UNIT -I

Accounting for Share Capital & Debentures

1.1 Issue of Shares, Forfeiture and Reissue of Forfeited Shares- Concept & process of Book Building, Issue of rights and bonus shares; Buy back of Shares, Redemption of Preference Shares

A company may be a group of individuals who donate money or price to common shares and use it for a standard purpose. Within the words of Judge James, "a company may be a group of individuals united for a standard purpose." Article 3 (1) (i) of the businesses Act of 1956 defines a corporation as "a company established and registered under this Act or an existing company".

Company Characteristics

1. It's a voluntary association of individuals
2. There's a separate legal entity
3. There's a standard seal
4. It's permanent inheritance.

Company Type

1. Supported Formation

1. Chartered Company – a corporation established under a special Chartered Company by a king or sovereign, like the Malay Archipelago Company.
2. Legislative Companies – These companies are formed by special legislative or parliamentary legislation like RBI.
3. Registered Companies-Such companies were established under the businesses Act of 1956 or were registered under the previous Companies Act.

II.            Based On Responsibility

1. Limited Companies-In these companies, the liability of every member is restricted to the face value of the shares he holds.
2. Guarantee Company-The liability of a member of such a corporation is restricted to the quantity he undertakes to contribute to the Debentures 's assets if the company is liquidated.
3. Unlimited Companies – In these companies, the members have unlimited liability and therefore the members are personally susceptible to the creditors of the Debentures that creates up for the shortfall. Such companies are rare lately.

III.            Based on Public Investment

1. Private Companies – These are companies thereunder clause,

a)     Limiting the amount of members to 50,

b)    Prohibiting invitations to the overall public to subscribe shares or Debentures,

c)     Restrict the transfer of shares.

B.    Public Companies – These are non-private companies.

Share Capital

The total capital of a corporation is split into small units. Each is named a share. Consistent with Article 2 (46) of the businesses Act of 1956, shares are defined as shares of the company's equity capital. Includes shares unless the excellence between shares is explicitly or implied.

Share Class

A. Preferred Shares

Shares that enjoy preferential dividends and capital repayments when the Debentures is liquidated instead of shares are called preferred share . Holders of preferred shares receive fixed rate of interest dividends.

Types of Preferred Shares

1. Cumulative Preferred Share – For these shares, the delinquent dividend is going to be carried forward and paid from subsequent year's profits.
2. Non-Cumulative Preferred Shares – If dividends don't accumulate and aren't carried forward to next year, they're called non-cumulative preferred shares.
3. Participating Preferred Shares – A balance of interests shared by some preferred shareholders (after meeting the share dividend) additionally to fixed dividends. Such shares are participation preferred shares.
4. Non-Participating Preferred Shares – these shares only receive fixed rate dividends. These aren't a part of the excess profit.
5. Redeemable Preferred Shares – If the well-liked share is returned to shareholders after a period of your time, these preferred shares e-shares are called redeemable preferred shares.
6. Convertible Preferred Shares – These shares are entitled to conversion into shares within a specified period or on a specified date, subject to issuance conditions.

B. Shares

Shares aren't preferred shares. Shares don't provide a preferential benefit in terms of dividends or capital repayments. Therefore, these are referred to as common shares. There's no fixed dividend rate paid to shareholders, and this rate can vary from year to year. At the time of liquidation, equity capital are going to be repaid last. However, shareholders do have full voting rights.

Types of Share Capital

1. Authorized (Registered or Nominal) Capital – this is often the utmost amount of capital that a corporation is allowed to boost through a public subscription.
2. Issued Capital – a number of the authorized capital generally provided for subscriptions is named Issued Capital.
3. Participating Capital – The portion of issued capital that receives an application from a public institution is named Participating Capital.
4. Called Capital – The portion of the subscribed capital called or requested by the Debentures is named called capital.
5. Paid-In Capital – The portion of the called capital provided by the member and truly paid is named paid-in capital. The outstanding balance of the called capital is named the outstanding capital or delinquent call.
6. Reserve Capital – The portion of uncalled capital that's called only the Debentures is liquidated.

Difference between Equity Shares and Preference Shares

Issue of Share Capital

Shares can be issued at face value, premium, or discount. If a shareholder needs to pay the company the par value of the shares, the shares are said to be issued at par. Shares are said to be issued at a premium if shareholders are required to pay more than par by the company. Shares are said to be issued at a discounted price if shareholders need to pay the company less than par. For example, a company issues shares with a par value of Rs.10 at Rs.10. It's a par issue. When issued in Rs. 12, the problem is premium. If issued in Rs.8, the issue will be discounted.

