Audit of Share Capital

Share capital is the money raised by company through equity share or by preference shares. In accounting terms share capital can be classify as authorised share capital, issued share capital and paid share capital.

Authorised Share Capital

As per section 2(8) of the Companies share Act, 2013. “Authorised capital” or “Nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company. Thus, it is the sum stated in the memorandum as the capital of the company with which it is to be registered being the maximum amount which it is authorised to raise by issuing shares, and upon which it pays the stamp duty. It is usually fixed at the amount, which, it is estimated, the company will need, including the working capital and reserve capital, if any.

Paid up Share Capital

As per Section 2(50) of the Companies be Act, 2013, “issued capital” means that part of authorised capital which is offered by the company for subscription and includes the shares allotted for consideration other than cash.

Audit procedures

• Tally the period-end share capital balance-authorised, issued and paid up, to the previous year audited financial statements.
• In case there in no change during the year, obtain a written confirmation/representation from the Company Secretary that there were no changes to entity’s capital structure during the year.
• In case there is any change, obtain the certified copies of relevant resolutions passed at the meetings of board of directors, shareholders authorising the increase/decrease in authorised and paid up share capital. Also, obtain and verify copies of forms filed with Ministry of Corporate Affairs (MCA) (Form SH 7 for increase in authorised share capital, Form PAS 3 for increase in paid up capital) and with Reserve Bank of India (Form) FCGPR in case of Foreign Direct Investment (FDI) by a Non-resident shareholder) and verify the number of securities issued alongwith the issue price.
• Verify whether the paid up capital as at the period-end is within the limits of authorised capital
• In case there was increase in authorised share capital, verify whether the Company has accurately calculated the fee and stamp duty payable to MCA and obtain a copy of the receipt in support of the payment made

Shares Issued at Premium

In case a company has issued shares at a premium, that is, at amount in excess of the nominal value of the shares, whether for cash or otherwise, section 52 of the Companies Act, 2013 provides that a Company shall transfer the amount received by it as securities premium to securities premium account and state the means in which the amount in the account can be applied. As per the section, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall apply a if the securities premium account were the paid-up share capital of the company.

Application of securities account

The securities account may be applied by the Company

(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares:
(b) in writing off the preliminary premium premium expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68. The auditor needs to verify whether the premium received on shares, if any, has been transferred to a “securities premium account” and whether the application of any amount out of the said “securities premium account” is only for the purposes mentioned above.

Shares issued at discount

According to section 53 of the Companies Act, 2013, a company shall not issue shares at a discount. except in the case of an issue sweat equity shares given under section 54 of the companies act 2013. Any share issued by a company at a discounted price shall be void. Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

The auditor needs to verify that the Company has not issued any of its shares at a discount by reading the minutes of meeting of its directors and shareholders authorizing issue of share capital and the issue price.

Issue of Sweat Equity Shares

According to section 54 of the Companies Act, 2013, the employees may be compensated in the form of ‘Sweat Equity Shares”.

“Sweat Equity Shares” means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. The auditor needs to verify that the Sweat Equity Shares issued by the company are of a class of shares already issued and following conditions have been complied with:

(a) the issue is authorised by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
(c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and
(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

The auditor also needs to verify whether the fresh issue of shares was a rights issue or a preferential issue and whether the relevant requirements for issue of share capital as per provisions of Companies Act, 2013 have been complied with.

Reduction of Capital

For verifying reduction of capital, the auditor needs to undertake the following procedures:
(i) Verify that the meeting of the shareholder held to pass the special resolution was properly convened and that the proposal was among circularised in advance all the shareholders;
(ii) Verify that the Articles of Association authorises reduction of capital;
(iii) Examine the order of the Tribunal. confirming the reduction and verify that a copy of the order and the minutes have been registered and filed with the Registrar of Companies;
(iv) Inspect the Registrar’s Certificate as regards to reduction of capital;
(v) Vouch the accounting entries recorded to reduce the capital and to write down the assets by reference to the resolution of documentary evidence; also check whether the requirements of Schedule III, Part I, have been complied with.
(vi) Confirm whether the revaluation of assets has been properly disclosed in the Balance Sheet;
(vii) Verify the adjustment made in the members’ accounts in the Register of Members and confirm that either the paid up amount shown on the old share certificates have been altered or new certificates have been issued in lieu of the old, and the old ones. have been cancelled;
(viii) Confirm that the words “and reduced”, if required by the order of the Tribunal, have been added. to the name of the company in the Balance Sheet.
(ix) Verify that the Memorandum of Association of the company has been suitably amended.

Disclosure in Balance Sheet

Ensure whether the following disclosure requirements of Ind AS compliant Schedule III of Companies Act, 2013 have been complied with:

Issued and Subscribed Share Capital (Number of shares and value)

• Balance at the beginning of the reporting period
• Changes in equity share capital during the year
• Balance at the end of the reporting period

For each class of capital

• Rights attached
• Preferences
• Restrictions, including Restrictions on the distribution of dividends, Restrictions on the repayment of capital

Shares held in Company by the following entities:

• Holding company
• Ultimate holding company.
• Subsidiaries of the company holding
• Associates of the holding company Subsidiaries of the ultimate holding company
• Associates of the ultimate holding company

Shares held in the company held by each shareholder holding more than 5% shares specifying the number of shares held Aggregate number and class of shares. for:

• Allotted as fully paid up pursuant to contract(s) without payment being received in cash
• Allotted as fully paid up by way of bonus shares
• Bought back

Above disclosure should have been made for a period of five years immediately preceding the balance sheet date