Process of Issue of shares and its related Concepts

Initial Public Offering (IPO):

The whole Company Accounting starts with this IPO.  What happens is, when a private company decides to convert itself into a public limited company to get listed in the stock market so that it can raise its capital for the expansion of its business, the company engages in the task of IPO. Here the company first time gets confronted with the general public by the way of prospectus. What is prospectus?    Listen, the company is going to take money from public and nobody will give their money to anyone unless they have the surety of profitable return of their investment. This prospectus is the document that tells everything about the company’s past performance, its business, its sales, its average profits, its reserves and many more things. After reading this prospectus thoroughly, if public get some surety or security about their return they move further, otherwise as we all know they won’t applied for it because they don’t have legal obligation to apply for that company, mind it! It’s just an offer from the company’s side to the general public.

Share Capital of Company:

But the task of IPO is not so easy. First the members of that company have to talk with registrar to make their Authorized Capital—It is the maximum limit of a company to issue its share in the market. It means the company is authorized to have maximum that much of share capital in its Balance sheet. After having authorized capital clause in its memorandum of association, company decides how much to issue or offer shares in that IPO from that authorized capital, it’s called Issued Capital. From that issued capital, general public applied for certain amount of shares it is called Subscribed Capital. From that subscribed capital, company makes calls to demand money for shares people (shareholders) have applied for, it’s known as Called Up Capital. From that called up capital, people paid certain amount of money it’s known as Paid up Capital. This was the whole concept of share capital of the Company.

Now after being impressed by the prospectus of the company, general public applies for the shares within a specific time limit. This share is a legal document which says that the person has made some contribution in the share capital of the company and he has proportionate share in that share capital. It forms the basis of ownership in that company. The fixed value of a share is printed on the share certificate; it is called the Face value or Nominal Value of Shares.

Suppose, general people have applied more than the shares intended by the company to be issued in this IPO then company would refund the excess money to the public. At last company would allot the required number of shares (called issue share) to the general public (called shareholders).

EXAMPLES:

 

As I have told you earlier also, we never understand theoretical part unless we look at some practical examples for it—so here it is:

Suppose, a company XYZ ltd has authorized capital of Rs 10000000; each share of the company has face value of Rs 10 each. Here the number of authorize shares are 10000000/10=1000000.

Now company has decided to issue 500000 shares in IPO. So the issued capital would be 500000*10=Rs 5000000.

After looking a prospectus, general public applies for 600000 shares and thus they paid Rs 6000000 as the face value of each share was Rs 10 and company issues share at par and allow the public to pay full money with application. So the subscribed capital would be Rs 6000000 but company has already decided to issue not more than 500000 shares so they would refund the excess money of 100000 shares multiply by Rs 10 so total Rs 1000000 and the subscribed capital would be equal to issued capital Rs 5000000

Here suppose, instead of 600000 shares, public subscribe 450000 shares ---then the subscribed capital of the company would be 450000*10=Rs 4500000.  

Now suppose, the company has decided to not take whole amount of money at the time of application but to allow public to give money in installment and the terms of installment is as follows:

·         At the time of application Rs 2 on each share applied for.

·         In the beginning of second quarter, Rs 4 on allotment money.

·         In the beginning of third quarter, Rs 2 on 1^st call money.

·          In the beginning of fourth quarter, Rs 2 on Final call.

Now in the beginning of third quarter the company will say our called up capital is Rs8 *450000=Rs 3600000 and paid capital is also Rs 3600000 if shareholders have paid in full otherwise after deducting that amount would be the paid up capital.

 

Points to be remembered that:

·         When a company issues share at face value it will be “Issue at par”

·         When a company issues share at price more than face value it will be “Issue at premium”

·         When a company issues share at price less than face value, it will be “Issue at discount”

 

This was all about the process of issue of shares and related concepts. I've tried my best to make you understand this concepts; If you have any question regarding this lecture, feel free to ask me in the comment box below.