 50) |   Rs. 2,000,000

4. Final Position

Note:

• Total Paid-Up Capital: Rs. 3,800,000 (Rs. 4,000,000 – Rs. 200,000 discount)
• Unissued Shares: 10,000 shares (Rs. 1,000,000)

Exam Tip

1. Memorize the 5 key features of a company (legal entity, limited liability, etc.).
2. Differentiate shares vs. debentures clearly in exams (ownership vs. loan, voting rights, etc.).
3. Pro-rata allotment is common—always calculate excess applications carefully.
4. Journal entries for share issue must include:
   • Application → Bank
   • Allotment → Application + Discount
   • Final Call → Bank
5. Forfeiture of shares is a frequent exam question—know how to account for it.
6. Real-world tie-ins (e.g., NEPSE, Nabil Bank) can earn bonus marks—mention them if possible.

Physical evidence of share ownership in a company. (Image: CC BY 4.0, via Wikimedia Commons)