Reorganization through Sub Division and Consolidation of Shares

Share capital reorganization refers to the alteration of the structure of a company’s share capital without changing the total capital amount. Two common forms of such reorganization are Sub-Division (also called splitting) and Consolidation of shares. These changes are often carried out to improve marketability, adjust share prices, or comply with statutory requirements. Both processes require following the provisions of the Companies Act, 2013 (particularly Section 61) and the company’s Articles of Association.

Sub-Division of Shares:

Sub-division of shares means dividing the existing shares of the company into shares of smaller denominations. This does not change the total share capital but increases the number of shares. For example, a company having 1,00,000 equity shares of ₹10 each can sub-divide them into 10,00,000 shares of ₹1 each.

Objectives of Sub-Division:

  • Increase marketability: By reducing the nominal value, the market price per share may become more affordable for small investors.

  • Improve liquidity: More shares in the market may lead to higher trading volumes.

  • Compliance: Sometimes required to meet stock exchange norms regarding minimum public shareholding.

Legal Requirements:

  • Must be authorized by the Articles of Association.

  • Approval through a resolution in a general meeting.

  • Necessary filings with the Registrar of Companies (RoC) in prescribed forms.

Effects of Sub-Division:

  • Face value decreases while the number of shares increases.

  • Shareholder’s proportionate ownership remains unchanged.

  • The market price per share usually adjusts in proportion to the split.

Example of Sub-Division:

If a company has 1,00,000 shares of ₹10 each (₹10,00,000 total capital) and decides to sub-divide them into shares of ₹2 each, the result will be 5,00,000 shares of ₹2 each. The total share capital remains ₹10,00,000.Journal Entry for Sub-Division

In accounting, no journal entry is usually required because the total capital remains unchanged. Only the share capital register and related documents are updated.

Consolidation of Shares:

Consolidation of Shares means combining the existing shares of smaller denominations into shares of larger denominations. This process reduces the number of shares while keeping the total capital constant. For example, 10,00,000 shares of ₹1 each may be consolidated into 1,00,000 shares of ₹10 each.

Objectives of Consolidation:

  • Reduce Administrative burden: Fewer shares mean reduced costs of share registry maintenance.

  • Increase Market price per Share: This may improve the company’s perception in the market.

  • Compliance: Sometimes used to meet minimum share price requirements for certain stock exchanges.

Legal Requirements:

  • Must be permitted by the Articles of Association.

  • Requires approval via a general meeting resolution.

  • Filing with the RoC is mandatory.

Effects of Consolidation:

  • Face value increases while the number of shares decreases.

  • Ownership proportion remains unchanged for each shareholder.

  • Market price per share adjusts accordingly, although total market capitalization remains unaffected.

Example of Consolidation:

If a company has 5,00,000 shares of ₹2 each (₹10,00,000 total capital) and decides to consolidate them into shares of ₹10 each, the result will be 1,00,000 shares of ₹10 each. The total share capital remains ₹10,00,000.

Journal Entry for Consolidation:

Similar to sub-division, consolidation usually requires no journal entry in the books, as it is a change in denomination, not in the total capital. Adjustments are made in the share capital records.

Comparison between Sub-Division and Consolidation

Basis Sub-Division Consolidation
Denomination Reduced Increased
Number of Shares Increases Decreases
Purpose To make shares more affordable, increase liquidity To increase share price, reduce admin work
Effect on Capital No change in total share capital No change in total share capital

Arranging for Cash Balance for the Purpose of Redemption

When a company decides to redeem its preference shares or debentures, it must ensure that it has adequate cash balance to meet the redemption obligation. Redemption involves paying the holders of redeemable securities (like preference shareholders) either at par, premium, or as per the terms of the issue. As per the Companies Act, 2013, redemption of preference shares can only be made if the company has sufficient profits or has made a fresh issue of shares to raise the necessary funds. The main concern here is liquidity, i.e., the company must have enough cash on hand at the time of redemption.

Importance of Arranging Cash for Redemption:

The process of arranging a cash balance is critical because:

  • Redemption payments are legally binding obligations.

  • Failure to arrange funds can damage the company’s reputation.

  • It ensures compliance with legal provisions regarding redemption.

  • It prevents financial strain or disruption of regular operations.

Sources of Cash for Redemption:

A company may arrange the required cash balance for redemption through several means:

(a) Utilization of Existing Profits

The company may use its accumulated profits (like retained earnings, general reserve, or profit and loss account balance) to meet redemption payments. If preference shares are redeemed from profits, a Capital Redemption Reserve (CRR) must be created for an amount equal to the nominal value of shares redeemed.

(b) Fresh Issue of Shares

A company may issue new equity shares to raise funds specifically for redemption. The proceeds from the fresh issue can be directly used for payment. This option helps maintain working capital as profits are not depleted.

(c) Sale of Assets

If the company has surplus or non-essential assets, they can be sold to generate cash for redemption. However, this option must be carefully considered to avoid loss of income or operational capabilities.

(d) Borrowing

Short-term loans or debentures may be issued to meet redemption obligations. This provides quick liquidity but increases the company’s financial liabilities.

Legal Requirements Regarding Cash for Redemption:

According to Section 55 of the Companies Act, 2013:

  • Preference shares must be fully paid before redemption.

