Q.Explain the terms 'Over subscription' and 'Under subscription'. How are they dealt with in accounting records?

Over Subscription and Under Subscription

Over subscription occurs when the number of shares applied for by the public exceeds the number of shares offered by the company. For example, if a company offers 1,00,000 shares but receives applications for 1,50,000 shares, the issue is oversubscribed by 50,000 shares.

Under subscription is the opposite — the number of shares applied for is less than the number offered. If only 80,000 applications are received against 1,00,000 shares offered, the issue is undersubscribed by 20,000 shares.

Accounting Treatment

Over Subscription

The company has three options to deal with excess applications:

The journal entry for refund of excess application money:

If excess is adjusted towards allotment or calls:

Under Subscription …

Understanding Oversubscription and Undersubscription

When a company invites the public to subscribe to its shares, it sets a fixed number of shares for issue. The response from the public can be more than expected (oversubscription) or less than expected (undersubscription). Both situations require specific accounting treatment to ensure fairness and legal compliance.

Oversubscription means the total number of shares applied for exceeds the number of shares offered. For example, if a company offers 10,000 shares but receives applications for 15,000 shares, it is oversubscribed by 5,000 shares. The company cannot issue more shares than offered, so it must decide how to allocate the available shares among applicants.

Undersubscription means the total applications received are less than the shares offered. For instance, if the company offers 10,000 shares but receives applications for only 8,000 shares, it is undersubscribed by 2,000 shares. The company can proceed with issuing only the shares applied for, provided the minimum subscription requirement (as per SEBI regulations) is met.

Accounting Treatment

For Oversubscription

The company has three options to deal with excess applications:

1. Reject excess applications entirely – Refund the application money to those applicants whose applications are not accepted.
2. Pro-rata allotment – Allot shares proportionately to all applicants, adjusting excess application money towards future calls.
3. Combination – Reject some applications and allot pro-rata to the rest.

Journal entries for oversubscription:

When application money is received:

• Debit: Bank Account (total application money received)
• Credit: Share Application Account

When allotment is decided:

• Debit: Share Application Account (total application money received)
• Credit: Share Capital Account (for shares allotted)
• Credit: Share Allotment Account (if excess money is adjusted towards allotment)
• Credit: Bank Account (if excess money is refunded)

For Undersubscription

The company simply accepts the applications received. If the number of applications is below the minimum subscription (usually 90% of the issued amount as per SEBI), the entire issue cannot proceed, and all application money must be refunded.

If the minimum subscription is met, the company proceeds with allotment:

• Debit: Bank Account (application money received)
• Credit: Share Application Account

Then transfer to Share Capital:

• Debit: Share Application Account
• Credit: Share Capital Account

Worked Example

Scenario: XYZ Ltd. offered 20,000 equity shares of ₹10 each at par. Applications were received for 25,000 shares. The company decided to allot shares on pro-rata basis to all applicants. Application money was ₹3 per share, and allotment money was ₹4 per share.

Working Notes:

1. Total application money received: 25,000 shares × ₹3 = ₹75,000 …