Explain the terms ‘Over-subscription’ and ‘Under-subscription’. How are they dealt with in accounting records?
Over-Subscription:
When shares are issued to the public for subscription through the prospectus by well managed and financially strong companies, it may happen that the total number of applications received for shares exceeds the number of shares offered by the company to the public, such situation is called the situation of over-subscription. A company can opt for any of the three alternatives to allot shares in case of over-subscription of shares.
(i) Excess applications are refused and money received on excess Applications is returned to the applicants-
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Bank A/c(Excess share applicationmoney refunded)
(ii) If the Applicant are made Partially Allotment (or Pro-rata Basis) : In case of over-subscription, when a company allots shares on proportionate basis to all the applicants, it is called as pro-rata allotment.
In such a case, the main problem is what to do with the excess amount received on application. Practically, it will be quite irrational to refund the excess money first and then ask the allottee applicants to pay the allotment money.
In practice, generally excess application money receive on these shares is adjusted towards the amount due on allotment or call. For this purpose the entry is made as follows-
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Share Allotment A/c(Excess share application moneytransfered to share allotment account)
(iii) Pro-rata and Refund of Money : In case of over-subscription, the director can adopt a combination of the above two alternatives i.e, they can accept full allotment to some applications, a pro-rata allotment to others and no allotment to the rest.
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Share Allotment A/c To Bank A/c(Application money transferred toshare capital account and excess shareapplication money transfered to shareallotment account and rest money isrefunded)
Under-Subscription:
In case when share applied by the public is lesser than number of shares issued by the company is called under-subscription.
As per the Securities Exchange Board of India (SEBI), the minimum subscription is 90% of the shares issued by the company. This implies that the company can allot shares to the applicants provided if applications for 90% of the issued shares are received. Otherwise, the company should refund the entire application amount received.
In this regard, necessary journal entry is passed only after receiving and refunding of the application. In this case, normal entries are made as the adjustment is not needed for any excess.
When shares are issued to the public for subscription through the prospectus by well managed and financially strong companies, it may happen that the total number of applications received for shares exceeds the number of shares offered by the company to the public, such situation is called the situation of over-subscription. A company can opt for any of the three alternatives to allot shares in case of over-subscription of shares.
(i) Excess applications are refused and money received on excess Applications is returned to the applicants-
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Bank A/c(Excess share applicationmoney refunded)
(ii) If the Applicant are made Partially Allotment (or Pro-rata Basis) : In case of over-subscription, when a company allots shares on proportionate basis to all the applicants, it is called as pro-rata allotment.
In such a case, the main problem is what to do with the excess amount received on application. Practically, it will be quite irrational to refund the excess money first and then ask the allottee applicants to pay the allotment money.
In practice, generally excess application money receive on these shares is adjusted towards the amount due on allotment or call. For this purpose the entry is made as follows-
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Share Allotment A/c(Excess share application moneytransfered to share allotment account)
(iii) Pro-rata and Refund of Money : In case of over-subscription, the director can adopt a combination of the above two alternatives i.e, they can accept full allotment to some applications, a pro-rata allotment to others and no allotment to the rest.
DateParticularsLFAmt. (Dr)Amt.(Cr)Share Application A/cDr To Share Capital A/c To Share Allotment A/c To Bank A/c(Application money transferred toshare capital account and excess shareapplication money transfered to shareallotment account and rest money isrefunded)
Under-Subscription:
In case when share applied by the public is lesser than number of shares issued by the company is called under-subscription.
As per the Securities Exchange Board of India (SEBI), the minimum subscription is 90% of the shares issued by the company. This implies that the company can allot shares to the applicants provided if applications for 90% of the issued shares are received. Otherwise, the company should refund the entire application amount received.
In this regard, necessary journal entry is passed only after receiving and refunding of the application. In this case, normal entries are made as the adjustment is not needed for any excess.
