What Are the Main Methods of Issuing Share Capital?
The modes of issuing share capital describe the different ways companies can raise funds by distributing shares to investors. Understanding these modes is crucial for Class 11, Class 12, and commerce competitive exams, and is also useful for practical business knowledge. At Vedantu, we help students grasp these concepts with clarity and real-world relevance.
| Mode of Issuing Share Capital | Description | Typical Usage |
|---|---|---|
| Public Issue (IPO) | Shares are offered directly to the public through a prospectus. | Raising large capital from widespread investors |
| Rights Issue | Shares are offered to existing shareholders in proportion to their holdings. | Further capital for expansion while retaining control |
| Bonus Issue | Additional shares are issued free to current shareholders by capitalizing reserves. | Rewarding shareholders and increasing liquidity |
| Private Placement | Shares are sold to select investors or institutions privately. | Quick fundraising or for strategic investors |
| Offer for Sale | Shares are sold through intermediaries, who later offer them to the public. | Minimizing direct listing complexity |
Meaning of Share Capital
Share capital is the total amount of money raised by a company through the sale of its shares. Investors who buy shares become owners or shareholders. This capital funds company operations, growth, and development. The process and classification of share capital are as per the Companies Act, 2013.
Types of Share Capital
- Authorised Capital: The maximum amount of share capital a company can issue as stated in its Memorandum of Association.
- Issued Capital: The portion of authorised capital offered to investors for subscription.
- Subscribed Capital: The part of issued capital that investors have agreed to buy.
- Paid-up Capital: The amount actually paid by shareholders; can be less than or equal to subscribed capital.
For more on this, visit Types of Share Capital.
Modes of Issuing Share Capital
Modes of issuing share capital are the formal ways a company offers its shares to raise funds. Each mode fits different business needs, regulatory requirements, and investor groups.
| Mode | Key Features | Example |
|---|---|---|
| Public Issue (IPO) | Shares sold directly to the public via a prospectus; regulated by SEBI. | Infosys Limited launching an IPO |
| Rights Issue | Only existing shareholders may buy additional shares at a set price. | Reliance Industries' rights issue to fund expansion |
| Bonus Issue | Free shares given to shareholders by capitalizing company reserves. | ITC Ltd. offering bonus shares to reward investors |
| Private Placement | Direct sale of shares to select investors, such as banks or mutual funds. | Startups raising funds from venture capital firms |
| Offer for Sale | Large shareholders or promoters offload shares through intermediaries to the public. | Government disinvestment in PSUs via offer for sale |
Why Different Modes?
Companies choose modes based on desired speed, regulatory obligations, investor preference, and control. Public issues provide access to more capital, while private placements offer speed and privacy. Rights and bonus issues reward or preserve shareholder value.
Stepwise Process of Issuing Shares
The process of issuing shares usually involves three main stages, aligning with the Companies Act, 2013 and SEBI rules:
- Issue of Prospectus: The company releases a document inviting investors and disclosing key details about the offer.
- Application Submission: Investors submit the application along with payment for desired shares, typically through scheduled banks.
- Allotment of Shares: After receiving applications and fulfilling minimum subscription, shares are allotted. Successful applicants receive an allotment letter.
For detailed journal entries and calculations, refer to DK Goel Solutions Class 12 Accountancy Vol 1 Chapter 4 and TS Grewal Solutions Chapter 6.
Advantages and Disadvantages of Different Modes
| Mode | Advantages | Disadvantages |
|---|---|---|
| Public Issue (IPO) | Access to large capital; increased brand awareness; wide investor base. | High costs; complex compliance; no guarantee of full subscription. |
| Rights Issue | Maintains existing ownership; quick process; lower costs. | Only viable if shareholders are interested; cannot raise funds from new investors. |
| Bonus Issue | Investor confidence; signals financial strength; improves liquidity. | No cash inflow; dilutes earnings per share. |
| Private Placement | Fast; fewer regulatory hurdles; tailored deals. | May restrict general public's access; usually available for select investors only. |
| Offer for Sale | Saves direct listing effort for company; often easier for disinvestment. | Company does not get new funds directly (goes to existing shareholders selling). |
Real-World Examples of Issuing Share Capital
- Public Issue (IPO): Zomato went public with an IPO in 2021, raising funds from public investors.
