Issue of Shares at par, Premium and Discount

A company can issue its shares either at par, at a premium or even at a discount. The shares will be at par is when the shares are sold at their nominal value. Shares sold at a premium cost more than their nominal value, and the amount in excess of the face value is the premium. And of course, shares sold at discount cost less than the face/nominal value.

Under Section 78 of the Act, the amount of securities premium can be used wholly or in part for:

(i) Paying up unissued shares of the company to be issued to members of the company as bonus shares

(ii) Writing off the preliminary expenses of the company

(iii) Writing off the expenses of or the commission paid or discount allowed on shares or debentures of the company

(iv) Providing for the premium payable on the redemption of redeemable preference shares or debentures of the company.

Shares Issued at Par

On Application Money Received

Application of shares does not guarantee allotment of shares. Some applications will be rejected. So, when the application money is received, we do not credit the share capital account. For the sake of convenience, we open a new account- share application account.

This money collected on the application must be deposited in the bank account in a Schedule Bank according to the Companies Act. This account is exclusively opened to deal with the application money. The journal entry for this transaction in the books of the company is as follows:

Date	Particulars		Amount	Amount
	Bank A/c	Dr	xxx
	To Share Application A/c			xxx
	(Being share application amount received for ___ shares @ Rs ___ per share)

The accounting entries pertaining to the issue of shares are as follows:

1. On receipt of applications money:

Bank a/c Dr.

  To share application a/c

(Being share application money received)

2. On allotment of shares:

(a) Share application a/c Dr.

  To share capital a/c

(Being appropriation of application money towards share capital)

(b) Share Allotment a/c Dr.

  To share capital a/c

(Being allotment money due on shares @ Rs. per share)

3. When allotment money is received, the following entry is passed:

Bank a/c Dr.

  To share allotment a/c (Being allotment money received)

4. (a) If any call is made on the shares, the following entries are passed:

Share call a/c Dr.

  To share capital a/c

(b) On receipt of call money:

Bank a/c Dr.

  To share call a/c

5. Issue of Share at Premium (Accounting Entries):

Section 78 of the companies Act, as amended by the Companies Amendment Act 1999 provides that the amount of premium on the securities issued by the company shall be transferred to Securities Premium Account. Generally, premium money is received along-with allotment money.

In such a case, the following entries are passed:

(a) Bank a/c Dr.

  To share application a/c

(Being application money received)

(b) Share application a/c Dr.

  To share capital a/c

(Being application appropriated towards capital a/c)

(c) Share Allotment a/c Dr.

  To share capital a/c

  To securities premium a/c

(Being allotment money and premium money due on share)

Bank a/c Dr.

  To share allotment a/c

(Being allotment money received)

Issue of Shares at Premium

A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price. If shares do not have a par value, then there is no premium. In this case, the entire amount paid is recorded in the common stock account (if the payment is for common stock, rather than for some form of preferred stock). For example, if ABC Company sells a share of common stock to an investor for $10, and the stock has a par value of $0.01, then it has issued the share at a premium of $9.99.

The Public Company invites the public to apply for and subscribe to its share capital. For this purpose, it also issues a Prospectus. The company generally issues its shares at par i.e., at its face value. However, a company may choose to bring an Issue of Shares at Premium.

According to Section 78 of the Companies Act, securities premium may be applied by the company for:

(i) Issuing to members of the company fully paid bonus shares.

(ii) Writing off the preliminary expenses of the company.

(iii) Writing off the expenses of, or the commission paid or discount allowed on issue of shares or debentures of the company.

(iv) Providing for the premium payable on the redemption of any redeemable preference shares or debentures.

Accounting treatment of Securities Premium

The company needs to credit the amount of Premium in a separate account i.e. Securities Premium A/c, as it is not a part of the Share Capital. It is actually a gain for the company. As per the Companies Act, 2013 the company shows the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.

