Oversubscription and Forfeiture of Shares
The ownership of a firm or a company is divided into several units known as shares. Shares tend to represent a part of the company and hence, the shareholder is regarded as a part owner. These shares are issued by the respective company itself. However, if there is a non-payment of the call money, there occurs forfeiture of shares and reissue of shares.
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If a public company invites people for applying and subscribing to its shares, then the company has to issue a Prospectus. Hence, a Prospectus is known as an advertisement carried out by the company for applying for its shares. It comes with a share application which is attached to it. Therefore, if the company decides to issue shares to the public, there can be basically three types of possibilities.
1. Full Subscription:
Full subscription occurs if the number of the total shares that the company offers to the public and the total number of shares for which the applications are received are the same.
2. Under Subscription:
Under subscription happens if the number of the total shares that the company offers to the public is higher when compared to the total number of shares for which the applications are received. In this situation, the company can allot shares only if it receives Minimum Subscription.
Minimum Subscription refers to 90% of the total number of shares which a company offers to the public. If the company does not receive a Minimum Subscription, then it needs to refund the application amount to the applicants.
3.Over Subscription:
Over Subscription occurs when the total number of the shares which the company offers to the public is lesser when compared to the total shares for which the applications are received. In this situation, the company would decide to make a pro-rata allotment to the applicants of the shares.
Forfeiture of Shares Issued at Discount
In simpler words, a share refers to a portion of a bigger thing. Hence, when it comes to the share market, share refers to a small proportion of the total capital amount of the businesses. Shares tend to form the major source of finance of any given company.
Shares also tend to tempt the investors since they give huge amounts of profits to them, which is so unlikely the case in fixed rate return on debentures. There are several prices or ways in which the company can issue its shares such as at discount, at par, and at premium.
Issuing the shares at a discounted rate means that the issue of the shares is at a price which is lesser than its face value. Consider, for example, that the company issues one share of Rs. 100 at a discounted rate of Rs. 90. Then (Rs. 100 - Rs. 90) Rs. 10 here refers to the amount of discount offered.
This refers to nothing but the loss of the company. Also, it is important to remember that if the issue of the share is below its Market Price, or MP, but it is above the Face Value or FV, then it is not regarded as an issue of share at a discounted price. The issue of the shares at a discounted rate would always be below its Nominal Value, or NV. The company would debit it to a different account which is known as the Discount on Issue of Share.
Forfeited Shares Issued at Premium
When the shares are issued at premium, it means that the issue of shares is at a higher price than its face value. In simpler words, premium refers to the amount which is over and above the face value of the share.
Generally, if a company is well-managed, financially strong and has a very good reputation in the market, would tend to issue their shares at a premium amount. Consider, for example, that a company issues a share having face value as Rs. 10 at Rs. 11. Then, this raised amount of Re. 1 is known as 10% premium.
The company can also call the amount of premium from the shareholders or the applicants at any given stage,which can be at the time of allotment, application, or calls. However, generally a company tends to call the premium amount during the time of allotment.
FAQs on Issue Forfeiture Reissue of Shares
1. What is the complete process of issue, forfeiture, and reissue of shares?
The process involves three main stages for a company:
- Issue of Shares: A company offers its shares to the public for subscription. Investors apply for these shares, and the company allots them, collecting the money in instalments like application, allotment, and calls.
- Forfeiture of Shares: If a shareholder fails to pay one or more instalments (e.g., call money), the company can, after giving proper legal notice, cancel their allotted shares. The amount already paid by the defaulting shareholder is then forfeited by the company.
- Reissue of Shares: The company can then sell these forfeited shares to another buyer. These shares can be reissued at par, premium, or even at a discount, subject to specific legal and accounting conditions.
2. What is the difference between issuing shares at par, at a premium, and at a discount?
These terms describe the relationship between a share's issue price and its face value:
- Issue at Par: This is when a share is issued at a price exactly equal to its nominal or face value. For example, a share with a face value of ₹10 is issued for ₹10.
- Issue at Premium: This occurs when a share is issued at a price higher than its face value. For instance, a ₹10 share issued for ₹12. The extra ₹2 is the premium, which is credited to the Securities Premium Account.
- Issue at Discount: This is when a share is issued for a price lower than its face value. As per the Companies Act, 2013, a company is prohibited from issuing fresh shares at a discount.
3. What happens in a case of oversubscription, and what is pro-rata allotment?
Oversubscription occurs when a company receives applications for more shares than it has offered to the public. Since the company cannot allot more shares than offered, it typically deals with this situation by making a pro-rata allotment. Pro-rata allotment means that every applicant is allotted a smaller number of shares in proportion to the number of shares they applied for. For example, if a company offered 1,00,000 shares but received applications for 1,50,000, it might allot shares in a 2:3 ratio (2 shares allotted for every 3 applied for).
4. What are the legal conditions a company must meet before it can forfeit shares for non-payment?
A company must strictly follow the procedures laid out in its Articles of Association (AoA). The standard legal procedure involves these key steps:
- The company must first identify a shareholder who has defaulted on the payment of a valid call.
- A formal notice must be sent to the defaulting shareholder, demanding payment of the unpaid amount plus any applicable interest.
- This notice must give the shareholder a minimum of 14 days from the date of the notice to make the payment.
- Only if the shareholder fails to pay within this specified period can the Board of Directors pass a resolution to formally forfeit the shares.
5. What is the accounting treatment for the forfeiture of shares originally issued at a premium?
The accounting treatment depends on whether the premium amount was collected before the forfeiture. There are two scenarios:
- If the premium has been received: The Securities Premium Account is not affected (i.e., not debited) at the time of forfeiture. Once collected, the premium amount is a capital receipt and cannot be cancelled.
- If the premium has NOT been received: The Securities Premium Account must be debited at the time of forfeiture. This is done to cancel the premium that was earlier recorded as due but was never actually paid by the shareholder.
6. How is the maximum permissible discount on the reissue of forfeited shares calculated?
The maximum discount a company can offer on the reissue of forfeited shares is limited to the amount that was already paid by the original shareholder before forfeiture. This amount is held in the Shares Forfeited Account. Therefore, the reissue price cannot be less than the amount that was unpaid on the shares. For example, if a shareholder paid ₹6 on a ₹10 share before defaulting, the company can reissue this share for a minimum of ₹4, allowing for a maximum discount of ₹6.
7. What happens to the balance in the 'Shares Forfeited Account' after the shares are reissued?
After the forfeited shares are successfully reissued, any remaining credit balance in the 'Shares Forfeited Account' (related to the reissued shares) is a capital profit for the company. This profit must be transferred to a statutory reserve called the Capital Reserve Account. For instance, if ₹6,000 was forfeited on 1,000 shares and they were reissued at a discount of ₹1,000, the remaining ₹5,000 is transferred from the Shares Forfeited Account to the Capital Reserve.
8. Why can a company not issue new shares at a discount, but can reissue forfeited shares at a discount?
This distinction is based on the Companies Act, 2013, and the nature of the transaction.
- New Shares: Section 53 of the Act prohibits issuing fresh shares at a discount to prevent the dilution of the company's capital and to protect the interests of creditors and existing shareholders.
- Reissued Shares: A reissue is not a fresh issue of shares; it's the sale of existing shares that the company reacquired through forfeiture. The discount on reissue is not a loss but an application of the amount already collected from the original owner. The total amount received on the share (from both the original and new shareholder) will always be at least equal to its face value, ensuring no actual loss to the company's capital.
