Open In App

Oversubscription of Shares: Accounting Treatment

Improve
Improve
Like Article
Like
Save
Share
Report

A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,000 and is divided into 10,000 units of ₹100 each. Each unit of ₹100 will be called a share. To easily identify the shares, it is essential to give them numbers. The share of a company is moveable in nature and can be moved through the process stated by the Articles of Association of the Company. 

According to Indian Companies Act, 2013, “Shares means shares in share capital of the company and includes stock except where the distinction between stock and share is expressed or implied.”

Oversubscription of Shares:

It is possible that a company receives applications for more shares than the shares offered to the public for subscription. This kind of situation is known as an Oversubscription. It is usual that the shares of a sound and well-managed company get oversubscribed. However, a company cannot allot more shares than it has offered to the public for subscription. At times of oversubscription of shares, a company has three alternatives. These alternatives are as follows:

1. First Alternative:

Under the first alternative, the company makes full allotment to some applicants and rejects excess applications, and returns the money to those applicants. For example, A company invites applications for 90,000 shares and receives applications for 1,30,000 shares. In this case, allotment of shares will be made as under:

First Alternative

 

2. Second Alternative:

Under the second alternative, the company makes pro-rata allotments among the applicants. It means that the company does not reject any application and allots shares to all applicants on a proportionate basis. The excess money paid by the shareholders is then adjusted on share allotment and on subsequent calls unless otherwise mentioned. For example, A company invites applications for 50,000 shares and receives 80,000 applications. Now, the company will allot shares to the shareholders in the proportion of 50,000:80,000; i.e., 5:8. It means that the applicant of 8 shares will be allotted 5 shares. This is known as pro-rata allotment. The excess money of the holders will be adjusted on the allotment and subsequent calls. If after adjusting money on allotment and calls, a surplus amount is left, then that amount will be returned to the shareholders at the time of share allotment. 

3. Third Alternative:

A company may also use a combination of the first two alternatives. It means that a company accepts some applications in full, rejects some applications, and makes pro-rata allotments for the remaining applicants. For example, A company invites applications for 60,000 shares and receives applications for 90,000 shares. It accepted applications of 20,000 shares in full, rejected applications of 10,000 shares, and allotted applications of 60,000 shares on a pro-rata basis. The allotment will be made as follows:

Third Alternative

 

Accounting Treatment Concerning Oversubscription:

1. If surplus applications are rejected:

In this case, the application money received from these applicants is returned, and the journal entry for the same will be:

If surplus applications are rejected

 

2. Pro-rata Allotment:

Pro-rata Allotment is a situation in which a company allots shares on a proportionate basis. And adjusts the excess money first on the allotment and then on subsequent calls. If the money still remains in surplus, it is returned to the applicants at the time of allotment. The entry for the same will be as follows:

Pro-rata Allotment

 

3. Full Allotment, Pro-rata Allotment, and No Allotment:

The directors of a company can use a combination of the first two methods. The entry for the same will be as follows:

Full Allotment, Pro-rata Allotment, and No Allotment

 

Difference between Undersubscription and Oversubscription:

Difference between Undersubscription and Oversubscription

 

Statement showing the Adjustment of Application Money Received:

When there is an oversubscription of shares, an Adjustment Table can be prepared to show the adjustment of application money received by the company.

Analysis Table

 

Illustration:

Sukant Ltd. issued 60,000 shares of ₹10 each at a premium of ₹2 per share payable as follows:

₹3 on Application

₹5 on Allotment (including Premium)

₹4 on First & Final Call

Applications were received for 1,05,000 shares. The Directors resolved to allot as follows:

  • Applicants of 70,000 shares: 40,000 shares
  • Applicants of 30,000 shares: 20,000 shares
  • Applicants of 5,000 shares: Nil

Calculate the amount received on Allotment.

Solution:

 

Analysis Table

 

Amount Received on Allotment

Amount Received on Allotment

 


Last Updated : 05 Apr, 2023
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads