Issue of Shares: Steps and Procedures

Issue of Shares is the process by which companies pass on new shares to shareholders, who can be either individuals or corporates. While acquiring the shares, companies follow the rules prescribed by the Companies Act 2013.

There are 3 basic steps of the procedure of issuing the shares.

1. Issue of Prospectus

2. Receiving Applications

3. Allotment of Shares 

A share is a unit of ownership in a company or an organization. It is also considered as an asset because in case a company makes a profit, an amount in proportion to the share held by you will be provided to you in the form of a dividend. Anyone who holds a share is called a shareholder for that specific financial asset or organization.

It should be noted that an organization is allowed to offer shares to be purchased by others through the Companies Act 2013 and has to follow the rules predefined under the act.

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

However, the dividend is passed on to both in case of a profit. In another instance, when there is a bankruptcy, the preferred shareholders are given preference in matters of dividend sharing. So, they receive the dividend even before the common shareholders and have an upper hand.

What is the Issue of Shares?

The meaning of the Issue of Shares is that the shares of an enterprise or any financial asset are distributed among shareholders who wish to purchase them. These shareholders can be either individuals or corporates who take part in buying the shares at a specific price.

Let us understand the concept of share allocation with the help of an example.

A company called XYZ has a total capital of Rs. 6 lakhs. It has divided the capital into 6000 units of shares each amounting to Rs. 100. Therefore, you can see that each unit or share of the company costs Rs. 100. Individuals or corporations can purchase the share at this price.

Hence, holding a share in an organization is often regarded as partial ownership as well. It is for the same reason that anyone holding a share is termed as a shareholder. 

What are the Steps involved in Issue of Shares?

The process of issues of shares is primarily divided into three significant steps, which are:

1. Prospectus Issue

This is the first step of the Issue of Shares wherein an enterprise releases a prospectus to the public. It contains the details that a new enterprise has come into being and that it would require funds from the public to operate, for which the public can purchase shares of that particular enterprise.

The prospectus has all the necessary details of that share issuing authority along with details pertaining to how they will collect money from investors.

2. Application Receipt

The second step in share issuing is the receipt of application as and when an investor wishes to purchase a share of that asset or enterprise. However, they have to follow the necessary rules and regulations as cited in the prospectus issued earlier.

They also have to deposit the amount against shares they are willing to purchase. The money has to be deposited to any scheduled bank along with the application.

3. Share Allocation

This is the last step in issues of shares wherein after completing the formalities from the investor’s side, the enterprise will issue the shares to the investors. As there is a minimum subscription limit, one has to wait till that quota is fulfilled.

Once that limit is fulfilled, the shares will be allocated to those investors who have subscribed for the capital shares. A letter of allotment is also sent out to those who have been allocated with shares.

Therefore, this process makes up for an authentic way of trading shares between investors and enterprises.

The main reason for issuing new shares by the company is to raise money to finance the business. The following are some of the examples where an Allotment of Shares may be considered.

• A number of shares will usually be issued when the company is established. With the help of a share issue, the company will be able to trade, along with any money that the company may borrow.

• Allotment of Shares is considered when the company requires new funds to grow the business organically. There are various factors that influence how many shares to issue.

• In order to repay all or some of the company’s borrowing, shares can be issued.

• Shares can be issued to fund the purchase of another company, which means raising cash from a share issue and using that cash to acquire the new business.

• Shares can also be issued to continue trading after a particularly difficult period, to repair a damaged balance sheet or in case of problems across an industry or part of a wider downturn in the whole economy.

• The company can make a capitalization Issue of Shares to existing shareholders. Rather than the shareholders needing to pay for the shares themselves, the company uses its own money to fund the allotment. This generally has the effect of reducing the value of the shares in issue, which may, in turn, make them more merchantable to investors.

• If shareholders prefer not to receive a cash dividend, the company may offer them a ‘scrip’ dividend instead by allotting shares of the same value as the cash dividend. This is often popular among companies because issuing shares as a dividend does not impact cash flow in the way a cash dividend does.

• In case a director or employee of the company takes on a share option after being permitted by the company, the company may acquire shares.

• The company may consider allotting the shares in case a new director or senior employee joins the business or an existing employee becomes a director. This can demonstrate the commitment of an employee or a new director to the business, and they will have a clear interest in the company’s success. The shares would either be passed to the employee or new director through a transfer from existing shareholders or by a new Allotment of Shares.

What are the Different Classes of Shares?

The types of issues of shares are usually set by a company or enterprise that is issuing its share to the public. This division is generally set to keep a limitation to all rights being conferred to those shareholders.

For instance, the right to vote and the amount of dividend they will receive when there is a profit incurred by an enterprise whose share is out for sale is decided on the basis of such divisions.

The division is made in the following two types -

1. Ordinary Share

This is the most common type of share issued by an enterprise that grants voting rights to the shareholders.

2. Deferred Share

These shares grant fewer rights than common shares, wherein dividends are paid only after a certain period of time and various other constraints.

3. Redeemable Share

As the name suggests, these shares might be bought back by an enterprise that sold them for the first time from the shareholders.

4. Non-voting Share

These shares do not permit any voting rights to their shareholders. Meaning that the shareholders are not able to partake in any executive decision regarding that organization. However, they are part owners of the enterprise.

5. Preference Share

These shares grant a prefixed amount of dividend to its shareholders. They do not enjoy voting rights, though they receive a dividend before any other shareholder.

6. Management Share

The shareholders are granted special voting rights when they hold management shares. Herein, for every share that a shareholder holds, they are permitted to exercise two votes.

7. Alphabet Share

These types of shares are a subcategory of common shares, wherein management divides the shareholders into multiple classes, all these classes are granted different voting rights.

What are Equity Shares?

Equity shares are issues of shares that are purely meant for ownership. It is entirely opposite to preference shares and does not provide any preference rights to shareholders during the distribution of dividends. However, these shareholders have voting rights.

The Process for Issue and Allotment of Shares

The following steps are involved in the process for the issue and Allotment of Shares.

Step 1: Board resolution

Step 2: Passing of special or ordinary resolution

Step 3: Filing of necessary forms 

Step 4: Approval of the ROC

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