Issue, Bonus, Sweat Equity, ESOP, ESPS, Buy Back of Shares, Redemption of Preference Shares, Issue and Redemption of Debentures, Underwriting of Securities

1. Issue of Shares

When a company needs funds for its operations, expansion, or other purposes, it can raise capital by issuing shares to the public or existing shareholders. Shares represent ownership in the company. There are different types of shares, primarily Ordinary Shares (Equity Shares) and Preference Shares.

1.1 Types of Shares

Equity Shares (Ordinary Shares): These shares represent the ownership capital of the company. Holders of equity shares have voting rights and are entitled to a share of the profits after all other liabilities and preference dividends have been paid. They bear the highest risk but also have the potential for the highest return.

Preference Shares: These shares carry preferential rights over equity shares regarding the payment of dividends and the return of capital in case of liquidation. They typically have a fixed rate of dividend and do not carry voting rights, unless their dividend is in arrears for a specified period.

1.2 Methods of Issuing Shares

Companies can issue shares in several ways:

• Public Issue (Fresh Issue): Offering shares to the general public for the first time or for additional capital requirements. This is done through an Offer Document (Prospectus).
• Rights Issue: Offering new shares to existing shareholders in proportion to their current shareholding. Existing shareholders have the right to subscribe to these shares.
• Bonus Issue: Issuing new shares to existing shareholders free of cost, usually out of accumulated profits or reserves.
• Private Placement: Issuing shares to a select group of investors, such as institutions or high-net-worth individuals, without a public offering.
• Employee Stock Option Scheme (ESOP) / Employee Stock Purchase Scheme (ESPS): Offering shares to employees.

1.3 Issue of Shares at Par and at Premium

Issue at Par: Shares are issued at their face value (nominal value). For example, a share with a face value of ₹10 is issued at ₹10.

Issue at Premium: Shares are issued at a price higher than their face value. The excess amount received is called the 'securities premium' or 'share premium'. For example, a share with a face value of ₹10 is issued at ₹12, with ₹2 being the premium. The securities premium can be used for specific purposes as prescribed by the Companies Act, such as issuing bonus shares, writing off preliminary expenses, or buying back shares.

Issue at Discount: Issuing shares at a price lower than their face value. This is generally prohibited by law, except in specific cases like sweat equity shares or shares issued under employee schemes, and requires strict regulatory approval.

1.4 Accounting Treatment for Issue of Shares

The accounting entries for issuing shares are as follows:

1.4.1 Issue of Shares for Cash

When shares are issued for cash, the application money is received first, followed by allotment and calls.

• On receipt of application money:

  Bank A/c Dr.

  To Share Application A/c

• On allotment of shares:

  Share Application A/c Dr.

  To Share Capital A/c (for face value)

  To Securities Premium A/c (for premium, if any)

• On receipt of allotment money (if premium is included):

  Bank A/c Dr.

  To Share Allotment A/c

• When calls are made (e.g., First Call):

  Share First Call A/c Dr.

  To Share Capital A/c

  To Securities Premium A/c (if premium is called here)

• On receipt of call money:

  Bank A/c Dr.

  To Share First Call A/c

1.4.2 Calls-in-Arrears

If a shareholder fails to pay the amount due on allotment or calls, it is termed 'Calls-in-Arrears'. Interest is usually charged on this amount as per the company's Articles of Association or the Companies Act.

1.4.3 Calls-in-Advance

If a shareholder pays the amount due on future calls in advance, it is termed 'Calls-in-Advance'. Interest may be paid on this amount as per the Articles of Association or the Companies Act. This is treated as a liability for the company.

1.4.4 Forfeiture of Shares

If a shareholder fails to pay the allotment money or any call money due, the company can forfeit (cancel) their shares. The amount paid by the shareholder till forfeiture is forfeited by the company. The Share Capital Account is debited with the paid-up value of the shares forfeited. The Share Application/Allotment/Calls Accounts are debited with the amounts due but not paid. The Calls-in-Arrears Account is credited with the total amount due. The balance is credited to the 'Share Forfeiture Account'.

