Issue of Shares

 

Introduction

The process of issuing shares is a critical mechanism through which companies raise capital. By offering shares to the public or select investors, a company divides its ownership into units that can be purchased, providing the company with the funds it needs for various purposes, such as expansion, paying debts, or improving infrastructure.

Types of Shares

Equity Shares

• Definition: Also known as ordinary shares, equity shares represent the ownership of shareholders in the company.
• Rights: Shareholders are entitled to dividends, which fluctuate based on the company's performance. They also have voting rights.
• Risks: High risk as dividends are not guaranteed and depend on profitability.

Preference Shares

• Definition: Preference shares come with a fixed dividend rate and have priority over equity shares in dividend payment and capital repayment if the company is liquidated.
• Rights: Generally, do not have voting rights unless specified.
• Risks: Lower risk compared to equity shares but with fixed returns.

Process of Issuing Shares

1. Authorization

• Company's Articles of Association: Must authorize the issue of shares.
• Regulatory Approval: Depending on jurisdiction, regulatory approval may be required.

2. Prospectus Issuance

• Definition: A legal document describing the company, its operations, and the details of the share issue.
• Purpose: To inform potential investors about the investment opportunity.

3. Application and Allotment

• Application: Investors apply for shares through an application process.
• Allotment: The company allocates shares to applicants based on the application received.

4. Pricing

• Fixed Price Issue: The company sets a fixed price for the shares.
• Book Building Issue: The price is determined based on the bids received from prospective investors.

5. Collection of Money

• Payment in Installments: Application money, allotment money, and call money.
• Full Payment: In some cases, full payment is required with the application.

Types of Share Issues

Public Issue

• Shares are offered to the general public.
• Includes Initial Public Offering (IPO) for companies going public for the first time.

Private Placement

• Shares are offered to a select group of investors, not the general public.
• Less regulatory requirements compared to a public issue.

Rights Issue

• Shares are offered to existing shareholders at a preferential rate.
• Helps maintain the existing ownership structure.

Bonus Issue

• Additional shares are issued to existing shareholders without any extra cost.
• Capitalized from the company's reserves.

Legal and Regulatory Framework

• Governed by the Companies Act and regulations set by the Securities and Exchange Board or equivalent authority.
• Compliance with disclosure and reporting requirements is mandatory.

Conclusion

The issue of shares is a vital function in the financial management of a company, enabling it to secure necessary capital while offering investors a chance to partake in the company's profits. Understanding the types of shares, the process of issuing shares, and the legal framework is essential for commerce students, providing a foundation for more advanced topics in corporate finance and investment.