  • Redemption must be done either from distributable profits or proceeds from a fresh issue of shares.

  • Premium on redemption must be provided out of Securities Premium Account or Profit and Loss Account.

  • CRR must be created if redemption is made out of profits.

Accounting Treatment:

The accounting treatment depends on whether redemption is financed from profits or fresh issue proceeds.

Case 1: Redemption from Profits

When redemption is made from profits:

  1. Transfer an amount equal to the nominal value of shares redeemed from distributable profits to the CRR.

  2. Provide for the premium on redemption from Securities Premium Account or Profit and Loss Account.

  3. Pay the preference shareholders.

Case 2: Redemption from Fresh Issue Proceeds

When funds are raised from a fresh issue:

  1. Record the proceeds from the fresh issue.

  2. Apply the proceeds directly towards redemption.

  3. If the proceeds are less than the redemption amount, use profits to meet the shortfall and transfer the required CRR.

Journal Entries for Arranging Cash for Redemption:

S.No. Particulars Debit (₹) Credit (₹)
1

Bank A/c Dr. (for proceeds from fresh issue)

XXX

To Share Capital A/c

XXX

(Being fresh issue of shares made for the purpose of redemption)

2

Profit & Loss A/c Dr.

XXX

To Capital Redemption Reserve A/c

XXX

(Being transfer to CRR on redemption out of profits)

3

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

XXX

To Premium on Redemption A/c

XXX

(Being provision made for premium on redemption)

4

Preference Share Capital A/c Dr.

XXX

Premium on Redemption A/c Dr.

XXX

To Preference Shareholders A/c

XXX

(Being amount payable to preference shareholders on redemption)

5

Preference Shareholders A/c Dr.

XXX

To Bank A/c

XXX

(Being payment made to preference shareholders)

Fresh issue of Shares for the Purpose of Redemption

When a company redeems its preference shares, it is essentially repaying the capital invested by the shareholders. The Companies Act, 2013 in India requires that a company must ensure its capital base is maintained after redemption. One of the recognized methods to comply with this requirement is to issue fresh shares specifically for the purpose of redemption. This process is not just a formality — it safeguards the company’s financial stability, protects creditors, and maintains statutory capital adequacy.

Legal Requirement:

As per Section 55 of the Companies Act, 2013, a company cannot redeem preference shares unless:

  1. They are fully paid-up.

  2. Redemption is funded either out of:

    • Profits available for distribution as dividends (requiring transfer of an equal amount to the Capital Redemption Reserve), or

    • Proceeds of a fresh issue of shares.

If the company opts for the second method, it can issue new shares — equity or preference — and use the amount raised to pay preference shareholders on redemption.

Objectives of Fresh Issue for Redemption:

  1. Maintain Capital Structure: Redemption reduces share capital; fresh issue replenishes it.

  2. Ensure Liquidity: Provides the necessary funds for payment to preference shareholders without straining working capital.

  3. Legal Compliance: Fulfills Companies Act requirements for redemption.

  4. Avoid Reduction of Shareholders’ Funds: Protects creditor interests.

  5. Sustain Creditworthiness: Maintains financial ratios and market perception.

Procedure for Fresh Issue of Shares for Redemption:

  1. Board Meeting: The Board passes a resolution approving the issue and the redemption plan.

  2. Compliance Check: Ensure preference shares to be redeemed are fully paid-up.

  3. Determine the Amount to be Raised: Based on the nominal value of preference shares to be redeemed.

  4. Offer of Fresh Shares: Follow procedures for public issue, rights issue, or private placement as per the Act.

  5. Collection of Application Money: Receive proceeds from new shareholders.

  6. Utilization for Redemption: Apply the amount exclusively for paying off the preference shareholders.

  7. Filing with ROC: Submit necessary forms such as SH-7 and others within the prescribed period.

Accounting Treatment:

When fresh shares are issued for redemption, the accounting process involves:

1. Receipt of Money from Fresh Issue:

Bank A/c Dr.
To Share Capital A/c
(Being fresh issue of shares for the purpose of redemption)

2. Redemption Payment:

Preference Share Capital A/c Dr.
Premium on Redemption A/c Dr. (if any)
To Preference Shareholders A/c
(Being amount payable to preference shareholders on redemption)

3. Payment to Shareholders:

Preference Shareholders A/c Dr.
To Bank A/c
(Being payment made to preference shareholders)

If redemption is at a premium, the premium amount is adjusted from the Securities Premium A/c or the Profit & Loss A/c.

Advantages of Fresh Issue for Redemption:

  1. No Strain on Profits: The company does not need to divert distributable profits; the cash comes from new investors.

  2. No Need for CRR Creation from Profits: Since the redemption is funded by fresh proceeds, the Capital Redemption Reserve requirement from profits may not arise.

  3. Boosts Shareholder Base: Brings in new shareholders and diversifies ownership.

  4. Maintains Liquidity: Working capital remains intact for operations.

  5. Positive Market Signal: Shows company’s ability to attract fresh investment.

Example:

Scenario:

A company has 10,000 preference shares of ₹100 each, fully paid-up, to be redeemed at par. The company decides to issue 10,000 equity shares of ₹100 each at par for this purpose.

