Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares: formula sheet

Key formulas

Face value and premium split

Amount due = Share Capital (face value portion) + Securities Premium (premium portion)

Premium is credited to Securities Premium Account, not Share Capital. Read which instalment carries the premium.

Application money entry

Bank A/c Dr (shares applied × application money per share) to Share Application A/c

Record money on all shares applied for, not only those allotted.

Allotment entry

Share Application A/c Dr to Share Capital A/c (allotted shares × application money) and to Refund / Share Allotment A/c (excess)

Excess = money received on application − application money on shares allotted.

Pro rata ratio

Shares allotted : Shares applied, e.g. 5,000 : 8,000 = 5 : 8

Excess application money is first adjusted against allotment money due, then refunded if any remains.

Cash received on allotment

Allotment due − excess application money adjusted − arrears on allotment

Use this to find the bank figure and to cross-check your entry.

Calls in arrears

Calls in Arrears A/c Dr to Call A/c (unpaid amount × number of shares)

Show it as a deduction from called-up capital in the notes. It is not an asset.

Calls in advance

Bank A/c Dr to Calls in Advance A/c; later Calls in Advance A/c Dr to Call A/c

Treat it as a liability until the call is made. Interest on it is paid as per the articles or the question's rate (Table F: the rate agreed between the Board and the member, not exceeding 12% p.a. unless the company in general meeting directs otherwise).

Interest on calls in advance / arrears

Interest = amount × rate % × time (in years)

For advance, time runs from the date of receipt to the date the call is due. For arrears, from the due date to the date of payment. Use the rate given in the question or the articles. If neither is given, under Table F interest on advances is at the rate agreed between the Board and the member, not exceeding 12% p.a. unless the company in general meeting directs otherwise. On arrears, Table F provides 10% p.a. or a lower rate fixed by the Board, and the Board may waive it wholly or in part.

Forfeiture entry (shares issued at par)

Share Capital A/c (called-up amount) Dr. To Calls in Arrear A/c (unpaid) To Share Forfeiture A/c (amount paid)

Called-up value is debited, not the face value, if some calls are yet to be made.

Forfeiture entry when the premium was not received

Share Capital A/c (called-up) Dr. Securities Premium A/c (unpaid premium) Dr. To Calls in Arrear A/c To Share Forfeiture A/c

Debit Securities Premium only for premium that was due but unpaid. Premium already received is not reversed.

Amount forfeited

Amount forfeited = Amount actually received on the shares (excluding any premium received and retained in Securities Premium)

Credit to Share Forfeiture A/c equals the money received, less the premium received if premium was received.

Reissue entry

Bank A/c (cash received) Dr. Share Forfeiture A/c (discount allowed) Dr. To Share Capital A/c (amount treated as paid up)

If reissued at a premium, credit the extra to Securities Premium.

Maximum discount on reissue

Maximum discount = Amount forfeited on the shares reissued (for all shares reissued, the forfeiture credit of those shares)

If only part of the forfeited shares are reissued, use the proportionate forfeiture amount.

Capital Reserve on reissue

Capital Reserve = Share Forfeiture balance for shares reissued − Discount allowed on reissue

Transfer this to Capital Reserve. Any balance for unissued forfeited shares stays in the Forfeiture Account.

Pro rata forfeiture amount

Forfeiture amount of shares reissued = Total forfeited amount × (Shares reissued ÷ Shares forfeited)

Use when only some of the forfeited shares are reissued and all were forfeited at the same rate.

Number of rights shares

Rights shares = Existing shares × (New shares ÷ Old shares in the ratio)

For a 1 for 4 offer on 8,00,000 shares: 8,00,000 × 1 ÷ 4 = 2,00,000 shares.

Theoretical ex-rights price

Ex-rights price = (Old shares × Cum-rights price + New shares × Issue price) ÷ (Old shares + New shares)

Use the ratio numbers, for example 4 old and 1 new. This is a weighted average.

Value of a right (per new share)

Value of right = Ex-rights price − Issue price of rights share

This is the gain on one new share.

Value of a right (per old share held)

Value per old share = Cum-rights price − Ex-rights price

It equals the per-new-share gain × New shares ÷ Old shares in the ratio.

