Sub-division of Shares, Worked
Chapter Five
Syllabus topic 3, "Methods including alteration of share capital ... sub division ..."
Pages 12 to 13 of 85
In one line
Sub-division splits each share into a number of shares of smaller face value, leaving the total capital exactly where it was.
What the Act says
Section 61(1)(d) lets a company sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived.
That trailing condition is the whole difficulty of the topic, and it is in the clause itself.
Why a company sub-divides
To make the shares tradeable. A share of Rs 100 is a large unit. Split into ten shares of Rs 10, more buyers can afford one, and the market in the shares improves.
To prepare for a reconstruction. A reduction is easier to apply evenly to small units. A scheme that writes capital down by 60 per cent is simpler to express on a Rs 10 share than on a Rs 100 share.
Sub-division is not a reduction. The total stays the same. That is why it lives in s.61 and needs no Tribunal.
The rule about paid and unpaid
If the original share was partly paid, each new share must carry the same proportion paid.
A share of Rs 100 with Rs 60 paid is 60 per cent paid. Sub-divided into ten shares of Rs 10, each new share must be Rs 6 paid and Rs 4 unpaid. It is 60 per cent paid, exactly as before.
What a student must not do is make some new shares fully paid and leave others wholly unpaid. That would change each holder's liability to further calls, which is precisely what the clause forbids.
Worked
Sunrise Ltd. has an issued capital of 10,000 equity shares of Rs 100 each, on which Rs 60 per share has been called and paid. The company resolves to sub-divide each share into shares of Rs 10 each.
Step 1. Find the totals before, because they must not change.
| Particulars | Amount |
|---|---|
| Nominal value, 10,000 shares of Rs 100 | 10,00,000 |
| Paid-up value, 10,000 shares at Rs 60 | 6,00,000 |
| Amount uncalled, 10,000 shares at Rs 40 | 4,00,000 |
Step 2. Find the new number of shares.
Each Rs 100 share becomes ten shares of Rs 10, so 10,000 shares become 1,00,000 shares of Rs 10 each.
Step 3. Apply the proportion.
The old share was 60 per cent paid, so each new share is 60 per cent paid: Rs 6 paid and Rs 4 unpaid on a share of Rs 10.
Step 4. Prove the totals have not moved.
Sub-division of Shares, Worked
| Particulars | Before | After |
|---|---|---|
| Number of shares | 10,000 | 1,00,000 |
| Face value per share | 100 | 10 |
| Nominal capital | 10,00,000 | 10,00,000 |
| Paid per share | 60 | 6 |
| Paid-up capital | 6,00,000 | 6,00,000 |
| Uncalled per share | 40 | 4 |
| Uncalled capital | 4,00,000 | 4,00,000 |
The journal entry.
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Equity Share Capital (Rs 100 each) A/c ... Dr | 6,00,000 | |
| To Equity Share Capital (Rs 10 each) A/c | 6,00,000 | |
| (Being 10,000 equity shares of Rs 100 each, Rs 60 paid, sub-divided into 1,00,000 equity shares of Rs 10 each, Rs 6 paid, under s.61(1)(d)) | ||
| Total | 6,00,000 | 6,00,000 |
The entry is passed at the paid-up figure, because that is what the Share Capital account carries in the books. The uncalled amount was never credited to Share Capital and so does not appear.
Where students lose the marks
Passing the entry at nominal value. The books carry Rs 6,00,000, not Rs 10,00,000. An entry for the nominal figure will not agree with the trial balance.
Forgetting the proportion. Turning a Rs 100 share with Rs 60 paid into six fully paid Rs 10 shares looks tidy and is wrong. It would extinguish the uncalled liability of Rs 4,00,000, which is a reduction of capital and needs s.66 and the Tribunal, not s.61.
Omitting the notice. Section 64 requires notice to the Registrar within thirty days, with an altered memorandum. A question asking for "the procedure" expects it.
In short
- Sub-division splits a share into smaller shares; the totals do not move.
- s.61(1)(d) requires the paid-to-unpaid proportion on each new share to be the same as on the old one.
- The journal entry is passed at the paid-up amount, not the nominal amount.
- It is not a reduction, so no Tribunal; but notice to the Registrar under s.64 within thirty days.
- Making partly paid shares fully paid by sub-division is a reduction in disguise and needs s.66.
Answer in one sentence
What is sub-division of shares? The splitting under s.61(1)(d) of a share into a larger number of shares of smaller face value, the total nominal and paid-up capital remaining unchanged and the proportion between paid and unpaid on each new share remaining the same as on the original share.
Is sub-division a reduction of capital? No. The aggregate capital is unaltered; only the denomination and the number of shares change, so an ordinary resolution under s.61 suffices and the Tribunal is not involved.
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.