Journal Entries:

Date Particulars Debit (₹) Credit (₹)
1. Bank A/c Dr. 10,00,000
  To Equity Share Capital A/c 10,00,000
2. Preference Share Capital A/c Dr. 10,00,000
  To Preference Shareholders A/c 10,00,000
3. Preference Shareholders A/c Dr. 10,00,000
  To Bank A/c 10,00,000

Creation of Capital Redemption Reserve Account, Features, Entries

Capital Redemption Reserve Account (CRR) is a statutory reserve created when a company redeems its preference shares out of distributable profits instead of proceeds from a fresh issue of shares. As per the Companies Act, 2013, an amount equal to the nominal value of shares redeemed must be transferred from profits to CRR to maintain the company’s capital structure. CRR can only be utilized for issuing fully paid bonus shares to shareholders and cannot be used for paying dividends. This provision ensures that redemption does not reduce the company’s working capital or equity base, thereby protecting the interests of creditors and maintaining financial stability.

Features of Capital Redemption Reserve Account (CRR):

  • Statutory Requirement

The creation of CRR is a statutory obligation under Section 55 of the Companies Act, 2013. It arises when a company redeems preference shares from its distributable profits instead of fresh issue proceeds. This ensures that the company’s paid-up capital remains intact even after redemption. The nominal value of the shares redeemed must be transferred from profits to CRR, safeguarding creditor interests. The law mandates this transfer to maintain financial stability and prevent erosion of the capital base. Failure to create CRR in such cases can result in non-compliance and legal consequences for the company and its management.

  • Purpose of CRR

The main purpose of CRR is to protect creditors by maintaining the company’s capital structure even after the redemption of preference shares. Without this reserve, redemption from profits could reduce the company’s capital, weakening its financial position. By transferring profits to CRR, the company converts distributable earnings into non-distributable reserves, ensuring they are preserved for capital purposes only. CRR thus acts as a buffer, maintaining the nominal capital intact and avoiding situations where shareholders might withdraw capital that creditors rely on for security. This mechanism ensures prudent financial management and strengthens investor and creditor confidence.

  • Creation from Profits

CRR is created only from distributable profits such as general reserves, profit and loss account surplus, or other reserves eligible for dividend distribution. It cannot be formed from capital profits or funds meant for specific purposes. When a company redeems preference shares from profits, the nominal value of those shares is transferred to CRR. This process effectively locks those profits into the company’s equity base, preventing their distribution as dividends. This restriction ensures that redemption does not compromise the long-term financial health of the company, thereby protecting stakeholders from risks associated with capital reduction.

  • Non-Distributable Nature

One of the key features of CRR is that it is non-distributable, meaning it cannot be used to pay dividends or meet other revenue expenses. Once funds are transferred to CRR, they are locked for specific capital purposes and cannot be withdrawn by shareholders. This characteristic is designed to ensure that the capital structure of the company is not weakened by the redemption process. By restricting its use, CRR maintains the stability of the company’s financial foundation and serves as a safeguard for creditors and long-term investors, ensuring the company retains sufficient capital for its operations.

  • Utilization Restriction

The utilization of CRR is strictly regulated under the Companies Act, 2013. It can only be used for issuing fully paid bonus shares to existing shareholders. This provision ensures that CRR is employed exclusively for strengthening the company’s equity base, not for operational or dividend payments. By limiting its usage, the law preserves the capital integrity of the company, ensuring that funds earmarked for CRR continue to serve their protective function. This restriction reinforces financial discipline, promotes capital stability, and maintains trust among creditors, investors, and other stakeholders relying on the company’s capital security.

  • Capital Maintenance Principle

CRR is based on the capital maintenance principle, which dictates that the company’s capital should remain unaffected by transactions like redemption of shares. Since preference share redemption from profits reduces the company’s available funds, transferring an equivalent amount to CRR ensures that the capital base remains unchanged. This principle is essential for protecting creditor interests, as they assess the company’s solvency and repayment ability based on its capital. CRR, therefore, acts as a safeguard, ensuring that the redemption process does not harm the financial stability or creditworthiness of the company in the long run.

  • Applicability to Preference Shares

CRR creation is specifically applicable when redeeming preference shares from distributable profits. If redemption is made from proceeds of a fresh share issue, CRR is not required. This distinction ensures that companies raising fresh capital for redemption are not burdened with reserve creation, as the equity base is maintained through new funds. However, when profits are used, CRR ensures equivalent capital replacement. This targeted application reflects a balance between operational flexibility and creditor protection, allowing companies to choose their redemption method while safeguarding the fundamental requirement of maintaining nominal paid-up capital intact.

  • Legal Compliance and Audit

CRR is subject to strict legal compliance and verification during statutory audits. Auditors must confirm that the amount transferred to CRR equals the nominal value of preference shares redeemed from profits. Any misstatement, omission, or non-compliance could result in penalties and affect the company’s credibility. Since CRR is a permanent reserve (except for specific utilization as per law), accurate recording and disclosure in financial statements are essential. This transparency ensures that shareholders, creditors, and regulatory bodies can trust the company’s adherence to statutory provisions and its commitment to maintaining a sound financial structure.