Entry for premium

Securities premium = Premium per share × Number of shares issued

Credit to Securities Premium Account (Section 52(1)), including premium received on rights shares.

Section 62(1)(a) offer period

Not less than 15 days (or such lesser days as prescribed) and not more than 30 days

Counted from the date of the offer. Notice must be dispatched at least three days before the issue opens.

Bonus shares to be issued

Number of bonus shares = Existing shares × Bonus ratio

For a 1:5 bonus (1 bonus for every 5 held), bonus shares = existing shares ÷ 5.

Amount capitalised

Amount to be capitalised = Number of bonus shares × Face value per share

This amount is debited to the reserves used. Bonus shares are fully paid, so the amount is the face value.

Entry on resolution

Reserve A/c Dr. (free reserves / securities premium / CRR) To Bonus to Shareholders A/c

Use this two-step form when the question shows a separate allotment step.

Entry on allotment

Bonus to Shareholders A/c Dr. To Equity Share Capital A/c

The share capital increases by the face value of the shares issued.

Partly paid shares

Calls in arrear / unpaid amount must be called up and received before bonus allotment

Section 63(2)(e) requires outstanding partly paid-up shares to be made fully paid on the date of allotment.

Order of use of reserves

Use the reserve the question names. If none is named, use free reserves first, then securities premium and CRR as needed.

Never use revaluation reserve. This ordering is the usual exam approach, not a rule in the Act.

Section 54 conditions

Special resolution + resolution specifies (number of shares, current market price, consideration if any, class of directors or employees) + SEBI regulations if listed, prescribed rules if not listed

The shares must be of a class already issued. Clause (c) of the section has been omitted (w.e.f. 7-5-2018), so do not quote a lock-in or one-year condition from the Act text.

Status of sweat equity shares

Rights and restrictions of equity shares apply; holders rank pari passu with other equity shareholders

Section 54(2). They are not a separate class with inferior or superior rights.

Value of benefit (sweat equity expense)

Sweat equity expense = Number of shares × Fair value per share − Amount received (cash, or value of know-how accepted)

This is the usual accounting approach in problems, not a rule stated in Section 54. Where shares are issued for know-how or intangible rights, the question gives the value at which the asset is taken over. Follow the question.

Share capital and premium split

Share capital = Number of shares × Face value; Securities premium = Number of shares × (Fair value − Face value); Debits (cash or asset received + employee cost) = Number of shares × Fair value

Section 54 does not deal with this split. It is the accounting treatment used when the shares are recorded at fair value. The use of the securities premium account is governed by Section 52. If the question states a different treatment, follow the question.

Total cost of the plan

Options expected to vest × (Fair value or intrinsic value per option)

Value per option is fixed at grant date and not changed later. Only the number of options is re-estimated.

Intrinsic value per option

Market price on grant date − Exercise price

If the result is zero or negative, intrinsic value is nil and no expense arises.

Cumulative expense to date (straight line)

Total cost × (Years elapsed ÷ Vesting period)

Use the latest estimate of options expected to vest.

Expense for the year

Cumulative expense to date − Expense already charged in earlier years

This can be negative if estimates fall; then you reverse the excess.

Cash received on exercise

Options exercised × Exercise price

Credit share capital for face value and securities premium for the balance.

Overall limit (all securities)

Maximum buy-back ≤ 25% × (paid-up capital + free reserves)

Section 68(2)(c). For equity shares in a year, the 25% applies to total paid-up equity capital of that year as the proviso states. Free reserves include securities premium.

Debt-equity test

(Secured + unsecured debts after buy-back) ≤ 2 × (paid-up capital + free reserves after buy-back)

Section 68(2)(d). Recompute capital and reserves after the buy-back. A higher ratio applies only if the Central Government notifies it for a class of companies.

Board-only route

Buy-back ≤ 10% × (paid-up equity capital + free reserves), with Board resolution

Proviso to section 68(2)(b). Above this, a special resolution is needed.

CRR transfer

CRR = Nominal value of shares bought back (out of free reserves or securities premium)

Section 69(1). Use nominal value, not the buy-back price.

Buy-back cost

Total payment = Number of shares × buy-back price per share

Premium = buy-back price − nominal value. Premium is charged to securities premium or free reserves.

