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Introduction to Company Accounts

Under and Over Subscription

A company issues shares to the general public for subscription. It receives the applications along with the application money so that it can allot the shares to the applicants. It may hardly happen that it receives the applications equal to the number of shares issued. Thus, there may be either under subscription or oversubscription.

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Under and OverSubscription

 Under Subscription of shares

A company offers shares to the public inviting applications for their subscription. When the number of shares applied for by the public is less than the number of shares issued by the company, it is a situation of under-subscription.

Generally, a company that is newly set up or does not have a good reputation in the market receives under-subscription. Usually, such companies opt for underwriting of the shares.

However, if a company receiving under-subscription receives the minimum subscription, it can allot the shares for which it receives the application.

Oversubscription of shares

When a company receives applications for shares more than the number of shares it has offered to the public, it is known as over-subscription of shares. Usually, the companies with strong financial background or good reputation in the market or profitable future prospects receive over-subscription of shares.

According to the guidelines of SEBI, a company cannot out-rightly reject any application. However, it can do so where the information is incomplete, the signature is not there or the application money is insufficient.

In this case, it is not possible for the company to allot shares to every applicant in the number that he desires. Thus, the company needs to allot the shares in a proper manner. The company has the following three alternatives:

  1. Reject some applications totally.
  2. Accept some applications in full.
  3. Make Pro-Rata Allotment to the remaining applicants.

Pro-rata allotment implies the allotment of shares in proportion of the shares applied for. In the case of pro-rata allotment, the company adjusts the excess money received at the time of application towards the allotment and refund the excess.

However, it can transfer the excess amount to Calls-in Advance A/c if its articles of association permit and takes the consent of the applicant by a separate letter or by inserting a clause in the Prospectus.

For example, JM Ltd. offers 20000 shares to the public. It receives applications for 40000 shares. When the company decides to allot the shares at pro-rata basis, then it has to allot 20000 shares to the applicants of 40000 shares. Thus, the ratio will be 40000:20000 i.e. 2:1. Hence, each applicant for 2 shares will receive 1 share. This is Pro-rata allotment.

 

oversubscription

(source – cashstock)

Journal Entries:

Date Particulars Amount (Dr.) Amount (Cr.)
1. On receipt of Application money Bank A/c (total application amount) Dr.
To Share Application A/c
(Being application money received for…[email protected] ₹…each)
2. Transfer of application money to Share Capital A/c and refund of excess Share Application A/c Dr.
To Share Capital A/c (application amount)
To Share Allotment A/c (excess)
To Calls-in-advance A/c (balance, if any)
To Bank A/c (refund)
(Being share application money on …..shares @ ₹…each, transferred to share capital, money on …..shares @ ₹…each, refunded and money on …..shares @ ₹…each, utilized towards allotment and call)
3. On Share Allotment due Share Allotment A/c (amount due on allotment) Dr.
To Share Capital A/c
(Being share allotment due on …..shares @ ₹…each,)
4. Share Allotment money received Bank A/c (actual amount received) Dr.
To Share Allotment A/c
(Being share allotment money received)
5. On Share call due Share Call A/c Dr.
To Share Capital A/c
(Being money on share call due on …..shares @ ₹…each,)
6. Share call amount received Bank A/c Dr.
Calls-in-advance A/c Dr.
To Share Call A/c
(Being share call amount received and calls-in-advance adjusted)

 

Solved Example For You:

Arhan Ltd. Co. issues 100000 equity shares of face value of ₹100 on 1st June 2018 at 20% premium. The arrangements for payment are:

June 1, 2018: On Application ₹20

July 1, 2018: On Allotment including Premium ₹70

September 1, 2018: On First and final call ₹30

The company receives applications for 285000 shares. This is a case of oversubscription. It deals with them in the following manner:

  1. Applicants for 25000 shares receive a full allotment.
  2. The applicants for 225000 shares receive one share for every three shares applied for on pro-rata basis.
  3. It rejects the applications for 35000 shares.

The company duly receives the entire amount. Pass necessary journal entries.

Ans.

Journal Entries

In the books of Arhan Ltd.

Date Particulars Amount (Dr.) Amount (Cr.)
1 June Bank A/c Dr. 5700000
To Share Application A/c 5700000
(Being application money received for 285000 [email protected] ₹20 each)
1 July Share Application A/c Dr. 5700000
To Share Capital A/c 2000000
To Share Allotment A/c 3000000
To Bank A/c 700000
(Being share application money on 100000 shares @ ₹ 20 each, transferred to share capital, on 225000 shares adjusted towards allotment and on 35000 shares refunded)
1 July Share Allotment A/c Dr. 7000000
To Share Capital A/c 5000000
To Securities Premium A/c 2000000
(Being share allotment due on 100000 shares @ ₹ 70 each including a premium of ₹20)
1 July Bank A/c Dr. 4000000
To Share Allotment A/c 4000000
(Being share allotment money received)
1 Sept Share Final Call A/c Dr. 3000000
To Share Capital A/c 3000000
(Being money on share call due on 100000 shares @ ₹30 each,)
1 Sept Bank A/c Dr. 3000000
To Share Final Call A/c 3000000
(Being share call amount received)

 

Working Notes:

Calculation of adjustment of application money

Category No. of shares applied No. of shares allotted Amount received on the application Application money required Adjusted towards allotment Amount due on allotment Amount received on the allotment Refund
a. 25000 25000 500000 500000       _ 1750000 1750000     _
b. 225000 75000 4500000 1500000 3000000 5250000 2250000     _
c. 35000 Nil 700000           _      _     _     _ 700000
Total 285000 100000 5700000 2000000 3000000 7000000 4000000 700000

 

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