Refer to

Deegan
Chapter 13
AF210
Topic 3
Company Formation & Share Capital
Notes

Presented by:
Mr. Selvin Prasad
(Bcom, PGCTT, PGDCRM, Mcom, PhD in
progress)
The University of the South Pacific, Fiji
 Prospectus COMPANY Institutional
assists Investors
with raises
involves CAPITAL
Underwriter involves
through
Public Offer Private is Fast &
pays
Placement cheap
has
Rights
Stages Issue
dilutes
Under- claim of
subscription Calls involves

on Allotment Existing
Provides Investors uses
Application
off
Discount Market Price
Maybe

Unit 3 Leading
Concept Map Unpaid Forfeiture
to
 Learning Outcomes
On successful completion of this topic, you should be
able to:
1. Outline some benefits of forming a company
2. Describe the main steps in raising share capital
through a public offering
3. Describe the purpose & content of a prospectus
4. Explain the role of an underwriter
5. Compare 2 ways to manage an over-subscribed
public offering
 Learning Outcomes
Continued…
6. Compare private placements with rights issues
7. Explain the rationale for issuing share options
8. Account for various types of share issues Demo
9. Account for forfeiture of shares Demo

10.Account for redemption of shares Demo

LO 1

Forming a Company

Rather than a sole trader

or a partnership
LO 1
Benefits of the company structure
1 Legal A company has legal status and can
recognition own property, sue and be sued etc.
2 Limited Shareholders are not liable for debts of
liability the company.
3 Access to A company can raise large amounts of
capital capital from the public.
4 Separation of A company can recruit experts to
ownership & manage daily operations, while
management shareholders are free to pursue other
interests e.g. full-time employment.
5 Strong Imposed through standards, legislation
Regulation etc. & governance structures.
LO 2

Raising Capital from the Public

Public Offerings
LO 2
Initial Public Offering (IPO)
Company hires Investors
an forfeit
underwriter unpaid
shares

Company
issues a
Company
prospectus Investors receives call
money
Company
Underwriter
receives
covers under-
applications
Investors subscription
& money Investors

Company Company refunds Company

allocates unsuccessful receives
(allots) applications & allotment Company
shares transfers cash to money makes call
main bank a/c
LO 3

Prospectus
LO 3

Content
Contains all information investors would reasonably
require to make an informed assessment about:
1. Rights & liabilities attaching to securities e.g.
ordinary or preference shares.
2. Financial position, performance & prospects of the
issuing entity.
3. Interests of every director, promoter, stockbroker
and professional adviser in any property acquired
with the funds received from the securities issue.
4. Whether securities will be quoted on the stock
exchange.
LO 3

Content
Before issuing a prospectus, it must be approved by the
capital market regulator
Reserve Bank of Fiji

The prospectus also contains the application form

Interested members of the public complete the form,
include the required amount and return it to the
company.
LO 4

Underwriters
LO 4

Underwriters
Role
1.May assist in determining the initial share price
2.Buy any under-subscribed shares at a discount
 Re-sell at a premium (realise a capital gain)

Optional i.e. not all share issues involve an underwriter

Usually a broker or financial institution
 Paid a commission [deducted from share capital]
LO 5

Over-subscription

Refund or
Transfer to future requirements
LO 5

Managing over-subscription
If the company receives more applications than the
shares it’s authorised to issue, it may
1.Allot shares only to some applicants; and
 Refund money to unsuccessful applicants
2.Allot some shares to all applicants on a pro-rata basis;
and
 Refund excess application money; or
 Transfer excess application money to future
requirements i.e. allotment/calls etc.
Actions must be consistent with the prospectus
LO 6

Other Ways to Raise Equity

Rights Issue
Private Placement
LO 6
Rights Issue
In this case, shares are offered to existing shareholders
 On a pro-rata basis e.g. 1 share for every 5 shares held

Benefits
1. No dilution of existing ownership, control etc. [if all
rights are exercised]
2. If renounceable, shareholders can sell shares [at
market price] for a capital gain
Disadvantage
Shares must be issued at a significant discount. If not,
shareholders would prefer to buy from stock exchange
LO 6
Private Placement
In this case, shares are issued to institutional Investors
 e.g. life insurance companies, superannuation funds
Benefits
1. Fast and less cumbersome than a public offering
2. Price is not significantly discounted i.e. close to existing
market price
3. Shares can be issued to ‘friendly institutions’ i.e.
good/strategic business alliances
Disadvantages
1. May dilute existing ownership
2. Existing shareholders lose opportunity for capital gain
LO 7

Share Options

For senior management

LO 7
Share Options
This can be used as a form of executive remuneration
 Aligning interests of managers & shareholders
 Raising capital is a secondary issue
 Options may also have a fee/cost which is
different from the share price
Reward managers for taking risks and meeting targets
 Managers are risk-averse by nature
 If the risk pays off, share price rises and managers
exercise share options to buy at a discount
 No downside risk. If share price falls, managers
are not obliged to buy shares
LO 8

Accounting for Share Issues

Public Offering,
Rights Issue, Private Placement,
Share Options
LO 8

Summary of Accounts
Name Type
Cash Trust Asset Cash is held in this a/c
pending allotment
Cash Asset
Application Liability
Allotment Asset (Receivable)
Call Asset (Receivable)
Share Capital Equity
LO 9

Forfeiture of Shares
LO 9
Forfeiture of Shares
Shareholders who fail to pay money due on call
 may forfeit (i.e. lose) their shares

The company may re-issue shares to new shareholders

 Discounted using money already paid up by
previous shareholders
 Deduct costs of re-issuing shares
 Any balance may be
1. refunded to previous shareholders; or
2. used to establish a reserve
LO 10

Redemption of Shares
LO 10

Redemption
Depending on the prospectus, some shares may be
redeemable
i.e. the company has a right to buy them back from
shareholders
Possibly at a premium (treated as an expense)

Shares may be redeemed out of

1.New issue of shares; or
2.Retained earnings
Refer to
Deegan
Chapter 13

AF210

Topic 3
Company Formation & Share Capital
Notes