Ever wondered how a company turns ideas into cash by selling a slice of itself?
💡 In Simple Words: When a company needs money, it can cut new pieces of ownership called shares and sell them to people. Those people become shareholders and own a tiny part of the company.
What is the Issue of Shares?
The phrase issue of shares simply means creating new shares and offering them to investors. A share is a unit of ownership in a company, like a tiny puzzle piece that fits into the big picture of the business.
When a company issues shares, it is essentially saying, “I need money, so I’ll let you own a small part of me in exchange for cash.” This is different from borrowing money because shareholders don’t expect a fixed interest payment; they hope the company grows and the share price rises.
Why Do Companies Issue Shares?
- Raise capital – Money that can be used for new machines, expansion, or paying off debt.
- Spread risk – More owners means the financial risk is shared.
- Improve credibility – Having many shareholders can make a business look trustworthy to banks and suppliers.
Think of it like a group of friends pooling money to buy a pizza. Each friend contributes a slice of cash, and in return, everyone gets a slice of the pizza.
Steps in Issuing Shares
The process follows a clear sequence, much like a recipe. Below is a simple flowchart that shows each step.
Let’s break down each node:
1. Board passes resolution
The company’s directors meet and decide to raise money by issuing shares. This decision is recorded in a formal document called a resolution.
2. Prepare prospectus
A prospectus is a brochure that tells potential investors about the company, the purpose of the issue, and the price of each share. It’s like a school’s flyer that explains why a new club is being started.
3. Obtain regulatory approval
The prospectus must be approved by the Securities and Exchange Board (or similar authority) to make sure all information is truthful.
4. Allot shares to applicants
After approval, the company allocates the requested number of shares to each applicant. If demand exceeds supply, a proportionate allotment is done.
5. Issue share certificates
Each shareholder receives a share certificate – a paper proof of ownership, similar to a ticket that proves you own a seat at a concert.
6. Enter journal entries
Accounting entries are recorded to show the inflow of cash and the increase in share capital.
Journal Entries for a Typical Share Issue
Assume a company issues 1,000 equity shares at ₹10 each, with a face value (the nominal value printed on the share) of ₹5. The extra ₹5 per share is called a share premium – the amount paid over the face value.
| Transaction | Debit | Credit |
|---|---|---|
| Cash received (1,000 × ₹10) | ₹10,000 | |
| Share Capital (face value) | ₹5,000 | |
| Share Premium Account | ₹5,000 |
In plain language, the company’s bank account gets bigger by ₹10,000, while two equity accounts – the official share capital and the extra premium – also grow.
Types of Shares Usually Issued
- Equity shares – Give voting rights and a claim on profits (dividends). Most common for the public.
- Preference shares – Holders get a fixed dividend before equity shareholders and have priority if the company is wound up. They usually don’t vote.
Imagine equity shares as a regular seat in a theater where you can shout “Encore!” (vote), while preference shares are like a VIP seat that guarantees you a snack (fixed dividend) but you stay quiet.
Key Points Summary
| Aspect | Details |
|---|---|
| Purpose | Raise long‑term capital without creating debt. |
| Legal step | Board resolution followed by prospectus and approval. |
| Accounting | Cash → Share Capital + Share Premium. |
| Common types | Equity shares, Preference shares. |
| Share certificate | Physical proof of ownership (now often electronic). |
📝 Likely Exam Questions
- Explain why a company may prefer to issue shares rather than take a bank loan.
Answer: Shares raise permanent capital, no fixed interest, risk is shared among many owners, and it improves the company’s creditworthiness. - List the major steps involved in the issue of shares.
Answer: Board resolution → Prepare prospectus → Obtain regulatory approval → Allot shares → Issue share certificates → Record journal entries. - Journalize the issue of 2,000 equity shares of ₹5 each at ₹12 per share.
Answer:
Dr. Bank ₹24,000
Cr. Share Capital ₹10,000 (2,000 × ₹5)
Cr. Share Premium ₹14,000 (2,000 × ₹7). - Differentiate between equity shares and preference shares.
Answer: Equity shares carry voting rights and variable dividends; preference shares have fixed dividends, priority in liquidation, and usually no voting rights. - What is a share premium and where is it shown in the balance sheet?
Answer: Share premium is the amount received over the face value of shares; it appears under the ‘Reserves and Surplus’ section as a separate line item.