The issue price of the shares can be received in one installment or in another installment. If the issue is a different installment payment, you may be paid for the application, allocation, and one or more calls. The application amount is called the application amount, the membership fee is called the allocated amount, and the rest is called the billed amount. According to the SEBI guidelines, the application fee issued must be at least 25% of the issue price (5% according to the Cos Act).

Share Allocation

Allocation of shares means accepting the applicant's offer to purchase shares. The Directors have the discretion to reject or accept the application. However, a public company cannot allocate its shares unless a minimum subscription is subscribed to by the general public and the amount of application is received. After allocating shares to applicants who will become shareholders of the company.

Journal Entries for Share Issue

1. On receipt of application money:

Bank A/C Dr

To Share Application A/C

2.    On Acceptance of Application:

Share Application A/C                      Dr

To Share Capital A/C

3.    On Allotment Money Due:

Share Allotment A/C                          Dr

To Share Capital A/C

4.    On Receipt of Allotment Money:

Bank A/C Dr

To Share Allotment A/C

5.    On Making First Call Due:

Share First Call A/C Dr

To Share Capital A/C

6.    On Receipt of First Call Money:

Bank A/C Dr

To Share First Call A/C

(Note: similar entries may be passed for second call, third call, if any.)

Problem 1

Bharat Trading Co. Ltd. With registered capital of Rs.100000 issued 5000 shares of Rs.10 respectively, Rs.2 at the time of application, Rs.2 at the time of allocation, Rs.3 at the first call, and the last Issued Rs.3 on the call. Pass journal entry assuming that the issued shares are fully subscribed and money has been received.

A1.             Journals in the books of Bharat Trading Co Ltd.

Issue of Shares at Premium

Shares are said to be issued at a premium if shareholders are required to pay more than par by the company. The excess amount received above par is called the share premium. Receipt of capital. The share premium will be transferred to "Securities Premium A / c". It should appear under the heading "Reserves and Surplus" on the liabilities side of the balance sheet.

Journal Entries:

(a) If Premium is Received with Application Money:

(i)   Bank A/C Dr

To Share Application A/C

(ii) Share Application A/C Dr (With Total)

To Share Capital A/C (Application Money)

To Securities Premium A/C (Premium)

(b) If Premium is Received with Allotment Money:

(i)   Share Allotment A/C Dr (Total)

To Share Capital A/C (Allotment Money Due)

To Securities Premium A/C (Premium)

(ii) Bank A/C Dr

To Share Allotment A/C

Issue of Shares at Discount

Shares are said to be issued at a discounted price if shareholders need to pay the company less than par. The share issuance discount is a capital loss and must be debited in a separate account called the share issuance discount A / c. It is displayed in "Miscellaneous expenses" on the asset side of the balance sheet. The discount rate must not exceed 10% of the nominal value of the share. Issuance discounts are usually recorded at the time of allocation. In addition, newly registered companies cannot issue shares at a discounted price. The journal entry is

Problem 2

The limited liability company issued 5000 shares of 10 rupees each with a premium of 5 rupees per share. The amount was paid as Rs.3 at the time of application, Rs.7 to the quota (including premium), and the balance of the first and last calls. All shares have been subscribed and the money has been properly received. Shows journal entries.

A2.                                        Journal Entries

When Both Preferred Share and Share Are Issued

If the company issues both preferred shares and shares, the journal entries will be written separately for each type of equity capital.

Under Share Subscription

The application for shares received may be less than the number of shares issued. It is called under the subscription. In this case, the allotment will be the same as the number of tendered shares, not the number of issued shares.

Share Oversubscription

The application for shares accepted may exceed the number of shares issued. This is called oversubscription. If you have an oversubscription, you may not be able to issue shares to all applicants. In such situations, the Company shall reject some applications altogether, allocate the full amount to some applications, and prorate some applications. Proportioning is the ratio of the number of shares to be allotted to the number of shares to be applied, and is to be distributed to each application. If the application is completely rejected, it will be returned to the applicant. With proportional distribution, the excess is adjusted at the time of allocation or call. The surplus will be refunded to the applicant even after the adjustment. The journal is

1. When Application money is returned: Share Application A/c Dr

To Bank A/c

2.   When excess Application is adjusted towards Allotment or Call:

3.     Share Application A/c Dr (total)

To Allotment A/c (amount adjusted towards Allotment)

To Call (if any) (amount adjusted towards Call)

Problem 4

Sun Ltd. Will issue 100,000 shares of Rs.10 to Rs.3 at the time of application, Rs.5 at the time of allocation, and Rs.2 at the first and last calls. There were applications for 250,000 shares. The company returned the application for 24,000 shares, and the excess application fees from the remaining applicants were carried over with partial satisfaction with the allotted amount of shares allocated. Received the balance of the allocation. The company didn't make the first and last call. Journal the transaction.