Journal Entry for Forfeiture:

Share Capital A/c Dr. (Nominal value of shares forfeited)

Share Allotment A/c Dr. (Amount due on allotment)

Share First Call A/c Dr. (Amount due on calls)

To Share Forfeiture A/c (Amount paid by the shareholder)

To Calls-in-Arrears A/c (Amount due but not paid)

1.4.5 Re-issue of Forfeited Shares

The forfeited shares can be re-issued at par, at a premium, or at a discount (but not exceeding the amount forfeited per share). When re-issued, the Share Capital Account is debited with the nominal value of the re-issued shares. The Bank Account is debited with the amount received. The difference is credited to Securities Premium Account (if re-issued at a premium) or debited to Share Forfeiture Account (if re-issued at a discount).

Journal Entry for Re-issue at a discount:

Bank A/c Dr.

Share Forfeiture A/c Dr. (Discount allowed)

To Share Capital A/c

The balance in the Share Forfeiture Account (after re-issue) representing the gain on re-issue, is transferred to Capital Reserve.

Journal Entry for Transfer to Capital Reserve:

Share Forfeiture A/c Dr.

To Capital Reserve A/c

2. Bonus Issues

A bonus issue is the issuance of new shares by a company to its existing shareholders free of charge. It is a way for companies to distribute accumulated profits and reserves to shareholders without distributing cash. It also helps to capitalize reserves and reflect the company's growth in its share capital.

2.1 Sources for Bonus Issue

According to SEBI (Issue of Capital and Disclosure Requirements) Regulations, a bonus issue can be made out of:

• Free reserves
• Securities premium account
• Capital redemption reserve account

A bonus issue cannot be made out of profits from the revaluation of assets or out of existing equity shares.

2.2 Conditions for Bonus Issue

A company can make a bonus issue only if:

• It is authorised by its Articles of Association.
• The Board of Directors has recommended it.
• The company has not defaulted in payment of interest or principal on fixed deposits or debt securities.
• The company has not defaulted in payment of statutory dues.
• The company has completed the redemption of preference shares, if any.
• The company has sufficient reserves.

2.3 Accounting Treatment for Bonus Issue

The company converts its reserves into share capital.

• To capitalize profits/reserves:

  General Reserve A/c Dr. / Securities Premium A/c Dr. / Profit & Loss A/c Dr.

  To Bonus Payable A/c

• On issue of bonus shares to shareholders:

  Bonus Payable A/c Dr.

  To Equity Share Capital A/c (for face value)

  To Securities Premium A/c (if issued at a premium, which is rare for bonus issues)

If the bonus issue is declared as 'final dividend', then it is treated as a liability until paid.

3. Sweat Equity Shares

Sweat Equity Shares are equity shares issued by a company at a discount or for consideration other than cash to:

• Directors
• Employees
• Other persons

These shares are issued in consideration of the provision of valuable intellectual property rights or know-how, or for providing services by way of contribution of value addition to the company.

3.1 Conditions for Issue of Sweat Equity Shares

The issue of sweat equity shares is governed by Section 54 of the Companies Act, 2013. Key conditions include:

• Authorised by Articles of Association.
• Passed by a special resolution of shareholders.
• The resolution specifies the number of shares, the current market price, consideration, class of shares, and the period of lock-in.
• The company must not have defaulted in any existing deposit or interest payments.
• The shares are locked-in for a period of three years from the date of allotment.

3.2 Accounting Treatment for Sweat Equity Shares

The accounting entries depend on whether the shares are issued for cash or for non-cash consideration.

• If issued for cash at a discount: The discount is debited to 'Securities Premium Account' to the extent of available balance, and the remaining discount is debited to 'Profit and Loss Account' or 'Shareholder's Reserve Account'.

  Bank A/c Dr.

  Securities Premium A/c Dr. (if available)

  Profit & Loss A/c / Shareholder's Reserve A/c Dr. (balance discount)

  To Equity Share Capital A/c

• If issued for non-cash consideration (e.g., Intellectual Property): The value of the asset/service received is debited, and the share capital is credited. The difference between the value of the asset/service and the nominal value of shares is debited to Securities Premium or P&L Account.

