Corporate Accounting (COM3CJ202) — Module 1: Accounting of Shares and Debentures

• MODULE I: ACCOUNTING OF SHARES AND DEBENTURES Corporate Financial Accounting Framework & Regulatory Environment Corporate accounting in India is governed by the Companies Act, 2013, the Companies (Specification of Definitions Details) Rules, 2014, the Companies (Share Capital and Debentures) Rules, 2014, and the Indian Accounting Standards (Ind AS) formulated in convergence with International Financial Reporting Standards (IFRS). A joint-stock corporate enterprise raises long-term equity and debt capital through the issue of financial securities. The accounting treatment of share capital and loan capital (debentures) constitutes the bedrock of corporate financial reporting, dictating how equity infusions, shareholder obligations, calls, forfeitures, borrowings, and balance sheet disclosures under Schedule III Division II / Division I are presented to investors, regulators, and market participants.

1. Concept, Nature, and Classification of Share Capital Under Section 2(84) of the Companies Act, 2013, a "share" is defined as a share in the share capital of a company and includes stock. The capital raised by a company through the issue of shares is termed its Share Capital. Unlike a sole proprietorship or partnership firm where capital is undivided and personal, corporate share capital is fragmented into distinct units of equal nominal value (face value, such as INR 1, INR 2, INR 5, or INR 10 per share).

STATUTORY HIERARCHY OF SHARE CAPITAL (SCHEDULE III DISCLOSURE) Balance Sheet Classification

1. Authorised /: Nominal / Registered Capital (Sec 2(8)) The maximum amount of share capital that a company is legally authorized by its Memorandum of Association (Capital Clause) to raise from the public. It cannot be exceeded without formally amending the Memorandum through an ordinary resolution passed at a general meeting.
2. Issued: Capital (Section 2(50)) Such part of the authorized capital which is issued by the company from time to time for public subscription, private placement, or consideration other than cash. It can never exceed authorized capital.
3. Subscribed: Capital (Section 2(86)) Such part of the issued capital which is for the time being subscribed by the members.

Disclosed under Schedule III as:

• Subscribed and fully paid-up: Entire face value called and received.
• Subscribed but not fully paid-up: Shares where company has called up part, or calls in arrears exist.

1. Called-up &: Paid-up Capital (Sec 2(15) & 2(64))

• Called-up Capital: That portion of subscribed capital which shareholders have been demanded to pay.
• Paid-up Capital: The actual aggregate amount credited as paid-up on shares issued, computed as: Paid-up Capital = Called-up Capital − Calls in Arrears.

Reserve Capital vs. Capital Reserve (Critical Distinction) Reserve Capital (Section 65): A company may, by special resolution, determine that any portion of its uncalled share capital shall not be capable of being called up, except in the event and for the purposes of the company being wound up. It is purely contingent, cannot be charged during the company's life, and requires no balance sheet accounting entry.

• Capital Reserve: A reserve created out of capital profits (e.g., profit on reissue of forfeited shares, profit on sale of fixed assets, capital redemption reserve). It is an actual realized balance sheet reserve and cannot normally be distributed as cash dividends.

1. Categories of: Shares under Section 43 of the Companies Act, 2013 Under Section 43 of the Companies Act, 2013, the share capital of a company limited by shares shall be of two kinds only:

A. Equity Share Capital (Common Stock) Equity share capital means all share capital which is not preference share capital. Equity shareholders are the residual owners, bearing the ultimate entrepreneurial risk and rewards. They possess voting rights on all resolutions placed before the company (Section 47(1)). Under Section 43(a)(ii), equity shares can be issued with:

• Ordinary Voting Rights: One share, one vote.
• Differential Rights (DVRs): Differential rights as to dividend, voting, or otherwise, subject to compliance with Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.

B. Preference Share Capital (Preferred Stock) Preference share capital carries two cumulative statutory preferential rights:

1. Preferential: Dividend: A prior right to payment of dividend at a fixed rate or fixed amount before any dividend is paid to equity shareholders.
2. Preferential: Repayment of Capital: A prior right to return of paid-up capital upon the winding up or liquidation of the company before equity shareholders receive any surplus.

Under Section 55, no company limited by shares can issue irredeemable preference shares; maximum redemption tenure is 20 years (30 years for specified infrastructure projects).

Type of Preference Shares Statutory Nature & Accounting Treatment Cumulative vs. NonCumulative

• Cumulative: Unpaid arrears of dividend accumulate year after year and must be cleared in full before equity dividends are declared. (All preference shares are presumed cumulative unless Articles state otherwise). Non-Cumulative: Dividends lapse if profits are insufficient in any given financial year.

