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Accounts Notes

Accounts unit 1 notes

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7 views3 pages

Accounts Notes

Accounts unit 1 notes

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chauhansiri252
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Unit 1

ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

BOOK-BUILDING PROCESS
It is a technique used for marketing a public offer of equity shares of a company.

When a company employs book-building process, it does not pre-determine the issue price.
Instead of it, it starts with an indicative price band and invites bids from prospective investors at
different prices. Those who bid are required to pay the full amount. Based on the response
received from investors, the final price is selected.

Investors who have bid a price equal to or more than the final price selected are given allotment
at the final price selected. Those who have bid for a lower price will get their money refunded.

SEBI has allowed book-building process as an alternative process for issue of shares.

The objective of book-building is to arrive at fair pricing of the issue which is supposed to
emerge out of offers given by various investors. This process of fair pricing of issue of shares is
determined at a date close to the date of the opening of the public offer.

This process of raising funds helps the company to raise funds faster and make them available to
the company without much loss of time. The company is able to get better prices of issue of
shares by encouraging bidding by large investors and it improves the chances of success of issue.
It is suitable for big issues by the companies.

Hence, the greatest advantage of book-building process is that it allows for price and demand
discovery. Another advantage is that the cost of issue is much less than the other traditional
methods of raising capital. In book-building, the demand for shares is known before the issue
closes. In fact, if there is not much demand, the issue may be deferred and can be rescheduled
after having realized the temper of the share market.

ISSUE OF RIGHT SHARES


According to the Companies Act, 2013, where at any time, a company having a share capital
proposes to increase its subscribed capital by the issue of further shares then such further shares
shall be offered to the persons who on that date are the holders of equity shares of the company,
proportionately to their equity holdings on that date, subject to the following conditions.
a) the offer shall be made by notice specifying the number of shares offered and limiting a time
not being less than fifteen days and not exceeding thirty days from the date of the offer within
which the offer, if not accepted, shall be deemed to have been declined.
b) unless the articles of association of the company otherwise provides, the offer aforesaid shall
be deemed to include a right exercisable by the person concerned to renounce the shares

(1)
CS (Dr.) Sangeeta Bagga
offered to him or any of them, in favour of any other person and the notice referred above
shall contain a statement to this right.
c) after the expiry of the term specified in the notice or if the person declines to accept the shares
offered, the Board of Directors may dispose of them in such a manner which is not dis-
advantageous to the shareholders and the company.

BUY-BACK OF SHARES
When a company has substantial cash resources, it may like to buy its own shares from the
market particularly when the prevailing rate of its shares in the market is much lower than the
book value. Buy-back of shares enables the company to go back to its shareholders and offer
to purchase from them the shares they hold. Buy-back of shares is a very important tool for
companies who want to reduce their share capital.

According to Section 68(1) of the Companies Act, 2013, a company may purchase its own
shares or other specified securities out of:
a) its free reserves.
b) the securities premium reserve account.
c) The proceeds of the issue of any shares or other specified securities.

The buy-back can be from:


a) the existing shareholders on proportionate basis.
b) the open market.
c) by purchasing the securities issued to employees of the company pursuant to a scheme of
stock-option or sweat equity.

Advantages of buy-back of shares:


1) It is an alternative mode of reduction in capital without requiring approval of Court/NCLT.
2) It improves earnings per share.
3) It improves return on capital, return on net worth.
4) It provides an additional exit route to shareholders when shares are undervalued.
5) It results in returning the surplus cash to shareholders.
6) It results in achieving optimum capital structure.
7) It serves the equity more efficiently.

PREFERENCE SHARES
Under Section 55 of the Companies Act, 2013, a company limited by shares, may issue
preference shares, if authorized by its articles, which are liable to be redeemed within a period
not exceeding twenty years from the date of issue. No company can issue any preference
shares which are irredeemable.

(2)
CS (Dr.) Sangeeta Bagga
A company may issue preference shares for a period exceeding twenty years but not
exceeding thirty years for infrastructure projects.

Accounting treatment for issue of preference shares is same, as in the case of equity shares.

Redemption of Preference shares:


The preference shares can be redeemed only when they are fully paid-up. Partly paid
preference shares cannot be redeemed.
The preference shares are redeemed out of:
a) the distributable profits of the company, or
b) proceeds of the fresh issue of shares made for the purpose of such redemption.

Creation of Capital Redemption Reserve:


If preference shares are redeemed out of the profits of the company, then a sum equal to the
nominal value of shares to be redeemed, shall be transferred to Capital Redemption Reserve
account.
The Capital Redemption Reserve account may be applied by the company, to issue fully paid
bonus shares to the members of the company.

Premium on redemption of preference shares:


a) For redemption of any preference shares issued on or before the commencement of
Companies Act, 2013, then the premium payable on redemption shall be provided out of
profits of the company or securities premium reserve account.
b) For redemption of any preference shares issued after the commencement of Companies Act,
2013 and if the company complies with accounting standards, then the premium payable on
redemption shall be provided only out of profits of the company.

______________________________

(3)
CS (Dr.) Sangeeta Bagga

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