Creation of Capital Redemption Reserve Account:

Date Particulars L.F. Debit (₹) Credit (₹)
1.

Profit & Loss A/c Dr.

xxx

  To Capital Redemption Reserve A/c

xxx

(Being the transfer of profits equal to the nominal value of preference shares redeemed to CRR as per Companies Act, 2013)

2.

General Reserve A/c Dr.

xxx

  To Capital Redemption Reserve A/c

xxx

(Being the transfer from general reserve to CRR for redemption of preference shares)

Treatment regarding Premium on Redemption

When a company redeems its preference shares or debentures at a price higher than their face value, the excess amount paid over the nominal value is called the premium on redemption. This premium is an additional financial obligation for the company and must be properly accounted for as per the Companies Act, 2013 and relevant accounting standards.

Legal Provisions:

According to Section 52(2)(d) of the Companies Act, 2013, the premium payable on redemption of shares or debentures should be provided out of:

  • Securities Premium Account, or

  • Profit & Loss Account (Free Reserves)

It cannot be provided from capital reserves or revaluation reserves.

Premium on Redemption of Preference Shares:

  • If preference shares are redeemed at a premium, the company must first ensure compliance with Section 55 of the Companies Act, 2013.

  • The premium payable should be transferred from the Securities Premium Account or free reserves before redemption.

  • If no adequate balance exists in the Securities Premium Account, the shortfall is met from distributable profits.

Premium on Redemption of Debentures:

  • The premium payable on redemption of debentures is generally specified in the terms of issue.

  • At the time of issue, if the debentures are issued with a condition of redemption at premium, a Loss on Issue of Debentures Account is created and written off over the life of the debentures.

  • On redemption, the premium is paid along with the principal amount.

Accounting Treatment:

The treatment varies depending on whether the premium is:

  1. Payable on preference shares

  2. Payable on debentures

a. Premium on Redemption of Preference Shares

  • Debit: Profit & Loss Account / Securities Premium Account

  • Credit: Premium on Redemption of Preference Shares A/c

b. Premium on Redemption of Debentures

  • If provided at the time of issue:

    • Debit: Loss on Issue of Debentures A/c

    • Credit: Premium on Redemption of Debentures A/c

  • At redemption:

    • Debit: Premium on Redemption of Debentures A/c

    • Credit: Debenture holders A/c

Sources for Payment:

The payment for premium can be made from:

  • Securities Premium Account (primary source)

  • Free reserves / Profit & Loss Account (secondary source)

The Companies Act ensures that premium is not paid from capital, protecting creditors’ interests.

Practical Steps for Treatment:

  1. Check Articles of Association: Ensure provisions allow redemption at premium.

  2. Ascertain Amount of Premium: Based on terms of issue.

  3. Identify Source: Securities Premium Account or free reserves.

  4. Pass Provision Entry: Transfer required amount before redemption.

  5. Make Redemption Payment: Pay face value + premium to shareholders or debenture holders.

Example:

Suppose a company redeems 10,000 preference shares of ₹100 each at a premium of ₹10 per share:

  • Face Value: ₹10,00,000

  • Premium: ₹1,00,000
    If Securities Premium A/c has ₹80,000, then:

  • ₹80,000 will come from Securities Premium A/c

  • ₹20,000 from Profit & Loss A/c

Journal Entries Table:

Date Particulars Debit (₹) Credit (₹)
1.

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

XXX

To Premium on Redemption of Preference Shares A/c

XXX

2.

Premium on Redemption of Preference Shares A/c Dr.

XXX

Preference Share Capital A/c Dr.

XXX

To Preference Shareholders A/c

XXX

3.

Preference Shareholders A/c Dr.

XXX

To Bank A/c

XXX

4.

Loss on Issue of Debentures A/c Dr. (if applicable)

XXX

To Premium on Redemption of Debentures A/c

XXX

5.

Premium on Redemption of Debentures A/c Dr.

XXX

Debentures A/c Dr.

XXX

To Debenture holders A/c

XXX

6.

Debenture holders A/c Dr.

XXX

To Bank A/c

XXX

Interest on Debentures, Characteristics, Entries

Interest on debentures is the periodic payment made by a company to debenture holders as a return on the funds borrowed through the issue of debentures. It is a fixed charge against profits, meaning it must be paid regardless of the company’s profitability. Interest is usually calculated on the face value of debentures at a predetermined rate and paid semi-annually or annually. As per the Companies Act and relevant tax provisions, interest is treated as a business expense and is deductible for tax purposes. Payment must comply with terms in the debenture trust deed, and tax is often deducted at source (TDS) before payment to debenture holders.

Characteristics of Interest on Debentures:

  • Fixed Obligation

Interest on debentures represents a fixed financial obligation for the company, payable at a predetermined rate irrespective of profit or loss. Unlike dividends on shares, it is not dependent on earnings but must be paid as per the terms of the debenture agreement. This fixed nature ensures debenture holders receive a stable return, making debentures a secure investment. For the company, however, it adds a constant financial burden, and failure to pay can lead to legal consequences or damage to creditworthiness, as it is a contractual liability.