A4.                                            Entries in the books of Sun Ltd

Calls in Arrears and Calls in Advance

Shareholders may neglect to pay reserves or make phone calls. Such membership fees are called overdue calls. It appears on the balance sheet as a deduction from the recalled capital. Directors are entitled to charge interest on overdue calls at the rates stated in the article. Without it, the interest will not exceed 5% pa. If shareholders pay more than they are billed, the excess is called pre-billing. The company must pay interest on the call-in advance at the rate specified in Articles. Without it, the company is obliged to pay interest at an annual interest rate of 6%. However, shareholders cannot pay dividends by telephone in advance.

Forfeiture of Shares

Cancellation of shares due to non-payment of allowances or call money within a certain period of time is called forfeiture of shares. This is a forced termination of membership of a defaulting shareholder. He also loses all the money he has paid to the company so far. A company may confiscate shares only if approved by that clause. Forfeiture will only occur after 14 days' notice to the defaulting shareholders. The balance of expired shares A / c must be presented in addition to the capital summoned to the liabilities side of the balance sheet until the shares are reissued.

Journal Entries:

1. Forfeiture of shares which were issued at Par:

2.     Forfeiture of shares which were issued at Premium:

1. When Allotment money (incl. premium) and call money not paid

3.     Forfeiture of shares which were issued at discount:

Problem 5:

Kerala Ltd issued 5000 shares of Rs.10 as Rs.3 at the time of application, Rs.2 at the time of allocation, Rs.3 at the first call and Rs.2 at the last call. Ali was allocated 50 shares and failed to pay the quota and make the first call. If those shares are forfeited, please enter a journal.

A5.

Problem 6

Malabar Ltd has Rs.3 at the time of application, Rs.4 (including premium) at the time of allocation, Rs.3 at the first call, and Rs.2 premium paid at the last call as Rs.2. Issued 5000 shares. Mr. Ajay was allocated 50 shares and failed to pay the quota and make his first call. If those shares are forfeited, please enter a journal

A6

Problem 7

Jay Ltd issued 5000 shares of Rs.10 at a 10% discount, Rs.3 at the time of application, R.1 at the time of allocation, Rs.3 at the first call and Rs.2 at the last call. Mr. Raju was allocated 50 shares and failed to pay for the first and last phone calls. If those shares are forfeited, please enter a journal.

A7.

Reissue of Forfeited Shares

The forfeited shares can be reissued by the company for PR, premium, or discount. However, the reissue discount must not exceed the forfeited amount.

Journal Entries:

1. On reissue at par (issued at par or premium):

Bank A/c     Dr (amount received on reissue)  

To share capital A/c (amount paid up)

2.     On reissue of at a discount (issued at par or premium):

Bank A/c                 Dr (amount received on reissue) Forfeited shares A/c Dr (amount of discount on reissue)

To share capital A/c (amount paid up)

3.     On reissue at a premium (issued at par or premium):

Bank A/c Dr (amount received on reissue)  

To share capital A/c (amount paid up)

To security premium A/c (premium on reissue)

4.     On reissue at a discount (issued at a discount):

Bank A/c    Dr (amount received on reissue) Discount on issue of shares A/c Dr (amount of original discount)

Forfeited shares A/c Dr (excess of discount on reissue over original issue)

To share capital A/c (amount paid up)

If all forfeited shares have been reissued, the credit balance in forfeited shares A/c (capital profit) shall be transferred to capital Reserve A/c by passing the following entry

Forfeited shares A/c Dr

To capital reserve A/c

If all forfeited shares are not reissued, only the profit on shares which are issued is transferred to Capital reserve A/c.

Problem 8

The directors of A Ltd have resolved to confiscate the 2000 shares for which Rs.10 and Rs.7.50 were paid, respectively, due to the unpaid final call of Rs.2.50. Of the above shares, 1800 were reissued for Rs 6 per share. Shows journal entries.

A8.

