Following are the principal sources of capital reserve
a. Premium on issue of shares and debentures.
b. Profit on sale of a fixed asset.
c. Profit on revolution of assets and liabilities.
d. Profit on forfeiture and re-issue of forfeited shares.
e. Profit on redemption of debentures at a discount.
f. Profit earned by a company prior to its incorporation.
Presentation: capital reserve is shown on the liabilities side of balance sheet under the head reserves and surplus.
Difference between reserves CapitaLand capital reserve
Basis of difference Reserve capital Capital reserve
Meaning It means that certain portion of uncalled share capital which shall not be called up except in the event of winding up. It is that reserve which is created out of capital profits.
Special A special resolution is passed by the company for the creation of reserve capital. There is no need to pass any resolution for the creation fo capital reserve.
Accounting treatment No accounting treatment regarding reserve capital is made in the books of accounts. Accounting treatment regarding capital reserve is made in the books of account.
Use Reserve capital can be called up only at the time of winding up of the company and used by the company Capital reserve can be used to meet capital losses or to declare a bonus share any time during the life of a company.
Minimum subscription (section 69)
Minimum subscription means the minimum amount which in the opinion of directors must be raised to meet the needs of business operations of the company relating to.
(i) For the payment of purchase price of any property purchased or agreed to be purchased,
(ii) For the payment of preliminary expenses including underwriting commission and brokerage with the issue of shares.
(iii) For the repayment of any money borrowed by the company for the above two matters,
(iv) For working capital, and
(v) For any other expenditure realised for the usual conduct of business operations.
Initial public offer
By making an offer inviting the public in general to subscribe to a share, which is generally known as initial public offer (IPO). The comapnycan make public issue under different modes and prices issue of shares at par or at premium or at discount.
It can issue the shares under tow modes (i) for cash (ii0 for consideration other than cash. From the point of view of issue company can issue shares on any one basis.
Employees stock option plan (ESOP)
Employee stock option means the option given to the whole time director’s officers and employees right to purchases or subscribe within specified period, the shares or debentures offered by the company at a pre-determined price. This is a voluntary scheme on the part often company in order to retain high caliber employees or to give them sense of belonging such as promoters mutual funds, employees of company financial institution etc. in such a case the allotters will not sell their shares for a minimum period of one year from the date of allotment.
Private placement of shares
Private placement of shares is the issue of shares to a selected group of persons privately and not to publican general through public issue. In other words it implies the issue of securities of a company direct to one investor or a small group of investors without resulting to underwriting these investors normally include financial institutions or other existing companies.
In private placement no prospectus is issued and the long procedure required in the case of public issue is avoided. The cost incurred in private placement is minimal and a very simple process of raising fund is applied.
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