  • Priority in Payment

Interest on debentures has priority over dividends to shareholders. It is classified as a charge against profits, meaning it must be paid before any distribution of profits to equity or preference shareholders. This priority is due to the debt nature of debentures, where debenture holders are creditors, not owners. Even in financial difficulties, interest payment is legally binding unless the company is under formal restructuring. This feature provides security to investors but creates a fixed commitment for the company’s cash flow management and overall financial planning.

  • Periodicity of Payment

Interest on debentures is paid at regular intervals, typically half-yearly or annually, as specified in the debenture trust deed. This periodicity allows investors to plan their income flow and makes debentures attractive for those seeking predictable returns. The company must maintain sufficient liquidity to meet these periodic payments on time. The fixed schedule also helps in accounting and budgeting, as companies can anticipate and allocate resources accordingly. Delays or defaults in such payments can lead to penalties, legal action, or loss of investor confidence in the company.

  • Tax-Deductible Expense

Interest on debentures is treated as a business expense for the company and is deductible while calculating taxable profits. This tax-deductibility reduces the company’s overall tax liability, making debt financing via debentures more attractive compared to equity financing, where dividends are not tax-deductible. However, the company must comply with tax rules, including the deduction of tax at source (TDS) before paying the interest to debenture holders. This characteristic benefits the company financially but also requires careful compliance to avoid tax penalties or disallowances in future assessments.

  • Legal Obligation

Payment of interest on debentures is a legal obligation under the Companies Act and the terms mentioned in the debenture agreement or trust deed. Failure to pay can lead to legal proceedings, damages, or enforcement of security by debenture trustees. Since debenture holders are creditors, the company is bound by law to fulfill this obligation. This legal enforceability ensures protection for investors but increases the risk for the company if its earnings or liquidity position deteriorates, as non-payment can affect reputation and borrowing capacity.

  • TDS Applicability

Interest on debentures is subject to Tax Deducted at Source (TDS) as per the Income Tax Act. The company must deduct TDS at the prescribed rate before making the payment to debenture holders and deposit it with the government within the stipulated time. Failure to comply can result in penalties, interest charges, or disallowance of the expense for tax purposes. TDS compliance ensures tax collection at the source, providing a steady flow of revenue to the government, while also giving debenture holders credit for the tax deducted in their annual filings.

Journal Entries of Interest on Debentures:

Sr. No.

Transaction

Journal Entry

Explanation

1

Accruing interest on debentures

Interest on Debentures A/c Dr.

  To Debenture holders A/c

Interest is accrued for the period but not yet paid. It is a charge against profit.

2

Payment of interest to debenture holders

Debenture holders A/c Dr.

  To Bank A/c

Payment is made to debenture holders for accrued interest.

3

Recording TDS on interest payable

Interest on Debentures A/c Dr.

  To TDS Payable A/c

  To Debenture holders A/c

When TDS is deducted from interest payable before payment.

4

Payment of interest after TDS deduction

Debenture holders A/c Dr.

TDS Payable A/c Dr.

  To Bank A/c

Payment made to debenture holders after deducting TDS and depositing it to govt.

5

Transfer of interest on debentures to Profit & Loss A/c

Profit & Loss A/c Dr.

  To Interest on Debentures A/c

Since interest is a finance cost, it is transferred to P&L account.

Statutory Provisions regarding Preparation of Financial Statements of Companies as per IND AS-1

IND AS-1, Presentation of Financial Statements, lays down the principles for presenting general-purpose financial statements, ensuring comparability both with the entity’s own prior periods and with other entities. For companies in India, the preparation and presentation of financial statements must comply with the Companies Act, 2013 (particularly Section 129 and Schedule III) and applicable Indian Accounting Standards notified under the Companies (Indian Accounting Standards) Rules, 2015.

Legal Framework under Companies Act, 2013:

Section 129 – Financial Statements

  • Every company must prepare a financial statement for each financial year that:

    1. Gives a true and fair view of its state of affairs,

    2. Complies with accounting standards notified under Section 133, and

    3. Is in the form provided in Schedule III.

  • Financial statements must be laid before the Annual General Meeting (AGM) along with the consolidated financial statements (if applicable).

  • The Board of Directors must approve and authenticate the statements before presentation to shareholders.

Schedule III – Form of Financial Statements:

  • Provides the structure and minimum disclosure requirements for the Balance Sheet, Statement of Profit and Loss, and accompanying notes.

  • Separate formats exist for companies complying with IND AS and those following Accounting Standards (AS).

Objective of IND AS-1:

  • To prescribe a uniform basis for presentation of financial statements.

  • To ensure that the financial statements:

    • Present a true and fair view.

    • Provide relevant, reliable, and comparable information.

    • Enable users to assess the financial position, performance, and cash flows of the entity.

Components of Financial Statements:

A complete set of financial statements as per IND AS-1 includes:

  1. Balance Sheet (Statement of Financial Position) as at the end of the period.

  2. Statement of Profit and Loss – including Other Comprehensive Income (OCI).

  3. Statement of Changes in Equity – showing movements in equity components during the period.

  4. Statement of Cash Flows – prepared as per IND AS-7.

  5. Notes to Accounts – including significant accounting policies and explanatory information.

  6. Comparative Information for the preceding period.

Fundamental Principles under IND AS-1:

a) Fair Presentation and Compliance with IND AS

  • Entities must present financial statements fairly to reflect the economic reality.

