Conversion of Shares into Stock and Back
Chapter Seven
Syllabus topic 3, "Methods including ... conversion of stock into shares and vice versa ..."
Pages 16 to 17 of 85
In one line
Stock is fully paid share capital held as one lump of a stated rupee value instead of as a number of separate shares, and s.61(1)(c) lets a company move its capital either way.
First, what "stock" means here
Not inventory. In this chapter stock does not mean goods held for sale. It is a form in which share capital may be held.
A member holding shares holds a number of units: 500 shares of Rs 10. A member holding stock holds a sum: Rs 5,000 of stock. The money is the same. What differs is that stock has no unit, so it may be transferred in any amount the articles permit, whereas shares must be transferred whole.
What the Act says
Section 61(1)(c) lets a company convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination.
Two things are in that clause and both are examined.
Only fully paid shares may be converted. Stock has no unit, so there is nothing on which to record a partly paid liability. A partly paid share must first be made fully paid before it can become stock.
On reconversion the denomination is free. Stock reconverted into shares may be divided into shares of any denomination the company chooses. It need not return to the denomination it came from.
Shares and stock compared
| Shares | Stock | |
|---|---|---|
| Held as | A number of units | A lump sum of rupees |
| Denomination | Each share has a face value | No face value; only an amount |
| May be partly paid? | Yes | No, must be fully paid |
| Transfer | Whole shares only | Any amount the articles allow |
| Numbering | Each share is distinguished by a number | Stock is not numbered |
| Issued directly? | Yes | No; stock arises only by conversion of shares |
Stock cannot be issued directly. A company cannot allot stock to a subscriber. It may only convert shares that have already been issued and fully paid. That point is the most common one-sentence answer on this topic.
Worked
Crestline Ltd. has an issued capital of 50,000 equity shares of Rs 10 each, fully paid. It resolves to convert them into stock.
| Particulars | Amount |
|---|---|
| 50,000 equity shares of Rs 10 each, fully paid | 5,00,000 |
The journal entry.
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Equity Share Capital A/c ... Dr | 5,00,000 | |
| To Equity Stock A/c | 5,00,000 | |
| (Being 50,000 fully paid equity shares of Rs 10 each converted into stock, under s.61(1)(c)) | ||
| Total | 5,00,000 | 5,00,000 |
Nothing else changes. Total capital, the company's assets and every member's proportionate interest are exactly as they were.
On reconversion, the company might resolve to divide the Rs 5,00,000 of stock into shares of Rs 5 each. It would then have 1,00,000 shares of Rs 5, and the entry reverses:
Conversion of Shares into Stock and Back
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Equity Stock A/c ... Dr | 5,00,000 | |
| To Equity Share Capital (Rs 5 each) A/c | 5,00,000 | |
| (Being Rs 5,00,000 of stock reconverted into 1,00,000 equity shares of Rs 5 each, under s.61(1)(c)) | ||
| Total | 5,00,000 | 5,00,000 |
Note that the denomination has changed from Rs 10 to Rs 5 and the Act permits it: reconversion may be into shares of any denomination.
Why a company would bother
Historically, to make transfer easier, because stock could be transferred in odd amounts when shares could not. In modern practice, with shares held in dematerialised form and traded freely, the advantage has largely gone, and conversion into stock is uncommon.
It remains on the syllabus because it remains in the Act, and MU asks it.
In short
- Stock here is share capital held as an amount, not as units. It is not inventory.
- Only fully paid shares may be converted into stock, because stock cannot carry an unpaid liability.
- Stock cannot be issued directly; it arises only from conversion.
- Reconversion may be into shares of any denomination.
- The entry is a transfer between two capital accounts; no total changes.
- Notice to the Registrar under s.64 within thirty days.
Answer in one sentence
What is stock, and how does it differ from shares? Stock is fully paid share capital held as a single sum of money rather than as a number of shares; it has no face value, cannot be partly paid, is not numbered, cannot be issued directly, and may be transferred in any amount the articles permit.
Can partly paid shares be converted into stock? No. Section 61(1)(c) permits the conversion of fully paid-up shares only, because stock carries no unit on which an unpaid liability could rest.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.