Issue of Shares of a Company
The issue of shares is one of the most important methods through which a company raises capital for its operations and growth. In company law, shares represent units of ownership, and their issuance enables a company to mobilise funds from investors in exchange for a stake in the business. The process of issuing shares is governed by legal provisions, primarily under the Companies Act, 2013, and involves a structured procedure to ensure transparency and investor protection.
This article provides a detailed understanding of the issue of shares, including its meaning, legal framework, process, types of shares, and related concepts.
Contents
hide
A share is a unit into which the share capital of a company is divided. It represents a fractional ownership in the company. A person holding shares becomes a shareholder and acquires certain rights, such as the right to vote on company matters and the right to receive dividends, depending on the type of shares held.
Shares are considered movable property and can generally be transferred in accordance with the company’s articles of association. They form the foundation of a company’s capital structure.
The issue of shares refers to the process by which a company offers its shares to investors and allots them to applicants who agree to subscribe. Through this process, the company converts its capital requirements into share capital by inviting investment from the public or specific persons.
Once shares are allotted, the investors become shareholders and gain ownership rights in proportion to their shareholding. These shareholders may include individuals, companies, limited liability partnerships, institutions, or other legal entities.
The issue of shares is not merely a financial transaction but also creates a legal relationship between the company and the shareholder.
Consider a company with a share capital of ₹10 lakh divided into 10,000 shares of ₹100 each. If the company invites the public to subscribe to these shares, interested investors can purchase them by paying the specified amount. Upon allotment, each investor becomes a shareholder and holds a proportionate ownership in the company.
This example shows how capital is divided into units and distributed among investors through the issue of shares.
The issue of shares by a company is governed by the Companies Act, 2013. The Act lays down the rules and procedures that must be followed while issuing shares to ensure fairness, transparency, and protection of investor interests.
The law requires companies to disclose essential information through a prospectus or similar document, maintain proper records, and adhere to prescribed timelines for allotment and refund of money. Non-compliance with these provisions may lead to legal consequences.
The process of issuing shares follows a structured sequence of steps designed to ensure legal compliance and investor confidence.
Issue of Prospectus
The process begins with the issue of a prospectus or a document in lieu of a prospectus. A prospectus is a legal document that invites the public to subscribe to the shares of a company. It contains important information about the company, including its business activities, financial position, objectives, and details of the share issue.
The prospectus also explains how the funds raised through the issue of shares will be utilised.
After the prospectus is issued, interested investors apply for shares by submitting an application form along with the required application money. This amount is deposited in a scheduled bank as specified in the prospectus.
The application represents an offer by the investor to purchase shares.
Minimum Subscription Requirement
Before allotment can take place, the company must receive a minimum subscription. This is the minimum amount that must be raised through the issue of shares, and it cannot be less than 90% of the issued capital.
If the company fails to receive the minimum subscription within the prescribed period, the issue is considered unsuccessful. In such cases, the company must refund the application money to investors within the stipulated time.
Once the minimum subscription is received, the company proceeds to allot shares to the applicants. Allotment refers to the acceptance of the investor’s offer by the company, resulting in a binding contract.
In cases where the number of applications exceeds the number of shares available (oversubscription), shares are allotted on a pro-rata basis.
Successful applicants receive a Letter of Allotment, confirming the allotment of shares and establishing their status as shareholders. Unsuccessful applicants are informed, and their application money is refunded.
The total price of shares may be collected in instalments rather than in a single payment. These instalments typically include:
- Application Money: Paid at the time of application for shares. This amount reflects the initial commitment of the investor and is required for the application to be considered valid.
- Allotment Money: Paid at the time of allotment of shares. This amount becomes due once the company accepts the application and allots shares to the applicant.
- Final Call (or Calls): The remaining amount of the share price is collected in one or more instalments as decided by the company. This allows flexibility in payment and reduces the immediate financial burden on investors.
This instalment system ensures that investors can participate in share subscription without making the entire payment upfront.
What is Minimum Subscription?
Minimum subscription refers to the minimum amount that a company must receive from investors before proceeding with the allotment of shares. It is generally fixed at not less than 90% of the issued capital.