Participating vs. NonParticipating

• Participating: In addition to the fixed preference dividend, shares carry a right to participate in surplus profits remaining after equity dividend of a specified threshold.
• Non-Participating: Entitled strictly to the fixed contractual dividend rate only.

Convertible vs. NonConvertible

• Convertible: Carry an option or mandate to be converted into equity shares after a specified period on predetermined terms. Non-Convertible: Cannot be converted into equity; repaid in cash upon maturity.

Redeemable Preference Shares (Sec 55) Must be redeemed within a maximum period not exceeding 20 years from the date of issue out of distributable profits or proceeds of a fresh issue of shares.

Irredeemable preference shares are prohibited in India.

1. Issue of: Shares: Modalities, Minimum Subscription & Pricing Terms A public company may issue shares through a Public Offer (Initial Public Offer – IPO, or Further Public Offer – FPO), Private Placement (Section 42), Rights Issue (Section 62(1)(a)), or Bonus Issue (Section 63).

Statutory Rule on Minimum Subscription (Section 39 & SEBI ICDR Regulations) Under Section 39(1) of the Companies Act, 2013, no allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sum payable on application for the amount so stated has been paid to and received by the company by cheque or other instrument.

Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, minimum subscription for public issues is fixed at 90% of the offer size. If the minimum subscription is not received within the prescribed statutory period (30 days from prospectus issue), the entire application money received must be refunded within 15 days from the closure of the issue. If delayed beyond 15 days, the directors are jointly and severally liable to repay the money with interest at 15% per annum (Rule 11).

• PRICING OF SHARES: PAR, PREMIUM, AND DISCOUNT Pricing Directives

1. Issue at: Par Shares are issued at an issue price exactly equal to their nominal (face) value. For example, a share of face value INR 10 is offered to subscribers at INR 10. The entire proceeds are credited to Share Capital Account.
2. Issue at: Premium (Section 52) Shares are issued at a price higher than their face value.

For example, a share of face value INR 10 is issued at INR 25; the excess INR 15 represents Securities Premium, credited to a distinct Securities Premium Account.

1. Issue at: Discount (Section 53) Under Section 53, a company is strictly prohibited from issuing shares at a discount.

Any share issued at a discount is void ab initio.

• Sole Exception: Issue of Sweat Equity Shares under Section 54.

1. Statutory: Utilization of Securities Premium (Section 52) Securities premium does not represent revenue profit; it is a capital receipt. Under Section 52(2) of the Companies Act, 2013, the balance in the Securities Premium Account may be utilized only for the following statutory purposes:

Statutory Permitted Uses (Section 52(2))

• Bonus Shares: Towards the issue of unissued shares of the company to the members as fully paid bonus shares.
• Preliminary Expenses: In writing off the preliminary expenses of the company.
• Expenses of Issue: In writing off expenses of, or the commission paid or discount allowed on, any issue of shares or debentures.
• Premium on Redemption: In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
• Buy-Back: For the purchase of its own shares or other securities under Section 68 (Buyback of shares).

Restricted Class of Companies (Section 52(3)) For prescribed classes of companies whose financial statements comply with the Accounting Standards under Section 133 (i.e., Ind AS compliant companies), the application of securities premium is further restricted. Premium cannot be used to write off preliminary expenses or provide premium on redemption of preference shares; it can only be used for:

Paying up unissued shares to be issued to members as fully paid bonus shares;

Writing off commission or discount allowed on issue of equity shares; and Buy-back of shares under Section 68.

1. Accounting: Entries for Issue of Shares for Cash Share capital is normally collected in instalments: Application, Allotment, First Call, and Final Call. As per Section 39(2), application money must be at least 5% of the nominal value (SEBI stipulates minimum 25% of issue price).

STANDARD JOURNAL ENTRY SEQUENCE FOR ISSUE OF SHARES AT PREMIUM ========================================================================================

1. ON RECEIPT OF APPLICATION MONEY: Bank Account Dr. [Actual money received] To Share Application Account [Application money] (Being application money received on X shares @ INR Y per share)

2. ON ALLOTMENT & TRANSFER TO CAPITAL (Par + Premium on Allotment):

Share Application Account Dr. [App money transferred] Share Allotment Account Dr. [Allotment money due] To Share Capital Account [Face value due] To Securities Premium Account [Premium component] (Being application money transferred and allotment due on X shares)

3. ON RECEIPT OF ALLOTMENT MONEY: Bank Account Dr. [Net money received] To Share Allotment Account [Allotment received] (Being allotment money received)

