Modes of Issue of Shares

Raising capital is one of the most essential functions of a company. Shares play a central role in this process, as they represent ownership in a company and enable it to collect funds from investors. The Companies Act, 2013 provides a structured legal framework governing how shares can be issued by companies. These modes ensure transparency, investor protection, and regulatory compliance.

This article explains the meaning of shares, the concept of issuing shares, and the various modes through which shares can be issued under company law.

Meaning of Issue of Shares

The issue of shares refers to the process by which a company distributes its shares to investors in exchange for capital. This process enables the company to raise funds for its operations, expansion, or other financial needs.

Shares may be issued to individuals, institutions, existing shareholders, or employees, depending on the method adopted. The issuance is carried out at a specific price, which may be:

• At par (equal to nominal value)
• At a premium (above nominal value)
• At a discount (in limited circumstances)

The issue of shares involves procedural steps such as invitation, subscription, and allotment, and must comply with statutory requirements.

Legal Framework: Section 23 of the Companies Act, 2013

Section 23 of the Companies Act, 2013 lays down the modes through which companies can issue securities, including shares. It provides a unified framework applicable to both public and private companies.

A key feature of this provision is that:

• Both public and private companies can issue shares through private placement, rights issue, and bonus issue.
• Only a public company is permitted to issue shares to the public through a prospectus.

This distinction ensures that public fund-raising is subject to stricter regulation, while private methods remain available to all companies.

Modes of Issue of Shares

The Companies Act, 2013 recognises multiple modes of issuing shares. These methods differ based on the nature of investors, regulatory requirements, and purpose of the issue.

Public Issue (Initial Public Offering – IPO and Follow-on Public Offering – FPO)

A public issue refers to the offering of shares to the general public. It is one of the most widely known methods of raising capital.

• Initial Public Offering (IPO): This is the first time a company offers its shares to the public. It enables the company to get listed on a stock exchange and access large-scale capital.
• Follow-on Public Offering (FPO): A company that is already listed may issue additional shares to raise further capital.

A public issue requires the preparation and filing of a prospectus, which contains detailed information about the company, its financial position, risks, and future prospects. Regulatory authorities such as SEBI oversee such issues to ensure investor protection.

Public issues allow wide participation and lead to dispersed ownership. However, they involve high costs, extensive compliance, and do not guarantee full subscription unless underwritten.

Private Placement

Private placement involves offering shares to a select group of investors rather than the general public. These investors may include financial institutions, banks, or high-net-worth individuals.

• It is a faster method of raising capital as it avoids the complexities of a public issue.
• The company receives funds quickly and there is minimal risk of under-subscription.
• Regulatory requirements are comparatively simpler, though still governed by the Companies Act.

However, private placement may lead to concentration of ownership in a few hands. Additionally, investors may demand favourable terms such as discounts or special rights.

Rights Issue (Privileged Subscription)

A rights issue involves offering new shares to existing shareholders in proportion to their current holdings.

• It preserves the ownership structure by giving existing shareholders the first opportunity to subscribe.
• Shares are often offered at a discounted price to encourage participation.
• It is a cost-effective method as it does not require extensive public disclosures like a prospectus.

This method is suitable when a company wishes to raise additional capital while maintaining control within existing shareholders.

Bonus Issue

A bonus issue refers to the distribution of additional shares to existing shareholders without any payment.

• It is made by converting the company’s reserves or retained earnings into share capital.
• Shareholders receive shares in proportion to their existing holdings.
• It does not bring new funds into the company but strengthens its capital base.

Bonus issues are often used to reward shareholders and improve market perception of the company.

Preferential Allotment

Preferential allotment involves issuing shares to a select group of investors on a preferential basis.

• These investors may include promoters, venture capitalists, or strategic investors.
• Shares are issued at a predetermined price in accordance with regulatory guidelines.
• It is commonly used to bring in strategic investment or strengthen promoter control.

This method ensures targeted fund-raising but must comply with pricing and disclosure norms.

Qualified Institutions Placement (QIP)

Qualified Institutions Placement is a specialised form of private placement available to listed companies.

• Shares are issued exclusively to qualified institutional buyers such as mutual funds, insurance companies, and foreign institutional investors.
• It enables companies to raise capital quickly without undergoing elaborate procedures of public issues.
• Regulatory norms ensure that only credible institutional investors participate.

QIP is particularly useful for listed companies seeking efficient capital infusion.

Employee Stock Option Plan (ESOP)

Under ESOP, shares are issued to employees, directors, or officers of the company.

• It forms part of employee compensation and incentive schemes.
• Employees are given the option to purchase shares at a predetermined price.
• It promotes employee retention and aligns their interests with the company’s growth.

ESOPs are governed by specific regulatory provisions to ensure fairness and transparency.

Traditional and Practical Methods of Distribution

In addition to the primary legal modes, certain traditional methods of share distribution are also used in practice.

Offer for Sale

In this method, shares are first allotted to an issuing house or financial institution, which then offers them to the public.

• It relieves the company from the burden of directly approaching investors.
• The issuing house handles the sale process and documentation.
• However, the premium earned may be retained by the intermediary rather than the company.

Sale through Intermediaries

Companies may appoint intermediaries such as banks or brokers to assist in selling shares.

• Intermediaries distribute application forms and promote the issue.
• They receive commission based on subscriptions received.
• This method reduces administrative burden but does not guarantee full subscription.

Sale to Inside Coterie

Shares may be issued to promoters or directors of the company.

• This method helps reduce costs associated with public issues.
• It allows insiders to increase their stake and participate in future profits.
• However, it may limit public participation.

Selling through Managing Brokers

Managing brokers assist in organising and promoting share issues.

• They help in drafting prospectus, marketing the issue, and coordinating with brokers.
• Their involvement improves the efficiency of the issue process.
• This method is commonly used by new companies.

Key Considerations in Issue of Shares

The issue of shares is governed by several procedural and legal requirements:

• Prospectus or Offer Document: Public issues require detailed disclosure of financial and operational information.
• Pricing of Shares: Shares may be issued at par, premium, or discount depending on regulatory provisions.
• Allotment of Shares: The board of directors is responsible for approving the allotment after receiving applications.
• Regulatory Compliance: Compliance with the Companies Act, 2013 and SEBI regulations is mandatory. Non-compliance may lead to civil and criminal liability.

Conclusion

The modes of issue of shares under the Companies Act, 2013 provide a comprehensive framework for companies to raise capital in a structured and regulated manner. These modes cater to different needs, ranging from large-scale public fund-raising to selective private investments and internal restructuring.

Each method has its own advantages, limitations, and regulatory requirements. Public issues ensure wider participation and transparency, while private placement and preferential allotment offer speed and flexibility. Rights and bonus issues protect the interests of existing shareholders, whereas ESOPs promote employee involvement.