Raising of share capital

A share is a unit of ownership of a company. It is a certificate with a denominated value, which shows ownership of a stake in a company. Shares issued to the public would be either paid for in full at application or paid for in instalments.

There are two types of shares, namely:

1. equity shares and
2. preference shares.

Equity shares

Equity shares are also known as ordinary shares. These shares are the main source of finance for a company giving the shareholders rights to ownership, vote, get dividend when the company earns profit and have claims on the assets. Equity shareholders are the real owners of the company and have a control over the management of the company. Equity share capital cannot be redeemed during the lifetime of the company.

Preference shares

These are the shares which have preferential right to get dividend and get back the initial investment at the time of winding up of the company. Preference shareholders are eligible to get fixed rate of dividend and they do not have voting rights. Preference shares may be classified into cumulative preference shares, non-cumulative preference shares, redeemable preference shares and irredeemable preference shares. With cumulative preference shares, the dividend that was not paid in years the company did not make profit, will accumulate, and be paid in future years when the company earns profit. Non-cumulative preference shareholders are not entitled to such treatment. Redeemable preference shares will be bought back by the company on the stated redemption date. As for equity shares, a company cannot buy back irredeemable preference shares.

Companies issue shares to raise money from investors who want to invest. The funds raised are used by companies to finance the development and growth of the business. Company issues shares which allow the shareholders to have a stake in the company's equity as well as a share in its profits, in form of dividends. To issue shares, a company follows rules and procedures issued by the Companies Act and Capital and Securities Market Authority (CSMA) of Tanzania.

1. Shares issued at par (nominal/face) value

   Shares are issued at par when the issue price or market price is equal to nominal value or face value of share. For example if the face value of share is TZS 1,000 and the issue price is TZS 1,000, then we say the shares have been issued at par. The par value of shares is maintained in a share capital account.

2. Shares issued at premium

   Share premium is the amount paid over and above the nominal value of the shares when the shares are issued to the public. The law requires share premium to be maintained separate from nominal value of the share.

   The amount paid over and above the par value is maintained in a share premium account. The share premium can be used for:

   1. Issuing fully paid bonus shares, i.e. free shares to existing shareholders;
   2. Writing off preliminary expenses or formation expenses of the company;
   3. Writing off discount on issue of shares or debentures; and
   4. Writing off premium on redemption of redeemable preference shares if the redemption is not through new issue of shares.

3. Shares issued at discount

   When a company issues shares to the public at a price below the par value, the differences is called share discount. Share capital has to appear at full nominal value of the shares and a discount on issue of shares account should be opened to take care of the discount element. On the statement of financial position, the discount amount will appear under equity section as a deduction from equity. Companies Act of 2002 specify the conditions which must be fulfilled by the company before it issues shares at a discount as:

   1. There must be an approval by members' resolution and sanctioned by the court;
   2. At least one year of trading must have lapsed before such an issue can be made;
   3. Shares should be issued within one month after court's sanction; and
   4. The maximum discount rate should be specified.

Money on issued shares can be paid in full on application stage or paid in instalments. When full amount is required on application, interested investors are required to pay the full issue price when applying for the shares. Alternatively, the company may decide to collect the issue price in two or more instalments. The first instalment is known as application money, where applicants must make payment at time of applying for the shares. The second instalment is called allotment money. Usually, not all applicants are given shares.

When shares are offered to the public, there is a possibility that the amount of applications may be more or less than what was offered.

Where fewer shares are applied for than those offered, the situation is referred to as under subscription.

On the other hand, if shares applied are more than the number of shares offered for subscription, this is referred to as over subscription. Over subscription happens when investors foresee a bright future for the issuing company, which motivates most of them to subscribe for many shares.

If shares have been oversubscribed, the company has an alternative of either to refund the excess money to unsuccessful applicants or issue shares on a pro rata basis to all applicants and retain the excess money for the shares which could not be issued and use that money to reduce future liabilities.

The pro rata issue is the most equitable basis of issuing shares where there is an over-subscription. The maximum number of shares the company can issue is limited to those shares, which have been offered to the public.

If pro rata issue has been made, the problem arises in determining what will be the amount of money, which will be received at the allotment stage, and at call stages. The issue is further complicated if some of shareholders fail to pay allotment liability and hence lead to calls in arrears which will have to be adjusted with their excess money retained on application stage. The remaining amount unpaid on those shares will appear as calls in arrears at the allotment stage and will be shown under current assets in the statement of financial position.