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Unit 1: Share Capital – Issue of Shares

The issue is said to be over-subscribed if the number of shares applied is more than the number Notes
of shares offered to issue. As explained earlier, in any condition the board of directors cannot
allot more shares than the shares offered for issue in the prospectus. Therefore, the board of
directors have to adopt any one of the following methods in such a situation:
(a) Total excess applications of shares over the shares issued may be rejected and their
application money refunded with the letter of regret. For this purpose, journal entry
will be:

Share Application Account Dr. (with actual refund)
To Bank Account
(Being the refund of excess application money on ______ shares @ _______ per shares)
(b) Allotment is made on pro-rata basis to the all applicants. In the pro-rata allotment, shares
are partially allotted to all applicants. No application for shares is refused and also no
applicant is allotted the shares in full. In pro-rata allotment all applicants get shares in the
same proportion. This proportion is: Total shares issued : Total shares applied for. For
instance, if one has applied for 200 shares and he is allotted 100 shares only. This would be
pro-rata allotment. Here, the basis of allotment would be one share allotted for every two
shares applied for. In this case, excess application money is not refunded to the applicant
but is adjusted towards the money due on allotment and the deficit of allotment money
will be payable by the applicant at the time of allotment money due. For this purpose
entry will be:
Share Application Account Dr. (with the excess application money)
To Share Allotment Account

(Being the excess application money transferred to share allotment account)
(c) In the form of third alternative the directors may adopt the following criteria:
(i) Some applicant may be totally rejected.
(ii) Some applicants may be accepted in full.

(iii) The remaining applicants will be allotted on the basis of pro-rata.
Where pro-rata system is adopted to allot shares, the excess application money will be transferred
from the share application account to the share allotment account. To the extent of allotment
money on shares allotted, the balance of excess of application money is refunded. If the directors
are authorised by the Articles, this balance of excess of application money will be transferred to
calls-in-advance account. If the application money received from any applicant exceeds the total
amount payable on shares allotted to him, such an excess will have to be refunded. Thus, the
combined journal entry for the disposal of excess application money will be:
Share Application Account Dr.
To Share Allotment Account

To Share Calls-in-Advance Account
To Bank Account.
In brief, if the entire surplus application amount is not refunded and is equal to the allotment
money due on shares allotted, these shareholders will not pay any amount on allotment. If it is
less than the allotment money due, the applicants have to pay the deficit amount on allotment
and if it is more that allotment money due, first it will be utilised for allotment money in full
and balance can be returned or transferred to the calls-in-advance account.

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