Audit of Shares | Company | India | Auditing

In this article we will discuss about:- 1. Special Issues of Shares 2. Underwriting Commission or Brokerage on Issue of Shares 3. Forfeiture.

Special Issues of Shares:

(a) Redeemable preference shares:

Ordinarily shares of a company, once issued, cannot be repaid or redeemed except in the event of liquidation. Sec. 80(5A) of the Companies Act prohibits a company from issuing any preference shares that are irredeemable or redeem­able after the expiry of ten years from the date of issue.

The section, however, permits issue of redeemable preference shares subject to the following condi­tions and an auditor should see that they are complied with in addition to the general share capital audit that he should carry out as enumerated above:

(i) Such issue should be author­ised by the Articles of a com­pany;

(ii) Shares must be fully paid be­fore redemption;

(iii) Funds required for redemption may be obtained from any one or both of the following sources, viz., (a) profits that would oth­erwise be available for divi­dend and (b) fresh issue of shares made for the purpose of redemption;

(iv) In case of redemption out of the first source mentioned above an amount equal to the nomi­nal value of the shares re­deemed should be transferred to a capital redemption reserve account from the profit and loss account and any premium payable on redemption should be provided out of profit and loss account or share premium account, if any, before redemp­tion;

(v) the capital redemption reserve account may be applied in paying up unissued shares to be issued to members as fully paid bonus shares;

(vi) Particulars of shares redeemed, if any, must be notified to the Registrar within one month thereafter;

(vii) Balance sheet should indicate the terms and earliest date of redemption or conversion, if any, of any redeemable prefer­ence capital. (Note under the heading “Share Capital” in Schedule VI, Part I). The amount of capital redemption reserve, if any, should be shown in the balance sheet under the head­ing “Reserves and Surplus”;

(viii) Redemption of preference shares is not taken as reduction in the amount of authorised capital.

(b) Shares issued as fully or partly paid for consideration other than cash:

Such shares may be issued either to vendors in satisfaction of purchase consideration or to brokers or under­writers in payment of their brokerage or commission for placing shares or to promoters for their services.

Auditor should verify this type of issue by re­ferring to Articles; contracts with ven­dors, promoters, brokers or underwrit­ers; directors’ resolution authorising ac­tual issue of such shares. He should see that the nominal capital limit is not exceeded by the special issue.

(c) Bonus shares:

Details have already been discussed previously. As per Clauses 96 and 97 of Table A, a company in general meeting may, on the recommendation of board of direc­tors, decide to capitalise any part of the company reserves or undistributed profit and to issue bonus shares as fully or partly paid for a corresponding sum; any balance in the share premium ac­count or capital redemption reserve account may also be applied in paying up unissued shares to be issued to members of the company as fully paid bonus shares. Auditor should go through Articles, directors’ and shareholders’ resolutions and see that the nominal capital limit is not exceeded by such special issue.

(d) Issue of shares at a premium:

A company may issue shares at a pre­mium either for cash or otherwise. In such a case, as per Sec. 78 of the Companies Act, 1956, a sum equal to the aggregate amount or value of the pre­mium on shares must be transferred to a separate share premium account; this account would ordinarily be considered a part of the paid-up capital of the company for the purpose of reduction of capital.

Any credit balance in the share premium account may be utilised for one or more of the following specific purposes only and not for distribution of dividend:

(i) Issuing bonus shares as fully paid;

(ii) Writing-off preliminary expenses;

(iii) Writing-off expenses of or com­mission paid or discount allowed on issue of shares or debentures; and

(iv) Providing for premium payable on redemption of any redeemable preference shares or debentures.

An auditor should check up whether any part of share premium account has been utilised and, if so, in a manner permitted by law and whether the unutilised balance, if any, is shown separately in the balance sheet under the heading “Reserves and Surplus”.

(e) Issue of shares at a discount:

Shares may be issued at par or at a premium at any time at the discretion of directors but issue at a discount can be made subject only to the following conditions as laid down in Sec. 79 of the Companies Act:

(i) Shares to be issued at a discount must be of a class already issued;

(ii) The issue must be authorised by a resolution passed by the com­pany in general meeting and sanc­tioned by the Company Law Board;

(iii) The resolution must specify the maximum rate of discount per­missible, which should not nor­mally exceed 10% unless a higher rate is permitted by the Board in any special case;

(iv) Before such an issue is made one year must have passed since the date from which the company was entitled to commence its business;

(v) The issue must be completed within two months from the date of the Company Law Board’s order or within such extended time as the Board may direct;

(vi) Every prospectus relating to such issue must contain particulars of discount allowed or so much of the discount as has not been written-off.

