Issue of Shares - Meaning, Examples and Types

The issue of shares is how corporations assign additional shares to the shareholders. Shareholders might be either corporations or individuals. It should be mentioned that a corporation can offer shares to be acquired by others via the Companies Legislation 2013 and needs to follow the regulations outlined by the legislation.

Generally, the Issue of Shares is of two sorts - ordinary shares and preference shares. While the former provides for voting rights to the shareholders, the latter does not permit the holders of any rights.

What is a Share?

A share, often referred to as a stock, is a financial instrument denoting ownership in a corporation. It represents a unit of ownership and participation in the company's assets, profits, and decision-making processes.

Companies typically issue shares to raise capital to fund their operations and growth. Shareholders, those who hold shares, possess certain rights, including voting on company matters and receiving dividends, which are distributions of profits.

The value of shares can fluctuate based on market conditions, company performance, and broader economic factors. Share trading occurs on stock exchanges, where investors buy and sell these ownership units.

How Shares are issued

The issuance of shares is a pivotal procedure through which companies raise capital from investors in exchange for ownership stakes. Here, we delve into the key stages of issuing shares, encompassing the issue of a prospectus, receiving applications, and the allocation of shares.

1. Issue of Prospectus:

The initial step in issuing shares involves preparing and disseminating a prospectus. A prospectus serves as a comprehensive document that outlines essential information about the company, its financial health, operational activities, risks associated with investment, and the terms of the share offering.

2. Receiving Applications:

Upon releasing the prospectus, interested investors are invited to submit applications for the shares being offered. These applications typically involve details such as the number of shares desired, the price at which they are willing to purchase the shares (often referred to as the subscription price), and personal identification information.

3. Allocation of Shares:

Once the application period concludes, the next step involves the allocation of shares to the applicants. The company's management, often supported by investment banks or underwriters, reviews the applications and determines the allotment of shares based on various factors.

Types of Shares

Shares, also known as stocks or equities, represent ownership in a company and entitle shareholders to a portion of its profits and assets. Companies issue different types of shares to cater to varying investor preferences and strategic needs. Here, we delve into the key categories of shares and provide concise explanations for each.

1. Common Shares:

Common shares are the most prevalent type of shares offered by companies. Holders of common shares have voting rights in corporate decisions and may receive dividends.

2. Preferred Shares:

Preferred shares come with preferential treatment in terms of dividends and asset distribution. While preferred shareholders usually don't possess voting rights, they receive fixed dividends before common shareholders.

3. Voting Shares:

Voting shares grant shareholders the right to participate in company decisions through voting at shareholder meeting.

4. Non-Voting Shares:

As the name suggests, non-voting shares lack voting rights in corporate matters. These shares are often issued to raise capital without diluting the decision-making power of existing stakeholders.

5. Dual-Class Shares:

Dual-class shares involve multiple shares within a single company, typically with different voting rights.

6. Convertible Shares:

Convertible shares can be converted into a different type of security, usually common shares, at a predetermined conversion ratio.

7. Cumulative and Non-Cumulative Shares:

Cumulative preferred shares ensure that if a company skips paying dividends in a particular year, those dividends accumulate and must be paid out before any dividends are distributed to common shareholders.

8. Redeemable Shares:

Redeemable shares can be repurchased by the issuing company after a specified period, often at the option of the shareholder or according to predetermined terms

9. Employee Stock Options:

Employee stock options are a form of equity compensation offered to employees, granting them the right to purchase company shares at a predetermined price.

10. Treasury Shares:

Treasury shares are company shares that were previously issued and have been repurchased by the company itself.

Methods of Issuing of Shares

Issuing shares is vital for companies to raise capital and promote growth. Different methods are available based on financial needs, market conditions, and regulations:

Shares at Premium: Issuing shares above nominal value, showcasing investor confidence and generating surplus funds for various purposes.

Initial Public Offering (IPO): Transforming from private to public ownership, with shares offered to the general public on a stock exchange, involving comprehensive procedures and disclosures.

Shares at Discount: Offering shares below nominal value to attract investors during economic downturns, subject to regulatory constraints.

Rights Issue: Providing existing shareholders the chance to purchase additional shares at a fixed price, maintaining ownership stakes.

Private Placement: Targeted share sale to specific investors, like private equity firms, bypassing certain public offering regulations.

Shares at Par: Issuing shares at their nominal value, often reflecting the original price listed on the share certificate.

Why Do Companies Issue Shares?

Companies issue shares as a strategic financial move to raise capital and achieve specific business objectives. Here are the primary reasons:

Capital Infusion: Issuing shares provides an avenue to secure funds for expansion, research, development, acquisitions, and other growth initiatives.

Debt Reduction: Companies can use the capital raised from shares to pay off existing debts and improve their financial stability.

Investment Opportunities: Shares attract investors seeking potential returns through dividends and capital appreciation.

Liquidity Enhancement: Publicly traded shares offer a market for shareholders to buy or sell, enhancing liquidity and allowing easy access to funds.

Employee Incentives: Companies issue shares or stock options to employees as part of compensation, aligning their interests with company performance.

Mergers and Acquisitions: Shares can be used as currency in mergers, acquisitions, and strategic partnerships.

Diversification: For closely held companies, issuing shares can bring in outside ownership and diversify the investor base.

Brand Visibility: Going public through shares can raise a company's profile, attracting attention from customers, partners, and the media.

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