  Intellectual Property Rights A/c / Intangible Asset A/c Dr.

  Securities Premium A/c Dr. (if applicable)

  Profit & Loss A/c Dr. (if applicable)

  To Equity Share Capital A/c

4. Employee Stock Option Scheme (ESOP)

An ESOP is a scheme that gives employees the option to purchase shares of the company at a predetermined price (exercise price) within a specified period. It is a form of employee compensation and a tool to motivate employees to perform better, aligning their interests with those of the shareholders.

4.1 Key Terms in ESOP

• Grant: The offer of options to employees.
• Vesting Period: The period during which the employee must remain employed by the company to be eligible to exercise the options.
• Exercise Price: The price at which the employee can buy the shares. This is usually at a discount to the market price.
• Exercise Period: The period within which the employee can exercise the vested options after the vesting period ends.
• Option: The right, but not the obligation, to buy shares.

4.2 Accounting Treatment for ESOP

ESOPs are generally treated as employee compensation expenses. The difference between the market price of the share at the time of grant and the exercise price is recognized as an employee compensation expense over the vesting period.

• At the time of grant: No journal entry is passed, but the company needs to disclose the details of the options granted.
• During the vesting period: An expense is recognized each year.

  Employee Compensation Expense A/c Dr.

  To Share-based Payment Reserve A/c

• On exercise of options:

  Bank A/c Dr. (Amount received from employees at exercise price)

  Share-based Payment Reserve A/c Dr. (Balance from options exercised)

  To Equity Share Capital A/c (Nominal value of shares issued)

  To Securities Premium A/c (Difference)

The expense recognized is based on the fair value of the options granted, often determined using valuation models like Black-Scholes.

5. Employee Stock Purchase Scheme (ESPS)

An ESPS allows employees to purchase company shares, usually at a discount to the prevailing market price, through payroll deductions over a period. Unlike ESOPs, ESPS typically involves the direct purchase of shares rather than granting an option. Employees contribute regularly, and at the end of a period, they use the accumulated funds to buy shares.

5.1 Key Features of ESPS

• Shares are purchased by employees, not options granted.
• Often facilitated through payroll deductions.
• Purchase price is usually at a discount.
• Provides a direct way for employees to become shareholders.

5.2 Accounting Treatment for ESPS

When employees exercise their right to purchase shares under an ESPS, the company receives cash and issues shares. The accounting is similar to a regular share issue, but the discount given to employees may be treated as an employee compensation expense.

• On receipt of employee contributions (if held separately):

  Bank A/c Dr.

  To Employee Contributions Suspense A/c

• On allotment of shares:

  Employee Contributions Suspense A/c Dr.

  Employee Compensation Expense A/c Dr. (for discount)

  To Equity Share Capital A/c (Nominal value)

  To Securities Premium A/c (if any premium over market price, rare)

• Alternatively, if no suspense account:

  Bank A/c Dr. (Amount received from employees)

  Employee Compensation Expense A/c Dr. (for discount)

  To Equity Share Capital A/c

  To Securities Premium A/c

6. Buy-Back of Shares

A buy-back of shares (or share repurchase) is when a company buys its own outstanding shares from the open market or directly from shareholders. This reduces the number of outstanding shares, potentially increasing Earnings Per Share (EPS) and shareholder value. It can also be used to consolidate ownership or prevent a hostile takeover.

6.1 Legal Provisions for Buy-Back

Buy-back is governed by Section 68 of the Companies Act, 2013. Key conditions include:

• Authorised by Articles of Association.
• Passed by a special resolution of shareholders.
• The buy-back must not exceed 25% of the total paid-up share capital and free reserves.
• The buy-back must be from existing shareholders on a proportionate basis or through the open market.
• The company must have sufficient distributable profits or the proceeds of a recent issue of shares or securities.
• The company must extinguish and physically destroy the shares so bought back within a specified period.
• A declaration of solvency must be filed with the Registrar of Companies and the Securities and Exchange Board of India (SEBI).

