Page 11 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Convertible Cumulative Preference Shares

Companies limited by shares are permitted by the Controller of Capital Issue (CCI) to issue
cumulative convertible preference shares (CCP) for which guidelines are framed by the Central
Government. For the objective of setting up new projects, expansion or diversification of existing
projects, normal capital expenditure for modernisation and the requirement of working capital
CCP shares can be issued. As per the guidelines of CCI, the entire issue of CCP shares would be
convertible into equity shares between the end of 3 years and 5 years, as may be decided by the
company and approved by the CCI. The rate of preference dividend on CCP shares would be
10%. The face value of these shares will ordinarily be ` 100 each.

Notes The conversion of Cumulative Preference Shares into equity shares would be
compulsory at the end of five years and these preference shares would not be redeemable
at any stage.

Equity Shares

Those shares which are not preference shares are called equity or ordinary shares. Equity
shareholders do not have any priority as to dividend or refund of capital. The balance of profit
after paying the preference dividend can be distributed among the equity shareholders as
dividend. There is no fixed rate of dividend for these shareholders. Right to claim dividend on
equity shares will arise only when the dividend is declared by the company in the general
meeting. In the case of the liquidation of a company, the equity shareholders would be paid only
if any surplus is left after the return of preference share capital.
1.3 Issue of Shares

The process of collecting the capital by issue of shares for a newly formed company, or an
established company requiring more capital for its expanding operations, is the same. Only a
public company can issue its shares to the public by issuing a prospectus. This invites the public
to submit their applications to take up the shares of the company. The Prospectus gives detailed
information about the company, the details of the issue, issue highlights, terms of present issue,
risk factors, history of the company, main objectives and present business, details of the projects
for which capital is being raised, prospects and profitability, market price of the share, previous
issues, companies under the same management, minimum subscriptions and any other details
as stated in the Companies Act. Details regarding the procedure to apply for the shares are also
given in application form. The prospectus gives details of the number and class of shares offered
and manner in which the amount of shares is to be paid by the public. Generally, the total
amount of shares is paid in a number of instalments. These instalments are termed as:

First Instalment : Application Money
Second Instalment : Allotment Money
Third Instalment : First Call Money
Fourth Instalment : Second Call Money

Last Instalment : Final Call Money

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