The issue of shares is the way to allocate new shares to the shareholders. Shareholders may be either individuals or corporate. The allocation of shares in India is made according to the Companies Act 2013. The issue of prospectus, receiving applications, and allocation of shares are three steps in the issue of shares.
A company’s capital accumulation can be collected via many installments. The first installment is collected during application which is known as application money. The second installment which is usually made while the allocation of the shares takes place is known as allocation or allotment money. The third installment is often called the 1st call. In this way 2nd. 3rd and so on calls can be made. The ‘final’ word is attached to the final installment payment.
There are mainly three steps involved in the process of issue of shares.
The company seeks public and private shareholders to apply for the shares that will be distributed among the mass. The shareholders come to know that a new company is going to distribute shares to the public. The prospectus is a document that details the shareholding pattern, including price, and how the money will be collected for each share in the process.
Once the prospectus is distributed, the prospective investors read and understand the terms and start submitting applications for buying shares. The company thus begins to collect eligible applications along with the money deposited by the investors. The deposit of money is usually done via the mentioned banks or other financial institutions mentioned in the prospectus.
When the minimum subscription is completed, shares can be allocated. Usually, most of the shares of companies that are listed are oversubscribed. Therefore, the distribution of shares is done on a pro-rata basis. After the completion of the allocation of shares, the relationship between the shareholder and the enterprise is formed and the shareholder becomes a part owner of the enterprise.
Companies may issue shares for a host of reasons. Some of these reasons may include the following:
Shares issued during the establishment of a company help the company to run and trade along with any other amount the company may borrow.
Shares are usually distributed when the company tends to grow organically. Factors in this may be considered while deciding how many shares will be required for funding the projects of a company. So, shares are the building blocks of the company’s funding process.
Shares can be issued by companies to repay borrowings.
Shares can be issued to accumulate funds for buying another company. This means raising cash and using that cash to acquire a new business.
Shares can also be issued in difficult times of business. This can be done to continue trading after a particularly difficult period.
Issue of shares to re-enact a damaged balance sheet is also possible. In the case of problems across an industry or a lack in the pace of the whole economy, shares can be issued.
Shares can also be issued to existing shareholders. Shareholders do not need to pay for the shares themselves in such cases. This generally reduces the value of the shares in the issue. This, in turn, makes the shares more merchantable to investors.
When shareholders do not want to receive cash dividends, the company may offer them a ‘scrip’ dividend. This is done by allotting shares of the same value as the cash dividend. This is a popular means among firms because issuing shares as a dividend has a less stringent impact on cash flow.
When a director or a top employee of the company decides on a share option, the company may issue new shares.
The company may also issue shares when a new director or senior employee joins the business. The same may be done when an existing employee gets a position on the board of directors. This demonstrates the commitment of the employee or the new director to the business. Moreover, this ensures that the director will have an increased interest in the company’s success. The shares in such a case would either be straightforwardly passed to the new director via a transfer from existing shareholders or by a new allotment of Shares.
Depending on the rights offered to shareholders, shares can be of the following types:
Ordinary shares are the most common types of shares offered by enterprises. These shares have voting rights and are considered the most valuable source of accumulating funds from the shareholders in general.
Deferred shares offer fewer rights when considered with respect to common or ordinary shares. They often do not offer voting rights and there are other constraints that bar the shareholders from enjoying the rights as common shareholders.
Redeemable shares may be bought back by the organization. That is why these shares are called redeemable. The owners of redeemable shares also have limitations in terms of ownership as in the case of common shares.
Although the owners of non-voting shares are part owners of the enterprise, they do not have voting rights for the organizations. This means that these shareholders cannot engage in any executive decision-making process while owning the shares of the organization.
Preference shares offer a prefixed amount of dividend to their shareholders before distributing the dividend among ordinary shareholders. However, the shareholders do not have voting rights.
Management shareholders are special categories where the shareholder is allowed to have two votes during a voting conference in the organization. As is obvious, there is a special focus on these shareholders as they act as managers of the organization.
These are a subcategory of common shares, wherein the management of the organization divides the shareholders into multiple categories. All of these categories are granted different voting rights.
The issue of shares is a valuable process for organizations to raise funds for various organizational needs. Hence, the firms take this very seriously. They plan everything neatly so that the money collection process does not get hampered by a lack of managerial approach.
As the issue of shares is a simple yet critical process, one must be alert about how to deal with the complete procedure without any mistakes. This is so because any mistake in the process would mean a very big loophole in the process of funding the company that may impact the company negatively in the future.
Q1. What is meant by the issue of shares? Briefly illustrate.
Ans. The issue of shares is the process by which a company allocates new shares to the shareholders. Shareholders may be either individuals or corporate. The allocation of shares is done according to the Companies Act of 2013. The basic three steps involved in the issue of shares are the issue of prospectus, receiving applications, and allocation of shares.
Q2. What is the first step in the issue of shares? Illustrate.
Ans. The first step in the issue of shares is the Issue of a prospectus where the company asks potential private and public shareholders to apply for the shares that will be distributed among the mass. This informs the shareholders that a new company is going to distribute shares to the public. The prospectus contains all details about the shareholding pattern, including price, and how it will be collected for each share in the process.
Q3. Which type of share offers voting rights to the shareholders?
Ans. Common shares offer voting rights to the shareholders.
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