Problem 9:

Arjun Ltd invited 10000 shares of Rs.100 with a premium of 5% each as Rs.25 at the time of application, Rs.45 for allocation (including premium) and Rs.35 for first and last calls. There were 9000 shares submitted and all were accepted. All monetary membership fees were received, except for the call for 100 shares confiscated. Of these 50 shares, they were reissued with the fully paid Rs.90. Pass the journal

A9. 

Surrender of shares

Shareholders may not be able to pay any further calls and may return their shares to the company for cancellation. The return of shares to such a voluntary company by the shareholders themselves is called a waiver of shares. Accounting for abandonment of shares is the same as accounting for confiscation of shares.

Redemption Of Preferred Share

If Preferred Share is issued, the company will reimburse such shareholders after the expiration of a set period of time, regardless of whether the company is liquidated.

In accordance with Article 80 of the Companies Act, a limited liability company may redeem preferred share in accordance with the following conditions.

1. All shares to be redeemed must be paid in full.
2. Such shares may be redeemed from either profits or income from the issuance of new shares. However, these cannot be redeemed from the issuance of new Debentures or the sale of company assets.
3. The premium paid at the time of redemption must be provided from the company's profit or the company's securities premium account.
4. If the shares are redeemed from profits, the amount equal to the nominal amount of the shares so redeemed must be transferred from the profits to the reserve account, i.e. the capital redemption reserve A / c.
5. Capital Redemption Reserve A / c can only be used to issue fully paid bonus shares.

Preferred share can be redeemed at face value or premium (but not at a discount). Redemption premiums are offered from existing Security Premium accounts or newly issued Security Premiums. If they are not sufficient, the redemption premium should be provided from the income statement or general reserve.

Redemption Method

There are three ways to Redeem Preferred Share. They are:

1. Redemption by issuing new shares
2. Redemption from profit
3. Partly redemption from new issuance and part from profit

Accounting Entries:

1. Ensure that the redeemable preference shares are fully paid. If they are partly paid, the following entries are passed to make them fully paid.

(a) Preference Share Final Call A/c Dr

To Preference Share Capital A/c

(b) Bank A/c Dr

To Preference Share Final Call A/c

2.     Entry for total amount due to preference

Shareholders

Preference Shares Capital A/c Dr (face value)

Premium on Redemption A/c                           Dr (premium on redemption)

To Preference Shareholders A/c (total amount payable on redemption)

3.     Entry for issue of equity shares either with or without premium

Bank A/c Dr (amount received)

Discount on issue of shares A/c Dr (if shares issued at discount)

To Equity share capital A/c  (face value of shares issued)

To Security Premium A/c  (if shares issued at premium)

4.     Entry for providing premium on redemption

Security premium A/c

Or P& L A/c

Or General Reserve A/c Dr

To Premium on Redemption A/c

5.     Entry for appropriation from divisible profits to meet deficiency of amount on redemption (or if redemption is out of profit)

P & L A/c or General Reserve A/c Dr

To Capital Redemption Reserve A/c

6.     Entry for payment to preference shares

Preference Shareholders A/c Dr

To Bank A/c

Problem 10

Sun Ltd had 8000, each with 8% redeemable preferred share of Rs.25, and Rs.20 was called. The company has decided to redeem the preferred share at a premium of 5% by issuing a sufficient number of shares of Rs 10 paid in full at a premium of 10%. Pass the journal related to the redemption.

A10.    Nominal value of shares to be redeemed200000

Premium on redemption 10000

Total amount required for redemption 210000

No. Of shares to be issued (except premium) 200000 = 20000

10

Problem 11

The following is an excerpt from Raja Ltd.’s Balance Sheet as of December 31, 2011.

1. 10000 rupees share 10,000 rupees 100,000 rupees each

2.     10000, 8% Preferred Share of each Rs.10 Rs.100000

3.     Capital reserve Rs.50000

4.     General reserve Rs.30000

5.     P & L A / c Rs.85000

The company will redeem the Preferred Share on January 1, 2012. Please fill in the journal.

A11.

Problem 12:

The company has 10,000, each fully paid 11% Redeemable Preferred Share of Rs 100. The company will redeem the shares at face value. For this purpose, we will issue 50,000 shares of 10 rupees each and make the balance available from the cumulative profit (P & L A / c). The issue was completely subscribed. Enter the journal.

A12.