4. ON MAKING FIRST CALL: Share First Call Account Dr. [Call amount due] To Share Capital Account [Call amount due] (Being first call money due on X shares @ INR Z per share)

5. ON RECEIPT OF FIRST CALL MONEY: Bank Account Dr. [Actual call money] To Share First Call Account [Call received] (Being first call money received) ========================================================================================

1. Oversubscription and: Pro-Rata Allotment Architecture When the number of shares applied for exceeds the number of shares offered for subscription, the issue is said to be oversubscribed. In such cases, the directors cannot allot more shares than offered. The company resolves oversubscription via three methods:

• Total Rejection of Excess Applications: Certain applicants receive zero shares; their application money is refunded in full.
• Full Allotment to Selected Applicants: Certain applicants receive 100% of the shares applied for.
• Pro-Rata Allotment: Allotment is made proportionately among applicants. For instance, if 2,00,000 shares are applied for and 1,00,000 shares are available, each applicant is allotted 1 share for every 2 shares applied (ratio 1:2).

Treatment of Excess Application Money in Pro-Rata Allotment The surplus application money paid by applicants on shares not allotted to them is retained and adjusted against amounts due on Share Allotment. Any further surplus remaining after fully adjusting allotment may be refunded, or, if authorized by the Articles and agreed by applicants, credited to Calls in Advance Account to satisfy future calls.

1. Calls in: Arrears and Calls in Advance Calls in Arrears (Default by Shareholder) When a shareholder fails to pay the allotment or call money due within the stipulated time, the unpaid amount is termed Calls in Arrears.

• Accounting Treatment: Either transferred to a separate "Calls in Arrears Account" [Dr. Calls in Arrears, Cr. Share Call A/c] or retained in the respective Call Account.
• Table F Interest: The Board of Directors may charge interest on calls in arrears from the due date to the actual date of payment at a rate not exceeding 10% per annum (Table F Clause 13). The Board has discretionary power to waive interest.
• Schedule III Presentation: Deducted from Calledup Capital under Subscribed Capital on the face of the Balance Sheet.

Calls in Advance (Prepayment by Shareholder) A company may, if authorized by its Articles, accept from any member all or any part of the money uncalled and unpaid upon any shares held by him (Section 50).

• Accounting Treatment: Credited to a separate "Calls in Advance Account" [Dr. Bank A/c, Cr. Calls in Advance A/c]. Adjusted against future calls as and when they fall due.
• Table F Interest: Under Table F Clause 18, the company must pay interest on calls in advance at an agreed rate, not exceeding 12% per annum.

Interest is a statutory charge against profits (payable even if there are zero profits).

• No Voting Rights: Member is not entitled to any voting rights in respect of money paid in advance (Section 50(2)). Disclosed as a Current Liability in Balance Sheet.

1. Forfeiture of: Shares: Legal Doctrine & Accounting Treatment Forfeiture of shares is the statutory cancellation of membership and seizure of shares of a defaulting shareholder due to non-payment of allotment money, call money, or interest.

STATUTORY PREREQUISITES FOR VALID FORFEITURE Articles & Table F Rules

1. Express: Authority in Articles The power to forfeit shares must be expressly provided in the Articles of Association. If Articles are silent, Table F provisions govern.

Any forfeiture without express authority is ultra vires and invalid.

2. Mandatory 14 Days' Prior Notice Under Table F Clause 28, a notice must be served on the defaulting member requiring payment of the unpaid call together with any accrued interest. The notice must specify a date not less than 14 days from service, stating that on default, shares will be liable to forfeiture.

1. Formal: Board Resolution The forfeiture must be declared by a formal resolution passed at a meeting of the Board of Directors. The forfeiture takes effect from the date of the resolution.
2. Bonafide: Exercise of Power The power of forfeiture is a fiduciary power to be exercised solely in good faith for the benefit of the company. It cannot be used collusively to relieve a shareholder from his liability.

Accounting Principles for Forfeiture Upon forfeiture:

The shareholder's name is struck off the Register of Members.

Share Capital Account is debited with the amount CALLED UP on the forfeited shares till the date of forfeiture (not the face value, unless fully called up).

The respective unpaid Call Accounts (or Calls in Arrears Account) are credited to cancel the outstanding debt.

The amount actually paid up by the shareholder (excluding securities premium already received) is transferred to Shares Forfeited Account.

Treatment of Securities Premium on Forfeiture (Section 52 Rule)

• Case A: Where Securities Premium has ALREADY BEEN RECEIVED:

Under Section 52, once securities premium is lawfully collected, it cannot be written back or debited upon subsequent forfeiture. The entry debits Share Capital with the called-up face value only, credits unpaid calls, and credits Shares Forfeited Account with the face value portion received.

