Accounting terms

share capital and others……

 Types of Company
• Private
– Minimum Capital of Rs. 100000
– 2 to 200 members/owners
– No public issue allowed
• Public company
– Minimum capital of Rs. 500000
– 7 to unlimited shareholders
– Public issue through prospectus
• One person company
– Allowed since 2013

• Dormant company
– Registered for future project
– No significant accounting transactions
• Holding company
– Company which has one or more subsidiaries

• Subsidiary company
– More than half of the capital and control of BOD
is with holding company
• Government company
– At least 51% shares with the central and/or state
government
 Registering a company
• Promoter getting an idea
• Filing documents with ROC
• Getting incorporation certificate (Pvt. Co.
starts immediately after this)
• Issuing prospectus (IPO)
• Commencing business
 Important documents
• Memorandum of association (MOA)
– Name, HO address, Capital requirement, objective
etc.
• Articles of Association
– Internal functioning
– Meetings, agenda, notices etc.
 Share Capital

• Authorized capital
– Maximum capital to be collected as mentioned in
MOA
– Can be changed only with permission from ROC

• Issued capital
– Issued to public in IPO
• Subscribed capital
– Subscribed by public as response through IPO
• Called up
– Asked by company at different stage
• Paid up
– Actual amount paid by the shareholders
 Types of Shares
• Each share has face value/nominal value
• Equity (Common Stock)
– IPO
– Bonus
– Right
• Preference (Preferred stock)
• Equity Shares/Common Stock
– Permanent capital
– Voting rights
– Dividend based on declaration
• Preference Shares/Preferred Stock
– For limited period/redeemable
– Limited voting rights
– Fixed dividend
– Preference over equity shareholder in getting
dividend and money back at the time of winding
• Bonus shares/stock dividend
– Issued to equity shareholders
– Free of cost
– From reserves
• Right shares
– Issued to existing equity holders
– Like IPO there is right issue
 Face Value/Par Value
• If the issue price per equity share is INR500 or
more, the face value determined to be at less
than INR10 per equity share
• The face value should not be less than INR1
per equity share.
• If the issue price per equity share is less than
INR500, the face value determined to be
INR10 per equity share.
• http://www.moneycontrol.com/stocks/marketinfo/bonus/

• http://www.moneycontrol.com/pehlakadam/primarymarketsmain.
php#issuetypes

• http://www.moneycontrol.com/ipo/ipoissues/ipoissues.php?s=LI

• http://www.sebi.gov.in/faq/pubissuefaq.pdf

• http://www.businesstoday.in/magazine/money/the-facevalue-
trap/story/4324.html
 Dividend
• Share from the profit distributed to the
shareholder
• First preference dividend is paid than equity
dividend
• Based on face value of shares
• Once declared it is mandatory
• Interim or final
• Unclaimed dividend: if shareholders does not
collect on time, it is liability for the company
• http://economictimes.indiatimes.com/news/e
conomy/finance/budget-2016-with-10-tax-on-
dividend-income-rush-of-interim-payouts-
likely/articleshow/51217301.cms
• http://www.business-
standard.com/article/markets/companies-
rush-to-announce-dividends-to-avoid-tax-
outgo-in-april-116030300224_1.html
 Debentures
• Debt instrument to finance business
• Fixed Interest to be paid mandatorily
• Redeemable after specific period
• Secured or unsecured
 Loans
• Borrowed from banks or financial institutions
• Long term or short term
• Secured or unsecured
 Provisions vs. reserves
• Reserve is created from profit, provision is
created against loss or liability
• Reserve is to strengthen future financial
position, provision is more to meet near
future liability or loss
 Tax
• Advance tax on quarterly basis
• Provision for tax based on estimation
• Current vs. deferred tax
 Buyback of Shares
• The term buyback of shares implies the act of purchasing
its own shares by a company either from free reserve,
securities premium, or proceeds of any shares or securities.
• Company opts for buyback when they have excess cash
surplus.
• Buy back signals to the stock market that companies’
shares are underpriced and company is willing to pay cash
to buy back and cancel the shares.
• A company can buy its own shares either from the existing
equity shareholders on a proportionate basis, open market,
odd lot shareholders, or employee of the company
pursuant to a scheme of stock option or sweat equity.
• https://www.business-
standard.com/article/markets/28-companies-
announce-buyback-plans-aggregating-rs-213-
billion-118062000284_1.html