Use of equation for determining the face value of shares to be issued

An equation can be applied when the given amount of premium in security premium A / c in the balance sheet plus amount of premium to be obtained from fresh issue of shares is not sufficient to pay premium on redemption of preference shares. Premium A / c given in balance sheet cannot be used for redeeming the face value of shares.

(a) When fresh issue is to be made at a premium:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A / c in B / S} + {Revenue profit available for redemption} + {N} + {N x% rate of premium on fresh issue}]

(b) When fresh issue of shares is to be made at a discount:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A / c in B / S} + {Revenue profit available for redemption} + {N}-{N x% rate of discount on fresh issue}]

Note: N = Nominal value of fresh issue of shares to be made for redemption

Problem 13:

The amount of new shares to be issued will be determined from the following information related to A Ltd. Redeemable Preferred Stock Rs.200000, Redemption Premium 10%, Splitable Profit Rs.60000, General Reserve Balance Rs.40000, Security Premium A / c Rs.15000. If the new issue is (I) 5% premium and (II) 10% discount.

1. A13. If fresh issue is made at a premium of 5%:

Redeemable preference share capital + premium on redemption] = [{Balance in security premium A/c in B/S} + {Revenue profit available for redemption} + {N} + {N x % rate of premium on fresh issue}]

[200000 + 20000] = [15000+ 60000+ 40000+N + 0.05N] 1.05N = 220000‐115000

N = 105000 = Rs. 100000

1.05

II.            If fresh issue is made at a discount of 10%:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A/c in B/S} + {Revenue profit available for redemption} + {N} ‐ {N x % rate of discount on fresh issue}]

[200000 + 20000] = [15000+ 60000+ 40000+N ‐ 0.1N] 0.9N = 220000‐115000

N = 105000 = Rs. 116667

0.9

Buy Back of Shares

Buyback is a way to cancel stock capital. That simply means buying your own stock. That leads to a decrease in the company's stock capital.

Purpose of Buy Back

1. Return surplus cash to investors
2. To improve financial condition
3. How to increase EPS
4. To raise the market price of stocks

Benefits of Buyback

1. Helps return surplus cash to investors
2. Helps increase EPS
3. It increases promoter holdings in the company
4. Helps rebuild the company's capital base

Disadvantages of Buy Back

1. Means undervalued company stock
2. May be used as a tool for insider trading
3. May be used to manipulate the price of a stock.

How to buy back

Following the SEBI guidelines, there are two ways to buy back shares. They are:

1. Tender Offer-This allows a company to buy back its shares proportionally from existing shareholders.
2. Buy back from the public market – Companies can also buy back their shares from the public market through either the stock exchange or the Book Building Process.

Classification Of Issues

(A) Public Issues

1. Initial public offering (IPO)
2. Follow the open involve participants (FPO)

(B) Rights Offering

(C) Bonus Issues

(D) Private Placement

1. Priority issues
2. Eligible institutional placement

Publication Issue:

When a security is issued / offered for subscription / purchase generally, it's called a public issue. Public offerings are often further divided into initial public offerings (IPOs) and post-public offerings (FPOs).

Initial Public Offering (IPO):

When an unlisted company issues a replacement / first issue of a security, it's called an IPO.

Follow the general public Offering (FPO):

When a corporation that's already listed goes public, it's called a public offering follow (FPO). Therefore, the FPO process begins after the IPO.

Rights Issue

When an issuer issues securities to current / existing shareholders, it's called a right offering. Rights are provided at a selected ratio to the number of securities held as of the record date.

Bonus Issues

When an issuer issues additional securities to existing shareholders for free of charge, it's called a bonus issue.

Private Placement

Private placement may be a thanks to raise funds by selling securities to a comparatively small number of selected investors. Investors involved privately placements are usually large banks, mutual funds, insurance companies and pension funds. Private placements are different from open offerings. Public offering allows securities to be sold to all or any sorts of investors within the open market. There are two sorts of private placement of shares or convertible securities by listed issuers:

Priority Assignment:

When a listed issuer issues shares to a gaggle selected consistent with SEBI guidelines, it's called a preferred allotment. Issuers are required to suits various provisions, including pricing, notice disclosure, lock-in, etc., additionally to the wants specified by the businesses Act.

