12 Corporate Accounting: Issue, forfeiture and reissue of shares; Liquidation of companies; Acquisition, merger, amalgamation and reconstruction of companies
12.1 Concept and Scope
Corporate accounting is the branch of accounting that records and reports the financial transactions and position of companies — entities incorporated under the Companies Act, 2013. It differs from partnership and sole-proprietor accounting in three ways: (a) separate legal entity — accounts are of the company, not its members; (b) statutory format — Schedule III prescribes the balance sheet and P&L layout; (c) specialised transactions — share capital, debentures, dividends, amalgamation, reconstruction, liquidation, all governed by detailed statutory provisions.
The principal statutory and professional sources of corporate accounting law are: the Companies Act 2013 (Sections 2, 23-42 share capital, 53-71 issue, 230-240 compromise/arrangement, 270-365 winding-up); SEBI ICDR Regulations 2018 (for public issues); Schedule III (financial-statement format); Ind AS / AS (measurement and disclosure); and the Insolvency and Bankruptcy Code, 2016 for insolvency-driven liquidation.
12.3 Issue of Shares
A company may issue shares at par (face value), at a premium (above face value, §52) or — only by a special resolution and with restrictions under §53 — at a discount (now generally prohibited for fresh issues except sweat-equity).
12.3.1 Modes of Issue
- Public issue — IPO or FPO; offered to the public at large; governed by SEBI ICDR Regulations.
- Private placement — offer to a select group (§42); 200-person ceiling per financial year.
- Rights issue (§62) — offer to existing shareholders in proportion to their holding.
- Bonus issue — capitalisation of free reserves; offered free to existing shareholders.
- Preferential allotment — issue to identified persons on preferential terms.
- ESOP / Sweat Equity — issue to employees / directors.
12.4 Forfeiture of Shares
If a shareholder fails to pay allotment or call money, the company can — after notice — forfeit the shares. Forfeiture cancels the membership and the share is available for reissue.
12.5 Buy-back of Shares (§68-70)
A company may buy back its own shares under §68 of Companies Act 2013, subject to:
- Buy-back ≤ 25 % of paid-up capital + free reserves.
- Debt-equity ratio post-buy-back ≤ 2:1.
- Sources: free reserves, securities premium, proceeds of fresh issue (other than the class being bought back).
- A Capital Redemption Reserve (CRR) equal to the face value of shares bought back is created out of free reserves/securities premium.
12.6 Bonus Issue (§63)
A bonus issue is the capitalisation of free reserves / securities premium / CRR by issuing fully-paid shares free to existing shareholders. Conditions: bonus must be authorised by articles, free reserves are available, the company has not defaulted on debt or statutory dues.
12.7 Debentures
A debenture (§2(30)) is a debt instrument acknowledging a loan to the company. Debentures may be issued at par, at a premium or at a discount. They may be redeemed at par or at a premium (Section 71). Key accounts:
- Discount on Issue of Debentures — capital loss; written off over the life of the debentures.
- Loss on Issue of Debentures — created when issued at par/discount but redeemable at premium.
- Debenture Redemption Reserve (DRR) — companies (other than certain regulated categories) must transfer 10 % of the outstanding debenture value to DRR before redemption.
12.8 Redemption of Preference Shares (§55)
Preference shares must be redeemed within 20 years of issue (irredeemable preference shares are prohibited; exception — infrastructure projects, up to 30 years).
Two sources: - Fresh issue of shares — equity or preference. - Free reserves / divisible profits — must create Capital Redemption Reserve (CRR) equal to the face value of shares redeemed.
CRR is treated as paid-up capital for the limited purpose of issuing fully-paid bonus shares.
12.9 Liquidation of Companies — IBC 2016
Liquidation is the winding-up of a company’s affairs — selling assets, paying liabilities and distributing the surplus. Under the current framework:
- Insolvency and Bankruptcy Code, 2016 governs corporate insolvency and liquidation.
- The National Company Law Tribunal (NCLT) is the adjudicating authority.
- Insolvency Professionals (IPs) manage the process under regulation by IBBI.
12.9.1 Three Modes
| Mode | Trigger | Authority |
|---|---|---|
| Compulsory (by Tribunal) under Companies Act §272 | Unable to pay debts; just-and-equitable; fraudulent conduct | NCLT |
| Voluntary winding-up | Now under Section 59 of IBC 2016 for solvent companies | IBBI-regulated |
| Liquidation under IBC §33 | After failed corporate insolvency resolution | NCLT-appointed liquidator |
12.9.2 Statement of Affairs and Deficiency Account
In liquidation, the company prepares a Statement of Affairs (List A-H of various asset/liability classes) and a Deficiency Account showing reconciliation between accumulated profits at the start and at the date of winding-up.
12.9.3 Order of Distribution under IBC §53 — “Waterfall”
- Insolvency resolution process costs and liquidation costs — paid in full.
- Workmen dues (24 months) and secured creditors who relinquished security — pari passu.
- Employees’ wages (12 months other than workmen).
- Financial debts owed to unsecured creditors.
- Government dues (2 years) and secured creditors enforcing security with shortfall.
- Remaining debts and dues.
- Preference shareholders.
- Equity shareholders / partners.
The IBC §53 waterfall replaces the older §53 of the Companies Act 1956 order. Note: workmen dues and secured creditors who give up security rank equally (Essar Steel ruling).
