Issue of Shares

A share is a unit of ownership in a company or an organisation. It is also considered as an asset, because in case a company makes a profit, an amount in proportion to 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 organisation.

It should be noted that an organisation 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. On another instance, when there is a bankruptcy, the preference 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 issue of shares is that the shares of an enterprise or any financial asset are distributed among shareholders whoever wishes to purchase it. 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 corporates can purchase the share at this price. 

Hence, holding a share in an organisation 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 Issuing 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 issue of shares wherein an enterprise release 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 will they collect money from investors.

  1. 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.

  1. 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. 

What are the Different Classes of Shares?

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

For instance, right to vote and 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 which grants voting rights to the shareholders.

  1. 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.

  1. Redeemable Share

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

  1. Non-voting Share

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

  1. 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.

  1. Management Share

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

  1. Alphabet Share

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

What are Equity Shares?

Equity shares are issue 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 distribution of dividends. However, these shareholders have voting rights.

For more information on shares and their types, check out our online learning programmes. There are several high-quality study materials for your understanding. All of the study materials are prepared by subject experts to provide you with a clear understanding of every concept. So, avail them now and ace your exam preparation. 

FAQ (Frequently Asked Questions)

1. What are Shares?

A share is a unit of the total capital of enterprise divided into equal portions. So, if a total capital of an enterprise is Rs.100 and divided into 20 parts, then each share will cost Rs.5, which can be bought by individuals or companies.

2. How are Shares Issued?

The issue of shares meaning is that an enterprise divides its total capital into multiple sections or units which are called shares. These shares can be purchased by public individuals or even corporates.

3. How are Shares Issued?

Shares are issued in three steps; 1st.  An enterprise releases a prospectus with relevant details of its shares to the public. 2nd. Whoever wishes to purchase the shares can deposit the amount and an application in a scheduled bank. 3rd. The shares will be allocated to the concerned investor along with a confirmation letter.