Q.Discuss the process for the allotment of shares of a company in case of over subscription.

Allotment of Shares in Case of Oversubscription

When a company receives applications for more shares than it offered (oversubscription), it cannot allot shares to all applicants. The process follows a strict legal and procedural sequence under the Companies Act.

Step 1: Decide the Basis of Allotment

The Board of Directors must decide a fair and non-discriminatory basis for allotment. Common methods include:

• Pro-rata allotment: Each applicant gets shares in proportion to their application, e.g., if 2,00,000 shares are applied for 1,00,000 offered, each applicant gets 1 share for every 2 applied.
• Lottery/random selection: Used when pro-rata would create fractional shares or when the company wants to select specific applicants.

Step 2: Process the Application Money

The company has received application money (say ₹X per share) from all applicants. The treatment depends on whether the company keeps or returns the excess:

Step 3: Pass Journal Entries

Assuming the company decides to adjust excess application money against allotment:

1. For receipt of application money (on all applications):

2. For transfer of application money to share capital (for allotted shares):

3. For adjustment of excess application money against allotment:

4. For refund of remaining excess (if any):

Step 4: Allotment Money Due and Received …

The Concept: Why Oversubscription Needs Special Treatment

When a company invites the public to subscribe to its shares, it specifies a fixed number of shares to be issued. If applications pour in for more shares than offered, the company cannot simply accept all—it must follow a fair and transparent allotment process. This is because the company's share capital is fixed at the time of issue, and issuing more shares than authorised would violate the Companies Act.

The key accounting principle here is that share capital accounts are credited only when shares are actually allotted, not when applications are received. Until allotment, the money received from applicants is a liability (Share Application Money) that must be either adjusted towards allotment or refunded.

The Step-by-Step Process

Step 1: Receive Applications and Record Application Money

When applications come in, the company debits Bank and credits Share Application Account for the total application money received. This is a temporary account—it will be closed after allotment.

Step 2: Decide the Basis of Allotment

The company's board must decide how to allot shares among the oversubscribed applicants. There are two common methods:

Pro-rata Allotment: Shares are allotted to all applicants in proportion to their applications. For example, if 1,00,000 shares are applied for but only 50,000 are offered, each applicant gets half the shares they applied for.

Preferential Allotment: Some applicants (e.g., existing shareholders, employees) may get full allotment, while others get reduced or no allotment.

Step 3: Adjust Application Money

For applicants who receive full allotment, their application money is transferred to Share Capital Account. For those who get partial allotment, the excess application money is either:

• Adjusted towards the allotment money due, or
• Refunded if the company chooses not to adjust.

For applicants who receive no allotment (rejected applications), the entire application money must be refunded.

Step 4: Make the Allotment Entry

The company passes a journal entry debiting Share Application Account and crediting Share Capital Account (for the amount due on shares allotted) and Share Allotment Account (for any excess adjusted). Any refund due is credited to Bank or a refund liability account.

Step 5: Record Allotment Money Due and Received

After allotment, the company calls for the allotment money. Share Allotment Account is debited and Share Capital Account credited for the amount due. When money is received, Bank is debited and Share Allotment Account credited.

Journal Entries Illustrated

Let's take a concrete example: XYZ Ltd. offered 1,00,000 equity shares of ₹10 each, payable ₹3 on application, ₹4 on allotment, and ₹3 on first and final call. Applications were received for 1,50,000 shares. The company decided to allot on a pro-rata basis, adjusting excess application money towards allotment.

Working Notes for the Example

Working Note 1: Calculation of Application Money Received

• Shares applied for: 1,50,000
• Application money per share: ₹3
• Total application money received: 1,50,000 × ₹3 = ₹4,50,000

Working Note 2: Calculation of Application Money on Shares Allotted

• Shares allotted: 1,00,000
• Application money per share: ₹3
• Amount transferred to Share Capital: 1,00,000 × ₹3 = ₹3,00,000

Working Note 3: Calculation of Excess Application Money

• Total application money received: ₹4,50,000
• Application money on shares allotted: ₹3,00,000
• Excess application money: ₹4,50,000 - ₹3,00,000 = ₹1,50,000
• This excess is adjusted towards allotment money due.

Working Note 4: Calculation of Allotment Money Due

• Shares allotted: 1,00,000
• Allotment money per share: ₹4
• Total allotment money due: 1,00,000 × ₹4 = ₹4,00,000

Working Note 5: Calculation of Allotment Money Received

• Allotment money due: ₹4,00,000
• Less: Excess application money adjusted: ₹1,50,000
• Net allotment money received: ₹4,00,000 - ₹1,50,000 = ₹2,50,000

The Ledger Accounts …