Qualified Institutional Placement (QIP): When a listed issuer issues shares to a professional institutional purchaser only from a regulatory perspective in accordance with SEBI guidelines, it's called a QIP. Qualified institutional investors are generally institutional investors with the expertise and financial strength to take a position in capital markets. "Qualified Institutional Investors" include:

1. Scheduled full-service bank.
2. Mutual fund;
3. Foreign institutional investors registered with SEBI.
4. Multilateral and bilateral development financial institutions.
5. Risk capital funds registered with SEBI.
6. Foreign risk capital investors registered with SEBI.
7. State Industrial Development Corporation.
8. An insurance firm registered with the Insurance Regulatory Development Authority (IRDA).
9. Provident fund with an outlined minimum corpus
10. Pension fund with a minimum corpus
11. Public financial institutions as defined by the businesses Act 2013

How to Price Public Issues

There are two ways

1. Fixed Price Method:

In an initial public offering (IPO), when shares are offered at a fixed price, such issuance is called a fixed price issue. This is the second preferred method of going public. In the offer document, the issuer must provide a fixed price reason and appropriate justification. In general, companies only address the fixed price issue if management determines that they can determine fair prices between companies without testing in the market as in book building.

B.    Book Building Method

This is the process used in an IPO to efficiently find prices and determine the number of shares to be issued. The price at which the security is offered is initially unknown. It is only known after the end of the book building process. This is a common way to market new issues in some developed countries. In the book building method, the market discovers the price, not the company determines the price.

How the Book Building Method Works

With this method, the price of the stock is not fixed. Instead, the company fixes a price range in which the stock can be sold. The highest price cannot exceed 120% of the lowest price. The bid is then invited to the stock. The IPO must remain open for a minimum of 3 days, during which bids will be placed. Investors can bid within the lowest price or price range. The actual price of a stock is determined by the number of bids received from investors (depending on the price range).

The lead underwriter, known as the bookrunner, determines the level of interest from investors at various price levels and obtains commitment. While the book is being created, you will be able to see the demand at different prices and investors will be able to submit bids accordingly.

Bids will be collected from investors during the IPO period. The bid price may be above the minimum price or it may be the minimum price. The offer price will be fixed based on the bid you receive and will be fixed after the end date of the bid.

Example:

In this way, the company does not fix a specific price for the stock, but instead offers a price range such as Rs. 80 to 100. When bidding on a stock, the investor must determine the price at which to bid on the stock (eg Rs). 80 rupees 90 or Rs. 100. They can bid

For stocks of any price within this range. The final price is fixed based on the supply and demand of the stock.

The lowest price (Rs. 80) is called the lowest price and the highest price (Rs .100) is called the upper price. The price at which the stock is allocated is known as the cutoff price. The entire process begins with the selection of a lead manager, an investment banker whose job is to make the issue publicly available.

Both the lead manager and the issuer determine the price range and issue size. Next, syndicate members are hired to get bids from investors. The problem usually stays open for 5 days. At the end of the offering period, the chief manager and issuer determine the price at which the shares will be sold to investors.

If the issue price is lower than the maximum price, the investor who bids at the maximum price will receive a refund and the investor who bids at the minimum price will eventually pay additional money. For example, if the cutoff in the above example is fixed at Rs. Those who bid at 90, Rs. 80, you have to pay rupees. Those who bid for 10 rupees per share. You will get a refund of 100, Rs. 10 per share. Shares are allocated when each investor pays the actual issue price.

Book Building and Fixed Price Methods:

The main difference between the book-building method and the list-price method is that the issue price is not initially determined in the former. Investors must bid on stocks within a given price range. The issue price is determined based on the supply and demand of shares.

On the other hand, in the fixed price method, the price is decided from the beginning. Investors cannot choose the price. They have to buy the stock at the price decided by the company. The book building method shows the demand every day during the offer period, while the fixed price method shows the demand only after the issuance is finished.

Major financial intermediaries in the Book Building Process

Below are the financial intermediaries who participate in the book building process.

1. Merchant Bunker

Merchant Bunker has been appointed lead underwriter. If you need multiple merchant bunkers to manage the problem, all other merchant bunkers are called Co-Book Runners. The lead underwriter has the following responsibilities:

1. Appointment of Bookrunner / Joint Bookrunner
2. Appointment of syndicate members
3. Draft prospectus and other documents and submission to SEBI
4. Determine the size, timing, and price range of public publications with the help of syndicate members
5. Appointment of registrar to the problem, banker to the problem, etc.
6. Submission of due diligence certificate to SEBI
7. Preparation of advertising and promotional materials
8. Announcement of start and end of subscription / bid collection
   1. Determining cut-off prices and stock allocations with the help of registrars
9. Acquire shares listed on the stock exchange
10. Prepare a final prospectus and submit it to SEBI and the registration company

