CUET UG Business Studies Accounting Company Accounts Share Capital Debentures Issue at PremiumDiscount

Must-Know

• A company can issue shares at par, at a premium, or at a discount; however, discount on issue of shares is permitted only under Section 53 of the Companies Act, 2013, and not in the case of a public issue.
• Shares issued at a premium mean the issue price is higher than the face value; e.g., if face value is ₹10 and issue price is ₹13, ₹3 is the premium per share.
• Securities Premium Reserve can be used for issuing bonus shares, writing off preliminary expenses, and buy-back of shares, as per Section 52 of the Companies Act, 2013.
• Discount on issue of shares is shown under "Non-current liabilities" as a deduction from share capital in the Balance Sheet (Note: AS 11 does not apply; presentation follows Schedule III).
• Minimum subscription is 90% of the issued amount as per Rule 13(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014; if not received, allotment must be refunded.
• Calls-in-arrears is the amount not paid by shareholders on calls made; it is deducted from subscribed capital in the Balance Sheet.
• Calls-in-advance is the amount paid by shareholders before it is called; it is shown under "Current liabilities" and carries interest up to 6% p.a. as per Table F of the Companies Act, 2013.
• Forfeiture of shares occurs when a shareholder fails to pay allotment or call money; the amount received is transferred to "Share Forfeiture Account", a temporary account.
• Reissued forfeited shares can be issued at par, premium, or discount, but the discount cannot exceed the amount credited to Share Forfeiture Account.
• Debentures are debt instruments acknowledging a loan; they carry a fixed rate of interest and are issued under the company’s common seal.
• Irredeemable debentures are not repayable during the lifetime of the company; however, as per Section 71(4) of the Companies Act, 2013, no company can issue irredeemable debentures.
• Debentures can be secured or unsecured; secured debentures are backed by a charge on company’s assets.
• Discount on issue of debentures is a capital loss and shown under "Other Non-current Assets" in the Balance Sheet as per Schedule III.
• Premium on redemption of debentures is a loss and must be provided for before redemption; maximum premium allowed is 25% unless permitted by terms of issue.
• When shares are issued for consideration other than cash (e.g., machinery), the asset is recorded at agreed value and Share Capital credited accordingly; e.g., machinery worth ₹5 lakh for 50,000 shares of ₹10 each.
• Underwriting commission is allowed up to 2.5% on issue price for shares and 1.5% for debentures as per Table F of the Companies Act, 2013.
• Right issue is an offer to existing shareholders in proportion to their current holdings; it follows Section 62(1)(a) of the Companies Act, 2013.
• Private placement of shares under Section 42 allows issue to 200 or fewer persons in a financial year; securities premium can be received in this method.
• Buy-back of shares is allowed up to 25% of total paid-up equity capital in a financial year as per Section 68; funds cannot be used from proceeds of earlier issues of same kind.
• Debentures issued as collateral security do not require interest unless the primary security fails; no journal entry is made unless invoked.

Difficulty Level

Intermediate — Requires understanding of journal entries, Balance Sheet presentation under Schedule III, and application of Companies Act, 2013 provisions; numerical problems are moderate but concept-heavy.

Common CUET Traps

• Trap: Assuming discount on issue of shares is allowed freely like premium. Avoid: Discount on shares is highly restricted under Section 53; only permitted for sweat equity or to vendors, not public issues.
• Trap: Treating Securities Premium Reserve as profit available for dividend. Avoid: It is a capital reserve and cannot be used for dividend distribution; permitted uses are specified under Section 52.
• Trap: Believing debentures can be irredeemable. Avoid: Section 71(4) prohibits issuance of irredeemable debentures; all must be redeemed within 10 years (20 years for infrastructure companies with CRR approval).