The statutory report, if any, must set out the discount paid or to be paid on shares or debentures.

An auditor should satisfy himself about compliance with the provisions. Preferably the discount on issue of shares should be treated as a capital loss and written-off from capital profit or capital reserve, if any.

(f) Every public company listed with recognised stock exchange(s) making an initial public offer of any security for a sum of not less than Rs. 1 (one) crore must issue the same in the dematerialised form pursuant to the requisite provisions of The Depositories Act, 1996, and the regulations framed there under [New Sec. 68D inserted by The Companies (Amendment) Act, 2000].

An auditor should satisfy himself about compliance with the concerned statutory regulatory requirements.

Underwriting Commission or Brokerage on Issue of Shares:

According to Sec. 76 a company may pay a commission to any person for subscribing or agreeing to subscribe or procuring or agreeing to procure subscription for any shares in or deben­tures of the company subject to the following conditions:

(a) The payment must be authorised by Articles;

(b) The rate of commission should not exceed 5% of the issue-price in case of shares and 2-1/2% of the issue price in case of debentures or the rate(s) prescribed in the Articles, whichever is lower;

(c) The amount or rate of commis­sion and also the number of shares/ debentures which persons have agreed to subscribe for commission should be disclosed in the prospectus or statement in lieu of prospectus, shelf prospectus or a similar statement or a circular or notice not being a prospectus inviting subscription, as the case may be;

(d) A copy of the contract for pay­ment of the commission is to be filed with the Registrar at the time of filing the prospectus or statement in lieu of prospectus, etc.;

(e) No commission is payable to a person for subscribing or agreeing to subscribe shares or debentures which are not offered to the public for sub­scription.

Any commission as aforesaid may be paid either in cash or in the form of shares or debentures as fully or partly paid.

As regards brokerage, a company may pay the same subject to the Articles. For a banking company the maximum limit for commission, brokerage, discount or remuneration in any form in respect of any shares is 2-1/2%. Particulars of commission, allowance or discount, if any, paid or made on issue of debentures shall be included in the particulars of charges to be filed for registration under.

An auditor should check commis­sion and/or brokerage by referring to articles, prospectus or statement in lieu of prospectus etc., statutory report, if any, and register of mortgages and charges (in respect of debentures), vouch­ing payment and scrutinising relevant contracts with regard to issue of shares or debentures in settlement of commis­sion or brokerage. He should be particu­larly careful to verify compliance with the provisions re: rate of commission and disclosure thereof in prospectus etc.

Forfeiture of Shares:

It should be clearly borne in mind that there is no statutory right enjoyed by a company to forfeit shares on ground of default in payment of calls. Such right must be specifically conferred by the Articles without which no share can be forfeited.

Subject to Articles, directors may forfeit shares after giving proper notice to the defaulting shareholders and affording them adequate opportu­nity to clear the arrears. Clauses 29 to 35 of Table A lay down a detailed procedure and conditions regarding for­feiture. Any irregularity in respect of provisions of the Articles would render a forfeiture void.

A forfeiture of shares may be an­nulled or cancelled by directors or the forfeited shares may be sold or other­wise disposed of by them. Such shares cannot, however, be sold or re-issued at a price less than the difference between the called-up value of the shares and the amount, if any, actually realised from the defaulting shareholders unless the formalities laid down in Section 79 re­garding issue of shares at a discount are complied with.

Subject to this, forfeited shares can be re-issued at a price less than the called-up or nominal value thereof. According to Part I of Schedule VI to the Companies Act any capital profit on re-issue of forfeited shares should be transferred to capital reserve.

An auditor should see whether all the aforesaid conditions are fulfilled. He should particularly go through the Arti­cles, resolutions and relevant entries in the register of members. He should also check disclosure regarding forfeited shares in the balance sheet as per Sched­ule VI to the Act.