2.     Syndicate member

They have the following responsibilities

1. Determining size, timing of public issuance, price range
2. Underwriting of shares
3. Collecting bids and applications from branch offices of issuing banks

3.     Registrar to the problem

They have the following responsibilities

1. Appointment of bankers to issue to collect application fees
2. Draft prospectus, print application and bid form, and provide these to syndicate members
3. Allocation of shares to investors

Key points in the Book Building Process

1. The issuer planning the offer nominates the lead merchant bunker as a "bookrunner".
2. The issuer specifies the number of securities to issue and the bid price range.
3. The issuer also appoints syndicate members to be ordered by the investor.
4. Syndicate members place their orders in an "ebook". This process is called a "bid" and is similar to a public auction.
5. Books usually stay open for 5 days.
6. Bid must be entered in the specified price range.
7. The bid can be modified by the bidder before the book is closed.
8. At the end of the book building period, book runners will evaluate bids based on demand at different price levels.
9. Bookrunners and issuers determine the final price at which the security will be issued.
10. Normally, the number of shares is fixed. Issuance size will be frozen based on the final price per share.
11. Allocate securities to the highest bidder. The remaining bidders will receive a refund order.

Book Building Problem Steps

The key steps in issuing shares using the Book Building Method are:

A. Quantity Evaluation Stage

This stage includes the following activities:

1. Appointment of major financial intermediaries by issuers

1. Appointment as lead manager of merchant bunker
2. Appointment of the registrar in question
3. Appointment of syndicate members

2. Responsibilities of lead manager (role before issuance-Part 1)

1. Creating a Memorandum of Information (IM) containing all information about the company. However, the number of shares to be issued and the issue price are not specified in the Memorandum of Information (IM).
2. Send a copy of the Memorandum of Information (IM) to syndicate members and circulate it among investment trusts, financial institutions, foreign institutional investors, and more. Syndicate members are lead book runners who purchase this information from these institutions.
3. Based on this information. The lead underwriter and the issuing company determine the quantity and price range of the shares to be issued.
4. Syndicate members sign contracts with lead book runners to undertake certain amounts of stock and the prices they are willing to buy.
5. Creation of Red Herring Prospectus including issue date, issue quantity, and price range
6. Creating a due diligence certificate

B. Pre-issue stage

This includes the following activities by the lead underwriter:

1. Submit the Red-Herring Prospectus and Due Diligence Certificate to SEBI. SEBI reviews both documents and reverts them to the lead book runner if they need explanations or changes.
2. Submit Red-Herring Prospectus to the stock exchange, Debentures registrant, and issuance registrant for approval. A listing agreement has been concluded with the stock exchange for the listing of the allotted shares.
3. An agreement with depository institutions (NSDL and CDS) to open a demat account and facilitate the electronic funds transfer of shares to the demat account of investors.
4. Appoint an advertising agency and hold a road show for an IPO.
5. The Red Herring Prospectus and IPO application will be printed and posted to Syndicate Members. They will be distributed to investors.

C. Actual Stage

This includes the following activities:

1. Issues exposed for investor bidding.
2. The investor fills out the application form and places an order with the Syndicate Member (the list of Syndicate Members is included in the application form).
3. Syndicate members provide bid information electronically to BSE / NSE and bid status is updated on the BSE / NSE website.
4. Syndicate members submit all physically filled forms and checks to the registrar in question.
5. Investors can modify their bids by filling out a form and submitting it to Syndicate Members.
6. Syndicate members will continue to update the stock exchange with the latest data.
7. The public issue ends due to an investor's bid.

D. Allocation Stage

It includes the following activities:

1. Based on the bids received, the lead manager will evaluate the final issue price.
2. Lead Book Runner updates "Red Herring Prospectus" at the final issue price and sends it to SEBI and the stock exchange.
3. The registrar will receive and process all application forms and checks from syndicate members. They send a clearance check and all fake applications are rejected.
4. The registrar creates an "allocation standard" and transfers the shares to the investor's Demat account. Refund the remaining money by ECS or check.
5. Once all the allotted shares have been transferred to the investor's Demat account, the lead manager will determine the issue date with the help of the stock exchange and finally the issuer's shares will be listed on the stock market. I will.

Book Building: Benefits

1. Realization of high price:

Book building issuance is superior to fixed-price issuance because it helps issuers achieve higher prices for their shares.