12.10 Amalgamation, Merger and Reconstruction
12.10.1 Concepts
| Term | Meaning |
|---|---|
| Amalgamation | Two or more companies blend into a single entity; both lose separate existence (or one of them survives — “absorption”) |
| Merger | Often used interchangeably with amalgamation; specifically — a combination approved by NCLT |
| Acquisition / Takeover | One company acquires control of another; both retain legal existence (parent + subsidiary) |
| Internal Reconstruction | Existing company reorganises its capital — capital reduction, alteration |
| External Reconstruction | A new company is formed to take over the business of the existing (now-liquidated) one |
12.10.2 AS 14 — Two Methods of Accounting for Amalgamation
AS 14 (Accounting for Amalgamations) prescribes two methods:
| Aspect | Pooling of Interests | Purchase Method |
|---|---|---|
| Nature | Amalgamation in the nature of merger | Amalgamation in the nature of purchase |
| Conditions | All five tests of “merger” met (§AS 14.3) | One or more tests fail |
| Assets / liabilities | Recorded at book values | Recorded at fair values or as agreed |
| Reserves | All reserves carry to the new entity | Only statutory reserves carry; rest absorbed in consideration |
| Goodwill / Capital Reserve | Difference adjusted against reserves | Difference recorded as Goodwill (if Dr) or Capital Reserve (if Cr) |
12.10.3 Five Conditions for “Pooling” Method
- All assets and liabilities of the transferor become assets and liabilities of the transferee.
- Shareholders holding ≥ 90 % equity of the transferor become shareholders of the transferee.
- Consideration is only by issue of shares (with cash for fractional shares).
- The business of the transferor is intended to be continued by the transferee.
- No adjustment is intended to be made to the book values of assets and liabilities.
12.10.4 Ind AS 103 — Business Combinations
For Ind AS adopters, Ind AS 103 — Business Combinations mandates the acquisition method only (no pooling). Identifies an acquirer; measures identifiable assets/liabilities at fair value; recognises goodwill or bargain-purchase gain.
12.10.5 Internal Reconstruction — Capital Reduction (§66)
A company may reduce its share capital under §66 with NCLT approval, by:
- Reducing the called-up amount per share.
- Writing off paid-up capital that is lost / unrepresented by assets.
- Returning capital surplus to requirements.
The resulting Capital Reduction A/c is used to write off accumulated losses, intangible assets and asset over-valuation.
12.11 Practice Questions
The maximum capital that a company is permitted to issue, stated in the Memorandum of Association, is called:
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Which of the following is **not** a permitted use of securities premium under §52?
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A share of ₹10 (₹8 called up) is forfeited for non-payment of ₹3 on first call. The Share Capital A/c is debited with:
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100 shares of ₹10 each (₹8 called up; ₹3 unpaid on first call) are forfeited and reissued at ₹7 as ₹8 paid up. Capital reserve will be:
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A company can buy back its own shares up to a maximum of:
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When preference shares are redeemed wholly out of free reserves, a Capital Redemption Reserve must be created equal to the:
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Under §55 of Companies Act 2013, the maximum period within which preference shares (except for infrastructure projects) must be redeemed is:
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Most companies must transfer to Debenture Redemption Reserve, before redemption, at least:
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Under AS 14, the *Pooling of Interests* method of accounting for amalgamation is permitted only when:
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Under Ind AS 103, business combinations are accounted for using:
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The Insolvency and Bankruptcy Code (IBC) was enacted in:
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Arrange the following claims in order of payment under IBC §53 waterfall:
(i) Equity shareholders
(ii) Insolvency resolution and liquidation costs
(iii) Workmen dues (24 months) and relinquishing secured creditors
(iv) Preference shareholders
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The adjudicating authority for corporate insolvency resolution and liquidation under IBC is:
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When an existing company reorganises only its share capital — for instance, by reducing the called-up value per share — it is termed:
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"A new company is formed to take over the assets and liabilities of an existing company which is liquidated." This is called:
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The format of a company's balance sheet and statement of profit and loss is prescribed in:
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Under AS 14, for an amalgamation to qualify as "in the nature of merger", the percentage of equity shareholders of transferor who must become shareholders of transferee is at least:
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Under §53 of Companies Act 2013, issue of shares at a discount is:
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A *rights issue* under §62 is an offer of further shares to:
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In amalgamation accounted under the **purchase method**, when consideration paid by the transferee exceeds the net assets taken over, the excess is recorded as:
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12.12 Quick Recall
- Share capital categories: Authorised → Issued → Subscribed → Called-up → Paid-up; Reserve capital for winding-up only.
- Modes of issue: Public, Private placement (§42, 200 cap), Rights (§62), Bonus (§63), Preferential, ESOP/Sweat.
- Securities premium (§52) — uses: bonus shares, write off preliminary expenses, write off issue expenses, premium on redemption, buy-back. Cannot be used for dividend.
- Forfeiture: Dr Share Capital (called-up), Cr Calls in Arrears + Forfeited Shares. Reissue: discount ≤ amount forfeited; balance → Capital Reserve.
- Buy-back (§68) — max 25 % of paid-up + free reserves; post-buy-back D:E ≤ 2:1; CRR = face value out of free reserves.
- Preference share redemption (§55) — max 20 years (infra 30); CRR = face value.
- DRR — 10 % of outstanding debentures for most companies.
- Liquidation under IBC 2016, NCLT adjudicates. §53 waterfall: Costs → Workmen+Secured (pari passu) → Employees → Unsecured financial → Govt+Secured shortfall → Other dues → Preference → Equity.
- Amalgamation (AS 14): Pooling (nature of merger; 5 conditions; ≥ 90 % shareholders) vs Purchase (fair value; goodwill/capital reserve). Ind AS 103 — acquisition method only.
- Internal reconstruction (§66) — capital reduction with NCLT approval. External reconstruction — new company takes over.
- Format: Schedule III to Companies Act 2013.