• Case B: Where Securities Premium has NOT BEEN RECEIVED:

If the shareholder defaulted on the instalment that included premium, the premium was previously debited to Allotment and credited to Securities Premium. Because it remains uncollected, Securities Premium Account must be debited to cancel the unrealized premium credit.

1. Reissue of: Forfeited Shares & Transfer to Capital Reserve Forfeited shares become the property of the company and may be sold or reissued by the Board of Directors at par, premium, or discount (Table F Clause 31). Reissue of forfeited shares is not an original issue of shares; hence, the Section 53 prohibition against issuing shares at a discount does not apply.

Maximum Permissible Discount on Reissue The maximum discount that can be allowed on the reissue of forfeited shares cannot exceed the amount already forfeited (i.e., previously received on those specific shares) and standing to the credit of Shares Forfeited Account.

• Expressed conversely: Minimum Reissue Price = Face Value − Amount Already Forfeited per share.

JOURNAL ENTRIES FOR REISSUE AND CAPITAL RESERVE TRANSFER ========================================================================================

1. ON REISSUE OF FORFEITED SHARES AT DISCOUNT: Bank Account Dr. [Actual money received] Shares Forfeited Account Dr. [Discount allowed on reissue] To Share Capital Account [Paid-up value credited] (Being reissue of X forfeited shares @ INR Y per share credited as fully paid-up)

2. ON TRANSFER OF NET SURPLUS TO CAPITAL RESERVE: Shares Forfeited Account Dr. [Net capital profit] To Capital Reserve Account [Capital profit transferred] (Being net gain on reissue of forfeited shares transferred to Capital Reserve Account)

• CRITICAL PROPORTIONAL RULE: If only a fraction of forfeited shares are reissued, only the proportional profit on the shares ACTUALLY REISSUED is transferred to Capital Reserve.

The balance relating to unissued forfeited shares remains in the Shares Forfeited Account and is added to Subscribed Capital in the Balance Sheet. ========================================================================================

1. Comprehensive: Accounting for Debentures Under Section 2(30) of the Companies Act, 2013, a "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. A debenture represents a formalized certificate of loan capital issued under the common seal or official signature of the corporate body.

Basis of Comparison Shares (Equity Capital) Debentures (Debt Capital) Legal Status of Holder Shareholders are owners of the company. Debenture holders are secured or unsecured creditors.

• Nature of Return Dividend: an appropriation of profit; payable solely when divisible profits exist and directors recommend.
• Interest: a charge against profits; payable mandatorily at a fixed coupon rate irrespective of profit or loss.

Voting Rights (Section 47) Possess voting rights on general company resolutions.

Under Section 71(2), no company shall issue any debentures carrying voting rights.

Security / Mortgage Cannot be secured by any charge on company assets.

Usually secured by a fixed or floating charge on corporate assets through a Debenture Trust Deed.

Discount on Issue Strictly prohibited under Section 53. Permissible without restriction; can be legally issued at a discount.

Priority on Liquidation Repaid last, after all outside creditors and preference shares.

Prior repayment priority over all equity and preference shareholders.

1. Classification of: Debentures
2. Security: Criterion

• Secured / Mortgage Debentures: Secured by a fixed charge on specific identified immovable assets or a floating charge on circulating assets. If company defaults, Debenture Trustee can sell assets to recover debt.
• Unsecured / Naked Debentures: Carry no charge on company assets; holders rank as ordinary general unsecured creditors.

1. Tenure /: Redemption Criterion

• Redeemable Debentures: Issued for a specified maturity tenure (normally maximum 10 years, or up to 30 years for infrastructure companies under Section 71), repayable in lump sum or instalments.
• Irredeemable / Perpetual Debentures: Repayable only upon winding up or at the distant option of the company.

1. Convertibility: Criterion

• Non-Convertible Debentures (NCDs): Cannot be converted into equity shares; repaid in cash upon maturity.
• Partly Convertible Debentures (PCDs): A specified percentage converts into equity shares, balance redeemed in cash.
• Fully Convertible Debentures (FCDs): The entire face value converts into equity shares on predetermined terms.

1. Registration: Criterion

• Registered Debentures: Payable to the registered holder whose name, address, and holding details are entered in the Register of Debenture Holders.

Transferable only through a formal transfer deed.

• Bearer Debentures: Negotiable instruments payable to the bearer. Transferable by mere physical delivery without registration. 12. Issue of Debentures: Modalities and Special Terms Debentures may be issued: (1) for cash; (2) for consideration other than cash; and (3) as collateral security.