Key time limits

Complete within 1 year; destroy shares within 7 days; return within 30 days; no new offer for 1 year; no further issue for 6 months

Sections 68(2) proviso, 68(4), 68(7), 68(10) and 68(8).

Quick revision

• A company cannot issue shares at a discount. The exceptions are sweat equity shares (s.54) and an issue to creditors when their debt is converted under a statutory resolution plan or debt restructuring scheme under RBI guidelines (s.53(2A)). Any other share issued at a discount is void.
• Premium received on issue goes to the securities premium account.
• Securities premium may be used for bonus shares, preliminary expenses, share or debenture issue expenses, premium on redemption, and buy-back.
• On forfeiture, share capital is debited with the called-up amount and the amount already paid by the shareholder stays with the company.
• On re-issue of forfeited shares, the discount allowed is debited to the forfeited shares account. Only the balance relating to the re-issued shares is then transferred to capital reserve.
• Sweat equity shares must be of a class already issued and need a special resolution that states the number of shares, current market price, consideration (if any) and class of directors or employees receiving them.
• Sweat equity shares rank pari passu with other equity shares.
• A buy-back may be made from free reserves, the securities premium account or proceeds of a fresh issue, but not from the proceeds of an earlier issue of the same kind of shares.
• Buy-back needs authority in the articles and a special resolution; a board resolution is enough if the buy-back is 10% or less of paid-up equity capital and free reserves.
• Buy-back limit is 25% or less of the aggregate of paid-up capital and free reserves. For a buy-back of equity shares in a financial year, the 25% is measured on the total paid-up equity capital in that year. Debt after buy-back must not exceed twice the paid-up capital and free reserves.
• Buy-back must be completed within one year, shares must be fully paid, and the bought-back shares must be destroyed within seven days of completion.
• After a buy-back, no new shares of the same kind may be issued for six months, except bonus issues and discharge of existing obligations.

Common mistakes

• Crediting the premium to Share Capital. Fix: Split every 'due' entry. Face value goes to Share Capital and the extra goes to Securities Premium.
• Computing allotment due on shares applied for instead of shares allotted. Fix: Application money received uses shares applied for. Allotment, call and capital figures use shares allotted.
• Debiting Share Capital with face value instead of the called-up amount. Fix: Always debit Share Capital with the amount called up on the forfeited shares.
• Reversing the premium that was already received. Fix: Debit Securities Premium only for premium due but not received. Received premium stays.
• Crediting the whole issue price to Share Capital Fix: Split the price into face value and premium first. Credit face value to Share Capital and premium to Securities Premium Account.
• Dividing by the wrong number when finding the ex-rights price Fix: Multiply each side by its number in the ratio and divide by old plus new shares, as in the formula.
• Using revaluation reserve to fund the bonus issue Fix: Remember the proviso to Section 63(1): reserves created by revaluation of assets cannot be capitalised. Skip it.
• Debiting Bank or crediting Bank in a bonus issue Fix: No cash is received. Only reserves and share capital are affected.
• Treating sweat equity as the same as ESOP. Fix: Remember: sweat equity is an actual issue now for know-how or value addition under Section 54. ESOP is an option to buy later. State this difference in any theory answer.
• Quoting a one-year lock-in or a 15% ceiling as part of Section 54. Fix: The current Section 54 text has clause (c) omitted. Quote only the conditions in the section: special resolution, content of resolution, class already issued, SEBI regulations or rules.

Exam tips

• Always write the terms table first. Most lost marks come from putting premium in the wrong instalment.
• In pro rata questions, state the ratio and show the excess application money calculation. Examiners give separate marks for each.
• Use proper narration and account names, such as 'Share Application A/c' and 'Securities Premium A/c', instead of generic labels.
• For MCQs, check the stage asked: application, allotment or call. A quick split of face value and premium usually gives the answer in seconds.
• If the question gives a discount on a fresh issue, mention Section 53 briefly. Then follow the instruction given, or treat it as a re-issue of forfeited shares.
• Write the forfeiture amount in a working note first. Every later figure depends on it.
• State whether premium was received. Examiners check this and it decides the Securities Premium entry.
• Show the maximum discount check in one line to earn a step mark.