  • Full compliance with all applicable IND AS is presumed to achieve fair presentation.

  • In extremely rare cases, where compliance with a requirement would be misleading, departure is allowed — with detailed disclosure of the reasons and the financial impact.

b) Going Concern

  • Management must assess whether the entity is a going concern.

  • If material uncertainties exist that may cast significant doubt, these must be disclosed.

c) Accrual Basis of Accounting

  • Financial statements (except for cash flow information) must be prepared using the accrual basis — recognising transactions when they occur, not when cash is received or paid.

d) Consistency of Presentation

  • Presentation and classification must be consistent from one period to the next unless:

    • A significant change in the nature of operations justifies a new presentation, or

    • A change is required by a new or revised IND AS.

Presentation and Disclosure Requirements:

Materiality and Aggregation

  • Each material item must be presented separately in the financial statements.

  • Similar items may be aggregated if immaterial.

  • Materiality is judged in the context of the financial statements as a whole.

Offsetting

  • Assets and liabilities, or income and expenses, must not be offset unless permitted or required by an IND AS.

Comparative Information

  • Comparative figures must be disclosed for the preceding period for all amounts.

  • Comparative narrative and descriptive information is also required when relevant.

Structure and Content

  • Identification: Each component must be clearly identified with the name of the entity, statement title, reporting date, and currency used.

  • Distinction: Entities must distinguish between current and non-current assets and liabilities unless a liquidity presentation is more relevant.

  • Minimum line items: Schedule III prescribes the minimum line items to be presented on the face of the Balance Sheet and Statement of Profit and Loss.

Notes to Accounts:

The notes must:

  1. Present information about the basis of preparation and specific accounting policies used.

  2. Disclose the information required by IND AS that is not presented elsewhere.

  3. Provide additional information necessary for a fair presentation.

Order of notes typically:

  • Statement of compliance with IND AS.

  • Summary of significant accounting policies.

  • Supporting information for items presented in the financial statements.

  • Other disclosures (e.g., contingent liabilities, commitments, related party transactions).

Statutory Disclosures under IND AS-1 & Companies Act

  • Authorisation date for issue of financial statements.

  • Significant judgments made by management.

  • Key sources of estimation uncertainty.

  • Capital management policies.

  • Dividends proposed or declared.

  • Disclosure of first-time adoption adjustments if applicable.

Responsibilities and Approval:

  • Preparation: Primarily the responsibility of the management.

  • Approval: Board of Directors must approve before submission to auditors.

  • Authentication: Signed by the chairperson of the Board, managing director, CFO, or authorised directors.

  • Filing: Filed with the Registrar of Companies (ROC) along with the Board’s and Auditor’s Reports.

Importance of Compliance:

Non-compliance with IND AS-1 and Companies Act provisions can result in:

  • Legal penalties.

  • Misrepresentation of financial position.

  • Loss of investor confidence.

  • Qualification in the Auditor’s Report.

Calculation of Underwriting Commission (excluding Journal entries)

Underwriting Commission is the payment made by a company to underwriters for guaranteeing the subscription of its shares or debentures. Underwriters assure that if the public does not subscribe fully, they will purchase the unsubscribed portion. This reduces the company’s risk of under-subscription. The commission is usually a fixed percentage of the total value underwritten and is regulated under the Companies Act (commonly up to 5% for shares and 2.5% for debentures). It may be paid in cash, securities, or both, as agreed in the underwriting contract.

Underwriting commission is normally calculated on the amount underwritten (i.e., gross number of shares/debentures underwritten × issue price per share/debenture).

Formula:

Commission = Gross underwritten quantity × Issue price per unit × Commission rate (%)

Notes

  • Issue price = face value + any share premium (use full issue price).

  • Commission rate and mode of payment are set in the underwriting agreement and must comply with Companies Act limits (commonly: up to 5% for shares; 2.5% for debentures — check local law/Articles).

  • Commission is usually payable on gross liability (the number agreed to be underwritten), not on net liability, unless the agreement specifies otherwise.

  • Commission may be paid in cash, by allotment of securities, or partly both, as per agreement.

Worked Example A — Single underwriter (simple)

Company issues 10,000 shares at ₹10 each. Underwriter X underwrites the whole issue at 3% commission.

Commission = 10,000 × ₹10 × 3% = 10,000 × 0.30 = ₹3,000

So Underwriter X’s commission = ₹3,000.

Worked Example B — Multiple underwriters (commission based on gross underwritten)

Company issues 12,000 shares at ₹15 (face ₹10 + premium ₹5). Underwriters: A = 6,000; B = 4,000; C = 2,000. Commission rate = 2%.

Compute for each on gross underwritten:

  • A: 6,000 × ₹15 × 2% = 6,000 × 0.30 = ₹1,800

  • B: 4,000 × ₹15 × 2% = 4,000 × 0.30 = ₹1,200

  • C: 2,000 × ₹15 × 2% = 2,000 × 0.30 = ₹600

Total commission payable = ₹3,600.