• https://economictimes.indiatimes.com/marke
ts/stocks/news/lts-share-buyback-plan-is-
expected-to-be-the-first-of-
many/articleshow/65481799.cms
• http://profit.ndtv.com/news/market/article-coal-india-
slips-as-buyback-offer-disappoints-market-1430453
• http://profit.ndtv.com/news/corporates/article-coal-india-
seeks-shareholder-nod-for-rs-3-650-crore-share-buyback-
1433525
• http://archive.indianexpress.com/news/reliance-industries-
share-buyback-closes-gets-38--of-target/1062121/
• http://www.business-
standard.com/article/markets/buybacks-on-india-inc-s-
radar-as-dividend-tax-goes-up-116042500861_1.html
• http://economictimes.indiatimes.com/markets/stocks/new
s/cash-rich-indian-companies-take-buyback-route-to-
reward-investors/articleshow/52529544.cms
 Stock splits
• A stock split or stock divide increases the
number of shares in a public company.
• for example, a company with 100 shares of stock
priced at Rs.10 per share. (Rs. 1000)
• The company splits its stock 2-for-1.
• There are now 200 shares of stock and each
shareholder holds twice as many shares.
• The price of each share is adjusted to Rs.5.
• The shares value is 200 × Rs.5 = Rs.1000, the
same as before the split.
• https://economictimes.indiatimes.com/marke
ts/stocks/news/over-50-companies-split-
shares-in-fy17-will-mrf-or-eicher-follow-suit-
in-fy18/articleshow/58006595.cms
• http://www.business-
standard.com/article/markets/five-
companies-approves-stocks-split-in-last-week-
115081700346_1.html
• http://money.livemint.com/iid85/company-
splits-value/equity.aspx
• http://articles.economictimes.indiatimes.com
/2014-11-20/news/56304010_1_india-gains-
state-bank-stock-split

• http://www.livemint.com/Companies/fGkQH
wk6QXsVXA6R3d5dbM/Bank-of-Baroda-
becomes-8th-bank-to-approve-stock-split-
this.html
• http://economictimes.indiatimes.com/market
stats/pid-27,companyid-0,year-0,pageno-
1,filtertype-latest,sortby-3,sortorder-asc.cms
 Other important regulations as per
Companies Act 2013
• At least one female director
• An individual can be director of 15 companies
• Mandatory auditor rotation after 5 years
• 2% of net profit as CSR
 Net worth
• the aggregate value of the paid-up share
capital
• and all reserves created
• after deducting the aggregate value of the
accumulated losses, deferred expenditure and
miscellaneous expenditure not written off
Example
 Year 1 beginning
• ABC Ltd. issues 10000 shares in an IPO at
Rs.100 (par/face value Rs.10)
• Oversubscription – 2 times
Liabilities Assets

Equity (at par

10000@10) 100000Cash 1000000

Securities Premium 900000

1000000 1000000
 Year 1 ending
• Profit earned Rs.200000
• Other assets Rs.500000
• Other liabilities Rs.300000
Liabilities Assets

Equity (at par

10000@10) 100000Cash 1000000
Reserves and surplus
(incd. Securities Other
Premium) 1100000 Assets 500000
other liabilities 300000

1500000 1500000
 Year 2
• Company declares bonus/stock dividend 1 for
every 2 shares held
 Accounting effects
• New shares 5000 without receiving cash
• Use existing reserves
Liabilities Assets

Equity (at par

15000@10) 150000Cash 1000000
Reserves and surplus
(incd. Securities Other
Premium) 1050000 Assets 500000
other liabilities 300000

1500000 1500000
 Year 3
• Company decides to go for buyback (stock
repurchase) of their shares (1 for every 3
shares)
• At Rs. 120 (MP RS.115)
• Assume buyback is successful
 Accounting effects
• 5000 shares to be cancelled
• Cash returned to shareholders @ Rs.120
(Rs.10 FV and RS.110 premium)
Liabilities Assets

Cash
Equity (at par (1000000-
10000@10) 100000 600000) 400000
Reserves and surplus
(incd. Securities
Premium) (1050000- Other
550000) 500000 Assets 500000
other liabilities 300000

900000 900000
 Year 4
• Right issue (only to existing share holders)
• Offered 1 for every 2 shares at Rs. 90 (10 FV
plus 80 premium)
• 50% shareholders agrees
 Accounting effects
• Cash received (2500*90)
• Par value (2500*10)
• Premium (2500*80)
Liabilities Assets

Equity (at par Cash

12500@10) 125000 (400000+225000) 625000
Reserves and surplus
(incd. Securities
Premium)
(500000+200000) 700000Other Assets 500000
other liabilities 300000

1125000 11250000
 Year 5
• Stock splits announced in the ratio of 2:1
Liabilities Assets

Equity (at par Cash

25000@5) 125000 (400000+225000) 625000
Reserves and surplus
(incd. Securities
Premium)
(500000+200000) 700000Other Assets 500000
other liabilities 300000

1125000 11250000
 Dividend/cash dividend
• When declared
Dividend (expense/P&L Account) dr. XXXX
Dividend payable (liabili.) xxxx

• When paid
Dividend payable (liabili.) dr. XXXX
Cash xxxx
• https://www.sebi.gov.in/legal/regulations/jun-
2018/securities-and-exchange-board-of-india-
issue-of-capital-and-disclosure-requirements-
regulations-2009-last-amended-on-february-
12-2018-_39242.html

• https://assets.kpmg.com/content/dam/kpmg/
in/pdf/2018/02/The-SEBI-ICDR-and-Listing-
Regulations.pdf