6.2 Methods of Buy-Back

• From existing shareholders on a proportionate basis (Tender Offer): Company offers to buy back shares from all shareholders in proportion to their holdings.
• From the open market: Company buys shares from the stock exchange over a period.
• Through Dutch Auction: Company specifies a price range, and shareholders tender shares at prices within that range. The company then determines the lowest price at which it will buy back shares.
• Purchasing shares of employees who were given ESOPs/ESPS.
• Buying back shares from odd-lot holders.

6.3 Accounting Treatment for Buy-Back

The buy-back can be funded from:

• Distributable profits: An amount equal to the nominal value of the shares bought back must be transferred from distributable profits to a reserve called the 'Capital Redemption Reserve' (CRR) or 'Buy-back Reserve'.
• Proceeds of a fresh issue of shares or securities: The amount received from the new issue is used for buy-back.

The shares bought back are usually cancelled, or they can be held as 'Treasury Shares' (though Indian law typically requires extinguishment).

• On buy-back of shares (assuming extinguishment):

  Equity Share Capital A/c Dr. (Nominal value of shares bought back)

  Securities Premium A/c Dr. (Premium paid, if any, or discount received)

  To Bank A/c (Amount paid for buy-back)

• Transfer to Capital Redemption Reserve (if funded from profits):

  Profit & Loss A/c Dr. / General Reserve A/c Dr. / Retained Earnings A/c Dr.

  To Capital Redemption Reserve A/c

The difference between the buy-back price and the nominal value (i.e., the premium paid or discount received) is adjusted against Securities Premium Account or General Reserve.

7. Redemption of Preference Shares

Redemption of preference shares means repaying the capital invested by preference shareholders. Preference shares can be redeemed only if they are irredeemable, subject to specific conditions laid down in Section 55 of the Companies Act, 2013.

7.1 Conditions for Redemption

Preference shares can be redeemed only if:

• They are redeemable (i.e., not perpetual).
• The company has sufficient distributable profits or the proceeds of a fresh issue of equity shares made for the purpose of redemption.
• The shares are fully paid-up (except for partly paid shares issued before the commencement of the Act).
• The Articles of Association permit redemption.
• The redemption must be done at a price not exceeding the nominal value plus any premium payable on redemption.

7.2 Sources for Redemption

• Distributable Profits: If redemption is made out of profits, an amount equal to the nominal value of the preference shares redeemed must be transferred from distributable profits to a reserve called the 'Capital Redemption Reserve' (CRR).
• Proceeds of a Fresh Issue of Equity Shares: The company can issue new equity shares for the purpose of redeeming preference shares.

7.3 Accounting Treatment for Redemption

• When redemption is made out of distributable profits:

  Profit & Loss A/c Dr. / General Reserve A/c Dr.

  To Capital Redemption Reserve A/c

• When redemption is made out of proceeds of a fresh issue of equity shares:

  Bank A/c Dr.

  To Equity Share Capital A/c

  To Securities Premium A/c (if issued at premium)

• On actual redemption of preference shares:

  Preference Share Capital A/c Dr. (Nominal value)

  Securities Premium A/c Dr. (Premium payable on redemption, if any)

  To Bank A/c (Amount paid to shareholders)

  To Dividend Payable A/c (Arrears of dividend, if any)

If the redemption is made out of profits, the CRR created can be used for issuing bonus shares to equity shareholders.

8. Issue and Redemption of Debentures

Debentures are long-term debt instruments issued by companies to raise funds. They represent a loan taken by the company, and debenture holders are creditors, not owners. Debentures typically carry a fixed rate of interest and have a maturity date.

8.1 Types of Debentures

• On security: Secured Debentures (backed by specific assets) and Unsecured Debentures (not backed by specific assets).
• On repayment: Redeemable Debentures (repaid on maturity) and Irredeemable Debentures (perpetual, not repaid during the company's life, rare).
• On convertibility: Convertible Debentures (can be converted into shares) and Non-Convertible Debentures.
• On coupon rate: Zero-Coupon Debentures (no periodic interest, issued at deep discount) and Fixed Coupon Debentures.