Issue of Debentures as Collateral Security Collateral security means subsidiary or secondary security pledged in addition to the principal security when a company borrows loans from banks or financial institutions. If the company defaults, the lender first enforces the primary security; if the recovery is deficient, the lender exercises its rights as a debenture holder.

• Accounting Methods: Method 1 (No Journal Entry): No accounting entry is passed in the books of account. The loan is disclosed under Long-term Borrowings in the Balance Sheet, and a note is appended stating that the loan is secured by the issue of X debentures as collateral security.

Method 2 (Debenture Suspense Account Method): An entry is formally passed:

Debenture Suspense Account Dr. To X% Debentures Account.

In the Balance Sheet, X% Debentures is shown under Long-term Borrowings, and Debenture Suspense Account is deducted therefrom, resulting in a nil net extension. 13. Accounting for Issue of Debentures with Terms of Redemption (The Six Cases) Under the conservatism (prudence) convention of accounting, anticipated future losses must be recognized immediately at the time of issue, whereas anticipated gains are ignored. Therefore, when debentures are issued with a condition that they will be redeemed at a premium, the premium payable on redemption is a capital loss recognized immediately upon issue.

Case Description Journal Entry on Issue Balance Sheet Disclosure Case 1: Issued at Par,

Redeemable at Par Bank A/c Dr. To Debenture Application & Allotment A/c Debenture App & Allotment A/c Dr.

To X% Debentures A/c X% Debentures shown at face value under Long-term Borrowings.

Case 2: Issued at Discount, Redeemable at Par Debenture App & Allotment A/c Dr.

Discount on Issue of Debentures Dr. To X% Debentures A/c Discount is unamortized loss; debentures shown at full face value under Long-term Borrowings.

Case 3: Issued at Premium, Redeemable at Par Debenture App & Allotment A/c Dr.

To X% Debentures A/c To Securities Premium A/c Securities Premium shown under Reserves & Surplus;

Debentures under Long-term Borrowings. Case 4: Issued at Par,

Redeemable at Premium Debenture App & Allotment A/c Dr.

Loss on Issue of Debentures Dr. To X% Debentures A/c To Premium on Redemption A/c Loss on Issue written off over tenure. Premium on Redemption shown under Other Long-term Liabilities.

Case 5: Issued at Discount, Redeemable at Premium Debenture App & Allotment A/c Dr.

Loss on Issue of Debentures Dr. (Total of Disc + Prem) To X% Debentures A/c To Premium on Redemption A/c Combined loss debited to Loss on Issue of Debentures Account; Premium on Redemption shown as Longterm Liability.

Case 6: Issued at Premium, Redeemable at Premium Debenture App & Allotment A/c Dr.

Loss on Issue of Debentures Dr. (Redemption Premium) To X% Debentures A/c To Securities Premium A/c (Issue Premium) To Premium on Redemption A/c Issue premium credited to Securities Premium;

Redemption premium loss recognized and credited to Premium on Redemption. 14. Writing Off Discount / Loss on Issue of Debentures Discount or Loss on Issue of Debentures is a fictitious asset / capital loss. Under circular instructions and Section 52(2)(c) of the Companies Act, 2013, it may be written off against the Securities Premium Account or amortized against the Statement of Profit and Loss over the tenure of the debentures using two methods:

Fixed Instalment Method (Equal Amortization): Used when debentures are redeemable in a lump sum at the end of a specified term (e.g., after 5 years). The total loss is divided equally by the number of years.

Fluctuating Instalment Method (Ratio of Debentures Outstanding): Used when debentures are redeemed by annual drawings or instalments. The loss is written off annually in the ratio of the debenture face value utilized during each respective year. 15. Financial Statement Presentation under Schedule III of the Companies Act, 2013 Under Part I of Schedule III to the Companies Act, 2013, Share Capital and Debentures must be disclosed with strict adherence to statutory note requirements:

SCHEDULE III BALANCE SHEET LAYOUT EXCERPT Statutory Reporting Particulars Note No. Amount (INR) I. EQUITY AND LIABILITIES

1. Shareholders' Funds (a) Share Capital 1 XXX (b) Reserves and Surplus (includes Securities Premium,

Capital Reserve) 2 XXX

1. Non-Current: Liabilities (a) Long-Term Borrowings (includes X% Debentures) 3 XXX (b) Other Long-Term Liabilities (Premium on Redemption of Debentures) 4 XXX
2. Current: Liabilities (a) Other Current Liabilities (Calls in Advance, Current Maturities of Long-term Debt) 5 XXX