Subscription of shares, Minimum subscription, Over subscription

Subscription shares are shares that investors subscribe to for a purchase price in exchange for equity in the company. These shares can take the form of ordinary or preference shares with an option of being bought back by the company at a later date for a fixed conversion price and within a fixed period of time. This issuance of shares can only be done by the company itself and such shares are bought by a potential investor that is commonly known as a subscriber. In the case of subscription shares, the funds invested by the investor will be deposited directly into the company’s account for the issuance of the new shares. This is different from share purchase agreements, whereby the purchasers and vendors sell and transfer the sale shares and the purchase price is paid to the vendor.

A subscription of shares may be used at any stage of a business for a private limited company. The nature of the subscription agreement will differ depending on the type of share being issued such as ordinary, preference or convertible redeemable preference shares. It is important to differentiate between a sale and purchase/share sale agreement on the one hand and a share subscription agreement on the other. The former relates to sale and transfer of shares in a company from an existing shareholder and from existing share capital in the company. The latter relates to subscriptions where there is an issuance of new shares or classes of shares in a company meaning the share capital of the company is increased to cater for the new shares.

Minimum Subscription

Minimum subscription refers to the minimum amount required by the company for its preliminary functions. It has been provided by the Companies Act, that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares in order to prevent companies from commencing business with inadequate resources. This is called the ‘minimum subscription’. The limit of minimum subscription is 90% of the size of the issue.

• The infrastructure companies that have a public issue, for them 90% of minimum subscription are not compulsory and are to be given by an alternative source through which the fund will be available to the company.
• A legal precedent for Minimum Subscription was created under the Companies Act of 1956. It states that the company is allowed to offer only a certain amount of shares to the public, for which the company can actually pay.

Over Subscription

When a company receives applications for shares more than the number of shares it has offered to the public, it is known as over-subscription of shares. Usually, the companies with strong financial background or good reputation in the market or profitable future prospects receive over-subscription of shares.

According to the guidelines of SEBI, a company cannot out-rightly reject any application. However, it can do so where the information is incomplete, the signature is not there or the application money is insufficient.

Alternatives for Over Subscription

Over subscription, there are three alternatives available to the company with respect to the allotment:

1. Full Allotment and Rejection of Excess Application: Rejection of some excess applications and allotment is made in full to other applicants. Those applicants whose applications are rejected are sent a letter of regret along with the refund of the money paid by them. Also, the applicants whose applications are accepted are sent a letter of allotment.
2. Pro-rata Allotment: Proportionate distribution of available shares can be made by the Board of Directors for allotment among applicants. The applicants get a lesser number of shares than the shares they have applied for, proportionately, which is called a pro-rata allotment. The allotment is based on the ratio between the number of shares to be allotted and the number of shares applied for.
3. Combination of the above two alternatives:

• Reject some applications and make pro-rata allotment of the remaining applicants: In this case letter of regret is sent to the rejected applicants and a letter of allotment is sent to the ones accepted over.
• Full allotment to some applicants and making pro-rata allotment of the left ones: In this case letter of allotment is sent to all the applicants.
• Rejection of some applications, full allotment to some applicants, and making pro-rata allotment to the remaining ones: Letter of regret is sent to the rejected ones. And the letter of allotment is sent to the applicants whose applications have been accepted.

SEBI Guidelines for Over Subscription

• There should be a categorization of the applicants on the basis of the number of shares they have applied for.
• Half of the net offer of shares to the public should be made to those companies or organizations that have made applications for more than 1000 shares.
• Half of the net offer of shares to the public should be given to those applicants, who have made applications of 1000 or less than 1000 shares.
• The Board of Directors has the authority to reject some applications on the grounds of a technicality like incomplete application forms or forms not bearing signatures or applications with less money.
• Any basis for allotment of shares can be adopted, but allotment has to be made in tradable lots, and the amount over and above received at the time of application should be adjusted towards allotment and calls, while the remaining excess sum is to be refunded.

Under subscription

A company offers shares to the public inviting applications for their subscription. When the number of shares applied for by the public is less than the number of shares issued by the company, it is a situation of under-subscription.

Generally, a company that is newly set up or does not have a good reputation in the market receives under-subscription. Usually, such companies opt for underwriting of the shares.

However, if a company receiving under-subscription receives the minimum subscription, it can allot the shares for which it receives the application.

Accounting Treatment for under subscription

Accounting is done in the basic manner as no special treatment is given. Further, journal entries are made as per the actual number of shares applied for and allotted to the public. By doing so the company can satisfy all the applicants.

SEBI Guidelines for Under Subscription

When the company has not received 90% of the amount issued from public subscription and accepted devolvement of shares from underwriters and other sources, in case of under subscription, within a period of 60 days, counting from the date of closure of share issue, the company is required to refund the full amount of subscription to the applicants within 78 days without interest and with interest for the delayed period past 78 days, @ 15% per annum.

Differences:

Over Subscription:

1. Applications received are more than the shares issued
2. In this case the application money is refunded on the rejected applications
3. Pro-rata allotment is made in this case
4. Minimum subscription is automatically received
5. Over subscription conveys that the position of company in capital market is very good
6. Issued Capital and subscribed capital are equal.

Under Subscription:

1. Applications received are less than the shares issued
2. Generally, the refund situation does not arise
3. No pro-rata allotment
4. Under subscription may not satisfy the requirement of minimum subscription
5. It sends a message that the company does not enjoy full confidence of investors in capital market
6. Subscribed capital is less than the Issued capital.