8.2 Issue of Debentures

Debentures can be issued at par, at a premium, or at a discount, similar to shares. However, the accounting treatment differs, especially for discount and premium.

• Issue at Par: Face value = Issue price.
• Issue at Premium: Issue price > Face value. The premium is credited to 'Securities Premium Account'.
• Issue at Discount: Issue price < Face value. The discount is treated as a loss and debited to 'Discount on Issue of Debentures Account' (a deferred revenue expenditure).

8.3 Accounting Treatment for Issue of Debentures

• On receipt of application money:

  Bank A/c Dr.

  To Debenture Application A/c

• On allotment:

  Debenture Application A/c Dr.

  To Debenture A/c (Face value)

  To Securities Premium A/c (Premium, if any)

• On receipt of allotment money:

  Bank A/c Dr.

  To Debenture Allotment A/c

• If issued at discount:

  Debenture Application/Allotment A/c Dr.

  Discount on Issue of Debentures A/c Dr. (Discount amount)

  To Debenture A/c (Face value)

• If issued at premium:

  Debenture Application/Allotment A/c Dr.

  To Debenture A/c (Face value)

  To Securities Premium A/c (Premium amount)

8.4 Redemption of Debentures

Debentures are usually redeemable. Redemption can be done at par, at a premium, or at a discount (rare).

When debentures are redeemed, the company needs to make provisions for redemption, such as creating a Debenture Redemption Fund (DRF) and investing in specific securities (Debenture Redemption Investments). SEBI mandates DRR for listed companies, except for those issuing debentures on a private placement basis.

• On redemption at par:

  Debenture A/c Dr. (Face value)

  To Bank A/c

• On redemption at premium:

  Debenture A/c Dr. (Face value)

  Premium on Redemption of Debentures A/c Dr. (Premium amount)

  To Bank A/c (Total amount paid)

The 'Discount on Issue of Debentures' account is written off over the life of the debentures. The 'Premium on Redemption of Debentures' account is treated as a loss and is either debited to Securities Premium Account or Profit & Loss Account.

9. Underwriting of Securities

Underwriting is a financial arrangement where an underwriter (usually an investment bank or financial institution) agrees to buy any unsold securities from the issuer at a specified price. This guarantees the issuer that all the securities offered will be sold, thereby ensuring the successful completion of a capital-raising issue.

9.1 Purpose of Underwriting

• Guarantee of Sale: Provides certainty to the issuer about raising the required capital.
• Market Stability: Underwriters help to stabilize the price of securities in the secondary market after the issue.
• Expertise and Distribution: Underwriters have the network and expertise to market and distribute securities effectively.
• Risk Management: The issuer transfers the risk of unsold securities to the underwriter.

9.2 Types of Underwriting Agreements

• Firm Commitment: The underwriter buys the entire issue from the issuer and resells it to the public. This is the most common type.
• Standby Underwriting: The underwriter agrees to buy any securities left unsold after the public offering.
• Best Efforts: The underwriter agrees to make their "best efforts" to sell the securities but does not guarantee the sale of the entire issue.
• All-or-None: The underwriter is obligated to purchase the securities only if the entire issue is sold. Otherwise, the deal is cancelled.

9.3 Underwriting Commission

Underwriters charge a commission (or fee) for their services. This is usually a percentage of the total value of the securities underwritten. The commission rate depends on the risk involved, the type of issue, and market conditions.

9.4 Accounting Treatment for Underwriting Commission

The underwriting commission is an expense incurred by the company for raising capital. It is generally treated as a preliminary expense or a capital issue expense and is written off over a period, typically not exceeding five years.

• On incurring the liability for commission:

  Underwriting Commission A/c Dr.

  To Underwriter's Account

• On payment to the underwriter:

  Underwriter's Account Dr.

  To Bank A/c

• On writing off the commission expense:

  Profit & Loss A/c Dr.

  To Underwriting Commission A/c

  (This entry is passed for the portion written off each year)