Why share issues matter for you
Ever wondered how a company turns ideas into tiny pieces of ownership that you can actually hold? Those pieces are called shares, and the way a company creates them is a core part of its accounts.
💡 In Simple Words: When a company needs money, it can split its capital into shares. Each share is like a small slice of the company that anyone can buy. The process of creating those slices is called a share issue.
What exactly is a share?
A share represents a unit of ownership in a company. Think of a pizza: if you cut it into eight slices, each slice is a share of the whole pizza. Owning a share gives you a right to a portion of the profits (called dividends) and a say in big decisions (through voting).
How does a company issue shares?
Issuing shares isn’t just printing pieces of paper. It follows a clear sequence that ensures legal compliance and accurate accounting.
Each step creates a paper trail that later shows up in the company's books.
Key journal entries
When shares are issued, two main accounts move:
- Share Capital – the amount raised from the issue.
- Bank – cash received.
For example, if a company issues 1,000 equity shares of ₹10 each, the entry is:
Bank ₹10,000
To Share Capital ₹10,000If the shares are issued at a premium (price above face value), another account called Share Premium records the extra money.
Bank ₹12,000
To Share Capital ₹10,000
To Share Premium ₹2,000Types of share issues you’ll see in exams
Exams love to test whether you can spot the right method. Here’s a quick comparison.
| Issue Type | When it’s used | Key features |
|---|---|---|
| Public Issue | First time a company raises money from the public | Requires prospectus, regulated by SEBI, shares listed on stock exchange |
| Rights Issue | Existing shareholders are offered new shares | Pro‑rata allotment, cheaper than public issue, no new prospectus needed |
| Bonus Issue | Company converts reserves into free shares | No cash flow, increases number of shares, each share’s market price adjusts |
| Private Placement | Shares sold to a select group (institutional investors, promoters) | Fast, less regulatory hassle, often at a discount |
Worked example: Rights issue
Imagine XYZ Ltd has 10,000 equity shares of ₹10 each (₹100,000 share capital). It announces a 1:2 rights issue at ₹8 per share. That means for every two shares you own, you can buy one new share.
Steps:
- Calculate number of new shares: 10,000 ÷ 2 = 5,000 shares.
- Cash to be received: 5,000 × ₹8 = ₹40,000.
Journal entry:
Bank ₹40,000
To Share Capital ₹40,000Notice the share capital increases because the issue price (₹8) is equal to the face value (₹10) minus a discount, but the discount is absorbed by the share premium account if any.
Common pitfalls and how to avoid them
- Mixing up face value and issue price. Face value is the nominal value printed on the share certificate; issue price is what investors actually pay.
- Skipping the premium account. Any amount above face value must go to Share Premium, not directly to Share Capital.
- Forgetting to update the share register. The register is the official list of who owns what; it must reflect every issue.
Quick recap
- Share issue = creating new ownership units.
- Legal steps: board resolution → prospectus → approval → allotment → certificate → register.
- Journal entries always debit Bank and credit Share Capital (plus Share Premium if applicable).
- Know the four main issue types: public, rights, bonus, private.
📝 Likely Exam Questions
- Explain the journal entry for a bonus issue of 1 share for every 4 shares held.
Answer: No cash is involved. The entry is:
where ₹X equals the total face value of the bonus shares transferred from the premium account.Share Premium ₹X To Share Capital ₹X - XYZ Ltd issued 2,000 equity shares of ₹5 each at ₹7 per share. Show the journal entry.
Answer:Bank ₹14,000 To Share Capital ₹10,000 To Share Premium ₹4,000 - List two differences between a rights issue and a public issue.
Answer: (i) Rights issue is offered only to existing shareholders, while public issue is open to anyone. (ii) Rights issue usually doesn’t need a prospectus, whereas public issue requires a detailed prospectus and SEBI approval. - Why must the share register be updated after every issue?
Answer: It provides legal proof of ownership, helps calculate dividends, and is required for compliance with the Companies Act.