Also, section 52 of the Companies Act, 2013 states how a company can use the Securities Premium. The following are the provisions regarding this:

• The company can use the amount towards the issue of un-issued shares to the shareholders or members of the company as fully paid bonus shares.
• It can use this amount to write off the preliminary expenses.
• The company may use it to pay the premium on the redemption of debentures or redeemable preference shares.
• It can also use this amount to write off the expenses incurred, commission paid or discount allowed on the issue of any securities or debentures.
• It can also use it for buy-back of own shares or any other securities.

Issue of Shares at Discount

A company may have to raise additional capital for its growth or preservation or whatever the reason might be. It is allowed for such further issue of share capital as u/s. 62 of the Companies Act 2013

In the rights issue, the company may choose to issue shares to its existing shareholders instead of resorting to issue of shares to the public. Such shares are issued at a discount given in the market price. It also helps to increase the stake of the existing shareholders.

“The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resort to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out.

Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.”

Conditions for Issue of Shares at Discount

• In order to issue the shares at a price less than the face value, the company has to get permission from the relevant authority. For seeking permission, they should call and upon a general meeting and discuss and authorize the matter in that meeting.
• There is a cap on the rate of discount. A company cannot issue any shares at more than 10% discount.
• The company should issue the shares within 60 days of receiving permission from the relevant authority. In certain cases, the company can extend this time frame after getting permission in the permission.
• The company cannot issue these shares before passing of 1 year from the date of commencement of business.
• The shares must belong to the same class of shares which are already available in the market. For example, if the has previously issued Equity shares then this time also, the company has to issue Equity shares only.
• Also, the company has to acquire the sanction by the Central Government after getting approval from the general meeting.

Following conditions as laid down in Sec. 79 of the Companies Act:

(a) The shares to be issued at a discount must be of a class already issued.

(b) The issue must be authorised by a resolution passed by the company in General Meeting and sanctioned by the Company Law Board.

(c) Rate of discount should not be more than 10%.

(d) One year must have passed since the date at which the Company was allowed to commence business.

(e) The issue of such shares must take place within two months after the date of court’s sanction or within such extended time as the Court may allow.

Accounting Treatment:

1. Generally, the ‘Discount on Shares’ is recorded at the Time of Allotment:

Share Allotment A/c … Dr. (With the amt., due)

Discount on Issue of Shares A/c … Dr. (With discount)

To Share Capital A/c (Total amount)

(Being the allotment money due)

(ii) To Write off ‘Discount on Shares’

Profit & Loss A/c/Securities Premium Reserve A/c ……..Dr

To Discount on Issue of Shares A/c

Note. Discount on issue of shares is recorded at the time of allotment made due.

Journal Entries

Generally, the shares are issued at discount at the time of allotment of shares. So, all the entries other than the allotment entries will be unaffected by these shares.

1. Entry for Due of Allotment

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Share Allotment A/c                                                Dr.		With the amount due
	Discount on Issue of Shares A/c                           Dr.		With the amount of discount
	To Share Capital A/c                                           Cr.			Total Amount (Due Amount + Discount)
	(Being the allotment money due)

2. Entry for Amount Received

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                                    Dr.		With the amount of money received
	To Shares Allotment A/c                                   Cr			Amount of money received
	(Being the receipt of the amount of allotment)

3. Writing-off the Discount on Issue of Shares

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Profit and Loss A/c/ Securities Premium A/c  Dr.		With the amount of discount
	To Discount on Issue of Shares                       Cr.			With the Amount of Discount
	(Being the amount of discount on issue of shares written off)

Entry if shares are issued to the underwriters

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                                  Dr.		With the amount received
	Issue of Shares at Discount A/c                          Dr.		Amount of Discount
	Share Capital A/c                                              Cr.			Total amount (Amount received and amount of discount)
	(Hence, the application money received after adjustment of discount)

Entry if shares are issued to the promoters for their service

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Preliminary expenses A/c                                   Dr.		Amount of Preliminary Expenses
	Issue of Shares at Discount A/c                         Dr.		With the amount of discount
	Share Capital A/c                                            Cr.			With total amount (Preliminary expenses and the amount of discount)
	(Being the shares given to the Promoters for their services)