In accounting, share allotment, forfeiture, reissue, and bonus issues are important concepts that govern how shares are issued, forfeited, reissued, and distributed to shareholders. These concepts help companies manage their share capital and ensure that shareholder records are accurate. This tutorial explains these concepts with real-world examples.
Share allotment is the process by which a company issues shares to investors after they have applied for them. When a company raises capital through the issuance of shares, it must decide how many shares to allot to each applicant based on the number of shares they have requested and the total number of shares available. The process of allotment is an essential step in raising capital for the company.
Let’s assume that XYZ Ltd. is issuing 1,000,000 shares at $10 per share. The company receives applications for 1,500,000 shares. Since the company only has 1,000,000 shares available, the allotment will be done proportionally. The company might allot 2/3 of the shares to each applicant based on their original application.
Total Shares Available: 1,000,000
Total Applications: 1,500,000
Allotment Ratio: 2:3
If an investor applied for 300,000 shares, they will receive:
Allotted Shares = (2/3) * 300,000 = 200,000 shares
Share forfeiture occurs when a shareholder fails to pay the calls on their shares within the required time frame. When this happens, the company has the right to forfeit the shares, meaning that the shareholder loses their rights to the shares, and the company can reissue the forfeited shares to other investors.
Let’s say ABC Ltd. issued 10,000 shares at $10 each, with a requirement for payment in installments. The first installment of $5 per share is due, and an investor only pays $3 per share. As a result, the company decides to forfeit the shares after issuing a notice of forfeiture.
Total Shares Issued: 10,000
Total Payment Required: $10 per share
Amount Paid: $3 per share
Forfeiture: After non-payment of $2 per share (remaining $7), the shares are forfeited
The company can now reissue the forfeited shares to other investors.
Once shares are forfeited, they can be reissued to other investors. The company can sell these shares at a price equal to or greater than the unpaid amount on the forfeited shares, ensuring it recovers any outstanding amounts from the previous shareholder. The process of reissuing shares is an essential tool for companies to manage their share capital effectively.
Continuing from the forfeiture example above, ABC Ltd. forfeited 2,000 shares after an investor failed to make the required payment. The company decides to reissue the forfeited shares at $8 each, recovering the unpaid amount.
Forfeited Shares: 2,000
Reissue Price: $8 per share
Amount Received: 2,000 * $8 = $16,000
In this case, the company recovers $16,000 through the reissue, which covers the unpaid amount from the previous shareholder.
A bonus issue (also called a scrip issue or capitalization issue) is the process by which a company issues additional shares to its existing shareholders, free of charge, in proportion to their current holdings. This is typically done by capitalizing the company's retained earnings or reserves, meaning that the company converts some of its accumulated profits into share capital.
Let’s assume that DEF Ltd. has 1,000,000 shares outstanding and decides to issue a 1:1 bonus issue. This means that for every share an investor holds, they will receive one additional share, free of charge. The company decides to distribute bonus shares by capitalizing its retained earnings.
Total Shares Outstanding: 1,000,000
Bonus Issue Ratio: 1:1
Total Bonus Shares Issued: 1,000,000
If an investor holds 100 shares, they will receive an additional 100 shares as part of the bonus issue. After the bonus issue, their total shareholding will be 200 shares. The company does not receive any additional cash from shareholders for the bonus issue, but it increases its share capital and retains the same value for shareholders in the form of additional shares.
In conclusion, share allotment, forfeiture, reissue, and bonus issues are important processes in managing a company's share capital. Share allotment refers to the process of distributing shares to investors, while forfeiture and reissue help companies handle situations where shareholders fail to make payments on their shares. Bonus issues provide a way for companies to distribute additional shares to existing shareholders without raising new capital. Understanding these processes helps ensure that companies can effectively manage their capital structure and meet the needs of shareholders.