Can excess application money be used to compensate calls in arrear?

Yes, excess application money can be used to compensate calls in arrear. When a company issues shares through an initial public offering (IPO) or a rights issue, it sets a specific price at which investors can apply for shares. This price is usually higher than the face value of the shares. The difference between the issue price and the face value is known as the premium.

Sometimes, the demand for the shares is higher than the supply, resulting in oversubscription. This means that the company receives more applications and money from investors than the number of shares it has offered. As a result, there may be excess application money left with the company after the allotment process.

Utilizing excess application money:
Companies are allowed to use the excess application money for various purposes, as specified in their prospectus. One of the possible uses of excess application money is to compensate calls in arrear. Calls in arrear refer to the remaining amount of money that shareholders need to pay on their shares after the initial application and allotment process.

Advantages of utilizing excess application money:
1. Improved financial position: By using excess application money to compensate calls in arrear, the company can enhance its financial position. It eliminates the need to collect additional funds from shareholders, reducing the burden on the company and its investors.

2. Better liquidity management: Utilizing excess application money can help the company manage its liquidity more efficiently. It allows the company to access funds already available with it, rather than relying on external sources or demanding immediate payments from shareholders.

3. Enhanced investor confidence: Investors may view the utilization of excess application money to compensate calls in arrear as a positive sign. It demonstrates the company's ability to manage its finances effectively and fulfill its commitments to shareholders.

4. Streamlined administrative process: Using excess application money for calls in arrear simplifies the administrative process for both the company and shareholders. It eliminates the need for additional paperwork, reminders, and follow-ups related to collecting the remaining payment.

Legal considerations:
While utilizing excess application money for calls in arrear can be beneficial, it is essential for companies to comply with legal requirements and obtain necessary approvals, if any, from regulatory authorities. The utilization of excess application money must be clearly disclosed in the prospectus and approved by the company's board of directors.

In conclusion, excess application money can be used to compensate calls in arrear, providing several advantages such as improved financial position, better liquidity management, enhanced investor confidence, and streamlined administrative processes. However, it is crucial for companies to adhere to legal requirements and obtain necessary approvals before utilizing the excess funds.