Share capital, Invitation, Application, Allotment, calls and paid-up procedures



Capital of a limited company is divided into shares of a fixed amount. The amount stated in the Memorandum is known as the Authorized Share Capital. For example, this may be shs. 10 million divided into 100,000 shares of shs. 100 per share. This fixed amount per share is called its par or nominal value. A company may not issue share capital in excess of what has been authorized. The actual amount that has been issued to shareholders is termed Issued Share Capital. If in the above example only 80,000 shares have been issued, then the company's issued capital is shs. 8 million.

The steps followed when a company issues shares are:

Invitation
The company invites the public to apply for its shares through a Prospectus which is an offer document that invites the public to subscribe and purchase shares of a company. A Prospectus gives objectives and information on attractiveness of the company.

Application
The public applies for shares in the company, usually bringing in a portion of the issue price. This is known as application money.

Allotment
Taking account of the number of applicants and applications together with the number of shares available for issue, the company decides on how applicants will be awarded company shares. If applications exceed number of shares available for issue, shares are known to have been oversubscribed. When shares are oversubscribed a mechanism will be designed to allocate the shares to applicants. This may involve refund of application money received at the previous stage. It can also be decided that shares be issued on a pro-rata basis. For example, if 30,000 shares are available for issue and 40,000 shares are applied for, one option would be to refund application moneys to applicants for 10,000 shares and allot in full the 30,000 shares to the remaining applicants. The other option would be to allot 3 shares for every 4 shares applied for, this is a pro-rata allotment. Once a decision to allot is made applicants are informed and allotment money has to be paid. Only at the stage of allotment is a company stated to have issued share capital.

Calls
When companies issue shares they may not require immediately the full issue price. It is normal for companies to demand payment of issue price from shareholders by instalments depending on company needs for funds. For example, payments for a fresh issue of shares of Shs. 100 each par value may be made as follows:

Shs. 20
(20%) on application
Shs. 30
(30%) on allotment
Shs. 30
(30%) on first call
Shs. 20
(20%) on final call

The last two instalments are calls.
Called-up Capital
This is the portion of the issued capital in which the amount payable per share has been requested [called]. In the above example, the amount called per share may be Shs. 80. In this case, the called - up capital is shs. 6.4 million (80,000 shares x shs. 80). The balance remaining of shs. 1.6 million is termed uncalled capital. This may be called for payment at a later date.

Calls in arrear
This is the amount of Issued Share Capital which has been called but has not been paid at its due date. In our example, it is possible that 1,000 shares of the called-up capital have not been paid. The calls-in-arrear will amount to shs. 30,000 (1000 shares*30)

Calls in advance
This is the amount which has not yet been called but already paid. It is possible for shareholders to pay the full value of the share instead of the amount requested at a certain date. For example a shareholder with 200 shares could have paid the full amount of shs. 20,000 (200 shares x 100) instead of what has been called for of shs. 16,000 (200 shares*80). the difference of shs. 4,000 is known as calls in advance.

Paid - up - capital
this is the portion of share capital that has been paid. It consists of the called-up capital plus calls in advance, less calls in arrear. In our example this will be shs. 6,374,000.

All the above information will be shown in the shareholders' equity section of the Statement of Financial Position as follows:

Authorised shares capital
shs.
100,000 ordinary shares of shs. 100 each
10,000,000
Issued share capital

80,000 ordinary shares of shs. 100 each, shs. 80 called
6,400,000
Add: Call in advance
4,000

6,404,000
Less: Calls in arrears
30,000
Paid up capital
6,374,000

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