(If the agreement specified payment only on shares actually taken by underwriters, recalc on actual taken quantity — always follow contract terms.)

Worked Example C — Mixed situation with firm underwriting (commission still on gross)

Use earlier Full Underwriting Example: Issue = 12,000 shares at ₹10. Underwriters A=6,000, B=4,000, C=2,000. Commission = 2.5%.

Commission per underwriter (on gross):

  • A: 6,000 × 10 × 2.5% = 6,000 × 0.25 = ₹1,500

  • B: 4,000 × 10 × 2.5% = 4,000 × 0.25 = ₹1,000

  • C: 2,000 × 10 × 2.5% = 2,000 × 0.25 = ₹500

Total commission = ₹3,000.

(Here firm underwriting numbers are part of the gross liability — commission calculation is unaffected by whether some of those shares are firm, marked, or unmarked.)

Special practical points:

  • If commission is specified per share instead of percentage, multiply per-share commission × gross underwritten quantity.

  • If issue price varies across tranches, compute commission separately per tranche.

  • If commission is partly in shares, compute cash equivalent of shares (issue price × number of commission-shares) to find cash portion.

  • Always confirm whether the underwriting agreement uses gross liability or actual taken as the base for commission — that clause controls the computation in practice.

Underwriting: Types of Applications, Calculation of Underwriters’ Liability: Firm and Pure Underwriting; Full & Partial Underwriting

Underwriting is a financial service where an underwriter (typically an investment bank or financial institution) guarantees to purchase unsold shares or securities during a public issue if investor demand is insufficient. This ensures the issuing company raises the required capital even in case of under-subscription. Underwriters charge a commission for this risk-bearing service.

  • Marked Applications

Marked applications are those received from the public that bear a distinctive mark, code, or stamp identifying a particular underwriter. These marks are used to determine which applications have been procured by a specific underwriter. The purpose is to allocate credit for subscriptions so that the liability of each underwriter can be calculated accurately. The number of marked applications received is deducted from the underwriter’s gross liability to determine the net liability. This system ensures fair recognition of the efforts of individual underwriters in securing subscriptions and avoids disputes over the allotment of shares among multiple underwriters involved in the same public issue.

  • Unmarked Applications

Unmarked applications are those received from the public without any identifying mark, stamp, or code linking them to a particular underwriter. These applications are considered to have been received directly by the company and not through any specific underwriter. For liability calculation, unmarked applications are usually distributed among all underwriters in proportion to the shares underwritten by each. This method ensures equitable sharing of responsibility for unsubscribed shares and prevents any underwriter from avoiding their commitment. The fair allocation of unmarked applications is important to maintain trust and balance in underwriting agreements involving multiple underwriters.

  • Firm Underwriting Applications

Firm underwriting refers to the commitment by an underwriter to subscribe to a fixed number of shares irrespective of the public subscription level. These applications are made by underwriters in their own name or for their clients, and they are treated separately from public applications. Firm underwriting ensures that a certain minimum subscription is guaranteed, reducing the company’s risk of under-subscription. The shares taken under firm underwriting are in addition to any shares an underwriter must take due to shortfall from public subscriptions. This method provides the issuing company with greater certainty of raising the intended capital from the issue.

  • Pure Underwriting

Pure underwriting refers to an arrangement where an underwriter agrees to take up all the shares or debentures that are not subscribed by the public. There is no separate commitment to purchase a fixed number of shares in advance, unlike firm underwriting. The underwriter’s liability is calculated only after considering the applications received from the public (both marked and unmarked). If the public subscribes fully, the underwriter’s liability becomes nil. This form is purely a safeguard against under-subscription and is often used when the company is confident of good public response but wants to ensure the issue’s success.

Example:

Company issues 10,000 shares at ₹10 each. Underwriter A agrees to underwrite the full issue (pure underwriting).
Public applications received: 8,000 shares (all marked for A).

Calculation:

  • Gross Liability of A = 10,000 shares

  • Less: Public applications (marked) = 8,000 shares

  • Net Liability = 10,000 – 8,000 = 2,000 shares

Answer: A must take 2,000 shares.

  • Full Underwriting

Full underwriting means the entire issue of shares or debentures is underwritten, either by a single underwriter or by multiple underwriters collectively. In this arrangement, underwriters commit to subscribing to any unsubscribed portion of the total issue, ensuring complete capital raising. The company is fully protected against the risk of under-subscription. Full underwriting is common for large public issues, especially Initial Public Offerings (IPOs), where raising the total intended amount is critical. It gives assurance to both the company and investors that the issue will succeed, enhancing market confidence and making it easier to attract potential subscribers.

Example:

Company issues 12,000 shares at ₹10 each.

  • A underwrites 6,000 shares

  • B underwrites 4,000 shares

  • C underwrites 2,000 shares
    Public applications:

  • Marked for A = 4,800 shares

  • Marked for B = 2,500 shares

  • Marked for C = 1,200 shares
    Unmarked = 1,000 shares

Step 1: Distribute unmarked in proportion of shares underwritten:

Total underwritten = 6,000 : 4,000 : 2,000 → Ratio 3:2:1

  • A gets 1,000 × 3/6 = 500

  • B gets 1,000 × 2/6 = 333

  • C gets 1,000 × 1/6 = 167

Step 2: Calculate net liability:

  • A = 6,000 – (4,800 + 500) = 700 shares

  • B = 4,000 – (2,500 + 333) = 1,167 shares

  • C = 2,000 – (1,200 + 167) = 633 shares

Answer:

A must take 700, B 1,167, C 633 shares.