2. Quick process:

Allotment of shares to investors shall be made within 15 days after the end of issuance.

3. Rapid availability of funds:

The issuing company can utilize the funds raised immediately after the share allotment.

4. Reduction of issuance cost:

The book building process involves several financial intermediaries, resulting in lower issuance costs.

5. Quick update:

The bidding process is electronic, so bid prices and quantities are available in real time.

6. Lack of uncertainty:

Syndicate members assess the demand for shares of the issuer long before the public issue. Therefore, there is less uncertainty about the price and quantity of shares offered.

7. Opportunity to correct bids:

Investors have multiple opportunities to modify bid prices and quantities in response to market reactions.

8. Quick list:

The shares will be listed on the stock exchange within 7 days of the end of issuance.

9. Reduction of management costs:

Since the number of shareholders is small, management costs are also low.

10. Institutional Preference:

The book-building issue has been well received because institutional investors are the largest buyers of stock.

Book Building: Disadvantages

1. Suitable for mega issues

Suitable for large-scale problems by large companies. Small businesses can't afford the book building problem.

2. Well-developed computerized system

Book building issues require a computerized trading and networking system.

3. Price fixing

Large investors are in a strong financial position and can manipulate prices. Therefore, small investors may find it difficult to buy stock.

4. Injustice allocation

The lead underwriter may favor large investors (investment trusts) in allocating stocks that affect small investors.

5. Centralized ownership

A small number of large investors can buy a large number of stocks and affect the market price of stocks on the stock exchange.

Key takeaways:

1. Shares represent the ownership of a company or financial asset owned by an investor who exchanges capital in exchange for these units.
2. Common stock enables voting rights and possible profits through rising prices and dividends.
3. Preferred Share does not offer price increases, but can be redeemed at attractive prices and offer regular dividends.
4. Most companies have shares, but the stock exchange only has shares in listed companies.
5. Shares of a listed company lost or abandoned because the owner did not comply with certain purchase agreements or restrictions are considered confiscated.
6. If the shares are confiscated, the shareholders will no longer bear the remaining balance and waive the potential profitability of the shares.
7. Expired shares are returned to the issuer, such as when an employee leaves the company before stock options are fully vested.
8. The issuer can reissue the confiscated shares at the desired price. Reissues are usually discounted from the initial price.
9. The price discovery process involves generating and recording investor demand for stocks before they reach the issue price.
10. Book building is the de facto mechanism for companies to price IPOs and is highly recommended by all major stock exchanges as the most efficient way to price securities.
11. Stock bonus issuance is stock issued by the company in lieu of cash dividends. Shareholders can sell their shares to satisfy their liquidity needs.
12. Bonus stock increases the company's equity capital, but not its net worth.
13. A rights issue is to encourage existing shareholders to buy additional new shares in the company.
14. At the rights offering, each shareholder is entitled to purchase a proportional distribution of additional shares at a specific price within a specific period of time (typically 16 to 30 days).
15. Shareholders are not obliged to exercise this right.
16. Underfunded businesses can look to rights issues to raise money when they really need it.
17. A rights issue is a way for companies struggling to raise funds frequently to repay their debts.
18. Shareholders can purchase new shares at a discounted price for a certain period of time.
19. In a rights issue, more shares are issued to the market, which can dilute and fall stock prices.
20. Repurchase is when a company buys its own stock on the stock market.
21. Repurchase reduces the number of issued shares, thereby increasing the (positive) profit per share and often the value of the shares.
22. A share buyback can show investors that they have enough cash in case of an emergency and are unlikely to have an economic problem.
23. Preferred stock (preferred stock) is the stock of a company in which dividends are paid to shareholders before dividends on common stock are paid.
24. There are four types of preferred stock: cumulative (guaranteed), non-cumulative, participatory, and convertible.
25. Preferred stocks are ideal for risk-averse investors and are callable (issuers can redeem them at any time).

References:

1. Monga, J.R. Fundamentals of Corporate Accounting. Mayur Paper Backs, New Delhi.
2. Shukla, M.C., T.S. Grewal, and S.C. Gupta. Advanced Accounts. Vol. – II. S. Chand & Co. New Delhi.
3. Maheshwari, S.N. And S.K. Maheshwari. Corporate Accounting. Vikas Publishing House, New Delhi.
4. Sehgal, Ashok and Deepak Sehgal. Corporate Accounting. Taxman Publications, New Delhi.
5. Gupta, Nirmal. Corporate accounting. Sahitya Bhawan, Agra.