Practice MCQs

1. Question: A company issues 10,000 shares of ₹10 each at a premium of ₹3 per share. What is the amount credited to the Securities Premium Reserve?
   A. ₹30,000
   B. ₹100,000
   C. ₹130,000
   D. ₹70,000
   Answer: A
   Explanation: Premium amount (₹3 × 10,000) = ₹30,000 is credited to Securities Premium Reserve.
   Why others fail: Option C is total issue proceeds, not just premium.

2. Question: Which of the following cannot be financed using the Securities Premium Reserve?
   A. Issue of bonus shares
   B. Writing off preliminary expenses
   C. Payment of dividend
   D. Buy-back of shares
   Answer: C
   Explanation: Dividend cannot be paid out of Securities Premium Reserve as it is a capital reserve.
   Why others fail: Students confuse capital reserves with revenue reserves, thinking all reserves can pay dividends.

3. Question: A company forfeited 1,000 shares of ₹10 each (₹7 called up) for non-payment of ₹4 per share. Later, these shares were reissued at ₹6 per share, fully paid. What is the balance in Share Forfeiture Account after reissue?
   A. ₹3,000
   B. ₹4,000
   C. ₹6,000
   D. ₹1,000
   Answer: A
   Explanation: Amount forfeited was ₹4 × 1,000 = ₹4,000; reissued at ₹6 (face ₹10), so discount of ₹4,000 charged to forfeiture account; balance = ₹4,000 – ₹1,000 (discount) = ₹3,000.
   Why others fail: Students forget to deduct the discount on reissue from the forfeiture account.

4. Question: Maximum period for redemption of debentures issued by a non-infrastructure company is:
   A. 5 years
   B. 10 years
   C. 15 years
   D. 20 years
   Answer: B
   Explanation: As per Section 71(4) of the Companies Act, 2013, debentures must be redeemed within 10 years, except for infrastructure companies (up to 20 years).
   Why others fail: Option D is correct only for infrastructure companies; students overlook this exception.

5. Question: A company received ₹50,000 as calls-in-advance from shareholders. At what maximum rate can it pay interest on this amount?
   A. 5% p.a.
   B. 6% p.a.
   C. 8% p.a.
   D. 10% p.a.
   Answer: B
   Explanation: Table F of the Companies Act, 2013 allows interest on calls-in-advance up to 6% p.a.
   Why others fail: Students assume higher rates are allowed, confusing it with loan interest rates.

Last‑Minute Revision

• ⚠️ Discount on issue of shares: allowed only under Section 53, not for public issues.
• ⚠️ Securities Premium Reserve: use for bonus shares, buy-back, preliminary expenses – not for dividend.
• ⚠️ Minimum subscription: 90% of issued amount – Rule 13(1).
• ⚠️ Calls-in-arrears: deducted from subscribed capital in Balance Sheet.
• ⚠️ Calls-in-advance: shown under Current liabilities, max interest 6% p.a.
• ⚠️ Forfeiture of shares: Share Forfeiture Account is temporary; balance transferred to Capital Reserve after reissue.
• ⚠️ Reissue of forfeited shares: discount cannot exceed forfeited amount.
• ⚠️ Debentures: always debt, carry fixed interest, not voting rights.
• ⚠️ Irredeemable debentures: prohibited under Section 71(4).
• ⚠️ Maximum redemption period: 10 years (20 years for infrastructure companies).
• ⚠️ Discount on debentures: shown under Other Non-current Assets.
• ⚠️ Premium on redemption: treated as loss, must be provided.
• ⚠️ Shares for consideration other than cash: asset recorded at agreed value.
• ⚠️ Underwriting commission: 2.5% on shares, 1.5% on debentures.
• ⚠️ Right issue: under Section 62(1)(a), offered to existing shareholders.
• ⚠️ Private placement: max 200 persons per financial year under Section 42.
• ⚠️ Buy-back limit: 25% of paid-up equity capital in a year – Section 68.
• ⚠️ Buy-back funding: not from proceeds of same type of securities.
• ⚠️ Collateral debentures: no entry unless invoked.
• ⚠️ Table F: governs interest on calls-in-advance and allotment money.