  • Partial Underwriting

Partial underwriting occurs when only a portion of the total issue of shares or debentures is underwritten. The company itself takes the risk for the remaining portion that is not covered by underwriters. This type of underwriting is used when the company expects that part of the issue will be subscribed by the public without underwriting support. Partial underwriting reduces underwriting commission costs, as only part of the issue is covered. However, it increases the company’s risk of under-subscription for the uncovered portion. This method is often used by companies with a good public reputation or small capital requirements.

Example:

Company issues 10,000 shares at ₹10 each.

Underwriter A underwrites 6,000 shares; Company retains risk for remaining 4,000.

Public subscription = 7,500 shares (5,000 marked for A, 2,500 unmarked).

Step 1: Unmarked shares proportion for A:

Unmarked = 2,500 shares

Proportion for A = (6,000 / 10,000) × 2,500 = 1,500 shares

Step 2: Net liability of A:

A’s gross liability = 6,000 shares

Less: Applications received for A = 5,000 + 1,500 = 6,500 shares

Since 6,500 > 6,000, A’s net liability = Nil

Answer:

A has no liability; company must bear any shortage on its own retained portion.

Underwriting Guidelines under Company’s Act

Underwriting, as per the Companies Act, refers to a contractual arrangement where an underwriter agrees to subscribe to the shares or debentures of a company if the public does not subscribe to them fully. This ensures the company receives the required capital for its business needs. Underwriting agreements may be for the whole or a part of the issue and can be made with individuals, firms, or financial institutions. The concept provides security to the issuing company against the risk of under-subscription.

  • Written Agreement Requirement

The Companies Act mandates that underwriting must be backed by a written agreement between the company and the underwriter. This agreement should clearly state the number of shares or debentures underwritten, the underwriting commission, and other terms and conditions. A copy of this agreement must be filed with the Registrar of Companies. The written form ensures legal enforceability, transparency, and protection for both parties. Without such documentation, any oral agreement will not be considered valid under the law and cannot be enforced in a court of law.

  • Underwriting Commission Limit

The Companies Act places a maximum limit on the underwriting commission a company can pay. For shares, the maximum commission is 5% of the issue price, and for debentures, it is 2.5% of the issue price, unless otherwise specified by the Articles of Association. The payment must be disclosed in the prospectus and should not exceed the rate mentioned in the Articles. This provision ensures that the company’s funds are not excessively drained in commissions and that the cost of raising capital remains reasonable and transparent.

  • Disclosure in Prospectus

Full disclosure of the underwriting arrangements is compulsory in the company’s prospectus under the Companies Act. The disclosure must include the name of the underwriter, the number of shares or debentures underwritten, and the commission payable. This transparency helps potential investors evaluate the security of the issue and the extent of third-party backing. It also reduces the risk of misrepresentation or fraud. Non-disclosure can make the company liable for penalties and can also be treated as a violation of investor protection norms enforced by regulatory authorities like SEBI.

  • Obligation to Take Up Unsubscribed Shares

Underwriters are legally obligated to take up the number of shares or debentures they have agreed to underwrite if the public fails to subscribe to them fully. This obligation ensures the company’s capital-raising goals are met without financial shortfall. The underwriter must make the payment within the stipulated time frame as agreed in the underwriting contract. Failure to do so may result in legal action by the company to enforce the agreement. This provision acts as the backbone of the underwriting system, ensuring reliability and trust between the issuer and the underwriter.

  • Payment of Underwriting Commission

The underwriting commission can only be paid if it is authorized by the company’s Articles of Association and approved by the board of directors. Payment must be made in cash, by the allotment of shares or debentures, or partly in both, as stated in the agreement. The commission cannot exceed the prescribed limits and must be paid only after the shares or debentures have been allotted. These conditions prevent misuse of funds, ensure fairness, and maintain the financial discipline of the company in compliance with statutory requirements under the Companies Act provisions.

  • Prohibition of Excess Allotment to Underwriters

Underwriters cannot be allotted more shares or debentures than what is required under the underwriting agreement, except when they voluntarily apply for more as part of the public issue. Allotting excess shares without proper application is considered a breach of the Companies Act. This restriction ensures fairness to other investors, prevents market manipulation, and maintains the credibility of the share allotment process. By following this guideline, companies avoid preferential treatment and uphold principles of equity and transparency in capital market transactions.

  • SEBI Regulations and Companies Act Compliance

Although the Companies Act governs underwriting, companies must also comply with Securities and Exchange Board of India (SEBI) regulations. SEBI requires that underwriters be registered and meet specific capital adequacy norms. They must maintain records of their underwriting obligations, fulfill financial commitments promptly, and avoid conflicts of interest. This dual compliance ensures investor protection, enhances market stability, and improves corporate governance. Non-compliance with either set of rules can result in penalties, suspension from capital market activities, and legal consequences for both the company and the underwriter.

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