- Rights Issue: Tata Steel has used rights issues to support its expansion.
- Bonus Issue: Infosys has rewarded shareholders with multiple bonus issues in its history.
- Private Placement: Many startups raise early-stage finance through private placements to venture capitalists.
- Offer for Sale: Government of India has used this route for disinvestment in public sector enterprises.
Additional Resources and Related Topics
To strengthen your understanding of share capital and its issuance, refer to:
- Issue, Forfeiture & Reissue of Shares
- Types of Share Capital
- Features of a Company
- Financial Market
- Equity Shares and Preference Shares
- Companies Act 2013 (Private Companies)
In summary, the modes of issuing share capital—such as public issue, rights issue, bonus issue, private placement, and offer for sale—give companies flexible options for raising funds and shaping ownership. Mastery of this topic is vital for exams and practical business use. At Vedantu, we make learning these concepts simple and exam-ready.
FAQs on Modes of Issuing Share Capital: Concepts, Types & Methods
1. What are the modes of issue of shares?
Companies use various modes of issuing share capital to raise funds. These include public issues (IPOs), rights issues, bonus issues, and private placements. Each method offers a different approach to raising equity capital.
2. What are the 4 types of share capital?
The four main types of share capital are: Authorized capital (maximum shares a company can issue), Issued capital (shares actually issued), Subscribed capital (shares accepted by investors), and Paid-up capital (amount received from investors).
3. What are the methods of issuing securities?
Issuing securities involves raising capital through various methods. Common methods include public issues, private placements, rights issues, and offers for sale, each with its own regulatory requirements and investor base.
4. What is share allotment?
Share allotment is the process of officially assigning shares to applicants who have successfully applied during a share issue. It follows the application process and represents the formal acceptance of investment.
5. What is the process of issuing shares according to the Companies Act, 2013?
The Companies Act, 2013 outlines a structured process for issuing shares. Key steps include a board resolution, preparation and issue of a prospectus, receipt of applications, allotment of shares, and ensuring compliance with SEBI regulations.
6. How do IPOs differ from private placements in terms of regulatory scrutiny?
Initial Public Offerings (IPOs) face significantly more regulatory scrutiny from bodies like SEBI, requiring extensive disclosures. In contrast, private placements involve a targeted group of investors and less public disclosure, resulting in simpler regulatory requirements.
7. Why do companies prefer rights issues during expansion phases?
Companies often opt for rights issues during expansion to raise capital while maintaining existing shareholder control. It's an efficient way to obtain additional funding without diluting ownership significantly. The process is typically simpler and faster than a full-scale IPO.
8. What happens if minimum subscription is not met in a public issue?
If a public issue fails to reach the minimum subscription level, all application money must be refunded to applicants. This is a key provision under SEBI guidelines to protect investors.
9. Can bonus shares alter the company's cash flows?
No, bonus shares do not affect a company's cash flows. They are issued by capitalizing reserves, meaning no new cash is injected into the business. It's a way to increase the number of outstanding shares without increasing the company's capital.
10. Are all modes of issuing share capital available to private companies?
No, not all modes of issuing share capital are available to private companies. For example, a public issue (IPO) is a method typically only open to public companies, as per the Companies Act, 2013 regulations.
11. What is issue of share capital?
Issuing share capital is the process by which a company offers its shares to investors in exchange for funds. It's a primary way for companies to raise equity financing to support operations, expansion, or other initiatives.
12. What are the advantages and disadvantages of issuing share capital?
Issuing share capital offers several advantages: raising capital without incurring debt, increased investor base, potential for growth. However, disadvantages include dilution of ownership for existing shareholders, regulatory costs, and potential fluctuations in share price.