This requirement ensures that the company has sufficient funds to carry out its business plans. If the minimum subscription is not achieved, the issue fails, and the company is obligated to refund all application money received within the prescribed time.
This provision safeguards investors from the risk of investing in underfunded ventures.
Companies issue shares primarily to raise capital. The funds collected through share issuance are used for various business purposes, including:
- Business Expansion: Companies may issue shares to finance growth, such as expanding operations, entering new markets, or increasing production capacity. This enables long-term development without relying solely on borrowed funds.
- Repayment of Borrowings: Issuing shares helps companies reduce their debt burden by using the proceeds to repay loans or other liabilities. This improves the company’s financial position and reduces interest obligations.
- Acquisition of Other Businesses: Companies may raise funds through share issuance to acquire or merge with other companies. This helps in achieving strategic objectives and increasing market presence.
Issuing shares provides an alternative to debt financing and allows companies to strengthen their capital base.
A company can issue different types of shares depending on its capital requirements and the rights it intends to grant to investors. Broadly, shares are classified into equity shares and preference shares.
Equity shares, also known as ordinary shares, represent ownership in a company. Holders of equity shares are considered the real owners and have voting rights in the management of the company.
Equity shareholders receive dividends based on the profits of the company. However, the payment of dividends is not guaranteed and depends on the company’s performance and decision-making.
Equity shares carry a higher level of risk, as equity shareholders are paid last in case of liquidation.
Types of Equity Shares
- Bonus Shares: These are additional shares issued to existing shareholders free of cost. They are issued out of the company’s reserves and increase the total number of shares held by shareholders without requiring additional payment.
- Rights Shares: These are offered to existing shareholders in proportion to their current holdings, usually at a concessional price. Shareholders have the option to accept or reject the offer within a specified period.
- Voting and Non-Voting Shares: While most equity shares carry voting rights, some shares may be issued with differential or no voting rights. This allows companies to raise capital without significantly diluting control.
Preference shares provide certain preferential rights over equity shares. These rights primarily relate to the payment of dividends and repayment of capital.
Preference shareholders receive dividends at a fixed rate and have priority over equity shareholders in the distribution of profits. In the event of winding up, they are also given priority in the repayment of capital.
However, preference shareholders generally do not have voting rights, except in specific circumstances.
Types of Preference Shares
- Cumulative Preference Shares: These shares carry the right to receive unpaid dividends from previous years. If the company fails to pay dividends in a particular year, the arrears accumulate and are paid in future years before any dividend is paid to equity shareholders.
- Non-Cumulative Preference Shares: These shares do not carry the right to claim arrears of dividends. If dividends are not declared in a particular year, the right to receive them lapses.
- Convertible Preference Shares: These shares can be converted into equity shares after a specified period or upon the occurrence of certain events. This feature provides flexibility to investors.
The following table highlights the key differences between equity shares and preference shares:
| Basis | Equity Shares | Preference Shares |
| Nature | Represent ownership in the company | Provide preferential rights over equity shares |
| Dividend | Variable and dependent on profits | Fixed rate and paid before equity dividends |
| Voting Rights | Carry voting rights in company decisions | Generally do not carry voting rights |
| Repayment on Liquidation | Paid after all other claims | Paid before equity shareholders |
| Risk | Higher risk due to uncertainty of returns | Lower risk due to fixed returns and priority |
| Convertibility | Cannot be converted into preference shares | May be convertible into equity shares |
Conclusion
The issue of shares is a fundamental aspect of company law and corporate finance. It enables companies to raise capital by distributing ownership among investors while ensuring compliance with legal requirements. The process involves several stages, including the issue of a prospectus, application, minimum subscription, and allotment of shares.
Different types of shares, such as equity and preference shares, provide flexibility to companies in structuring their capital and to investors in choosing suitable investment options. While equity shares offer ownership and higher returns with greater risk, preference shares provide stability through fixed returns and priority rights.
Attention all law students and lawyers!
Are you tired of missing out on internship, job opportunities and law notes?
Well, fear no more! With 2+ lakhs students already on board, you don't want to be left behind. Be a part of the biggest legal community around!
Join our WhatsApp Groups (Click Here) and Telegram Channel (Click Here) and get instant notifications.
