Issue of Shares- Meaning Types Process and Examples
The issue of shares is one of the main ways a company can raise money for its business. Companies need capital to start projects, buy assets, expand operations, and support future growth. Investors may also study topics such as nbcc bonus shares when learning how companies distribute or increase their share capital.
When a company issues shares, investors provide money or other permitted consideration in return for an ownership interest. The exact rights depend on the type and terms of the shares. This process connects companies that need capital with investors willing to provide it.
What Is Issue of Shares?
The issue of shares refers to the process through which a company creates and allots shares to investors. The investors become shareholders after receiving the shares and gain rights based on their share class. A share represents an interest in a company, but different shares can carry different rights. These rights may relate to voting, dividends, repayment of capital, or other matters.
For example, suppose a company issues 100,000 equity shares with a face value of ₹10 each. The nominal share capital represented by these shares would be ₹1,000,000.
| Particular | Example |
|---|---|
| Number of Shares | 100,000 |
| Face Value per Share | ₹10 |
| Nominal Share Capital | ₹1,000,000 |
| Type of Share | Equity Share |
Why Do Companies Issue Shares?
A company needs funds at different stages of its life. A new company may require money to establish operations, while an existing business may need funds for expansion. The issue of shares helps a company raise share capital to finance factories, equipment, technology, acquisitions, or other business needs. Unlike ordinary borrowing, equity capital does not normally create a contractual obligation to repay principal like a loan.
However, issuing new equity may reduce the ownership percentage of existing shareholders. Companies must therefore consider their funding needs, capital structure, shareholder rights, and legal requirements.
Main Types of Shares
| Type | General Feature |
|---|---|
| Equity Shares | Usually represent ordinary ownership interests |
| Preference Shares | May provide preferential financial rights |
| Voting Shares | Carry specified voting rights |
| Non-Voting Shares | Carry limited or no voting rights |
| Redeemable Shares | May be redeemed under specified terms |
Process of Issue of Shares
| Stage | Meaning |
|---|---|
| Application | Investors apply and submit application money |
| Allotment | Company allocates shares to successful applicants |
| First Call | Company requests another amount, if required |
| Final Call | Company collects the remaining called amount |
Shares Issued at Par
| Face Value | Issue Price | Premium |
|---|---|---|
| ₹10 | ₹10 | ₹0 |
| ₹50 | ₹50 | ₹0 |
| ₹100 | ₹100 | ₹0 |
Shares Issued at Premium
The issue of shares at a premium happens when the issue price is higher than the nominal value. The extra amount over nominal value is called the share or securities premium.
| Particular | Amount |
|---|---|
| Face Value | ₹10 |
| Issue Price | ₹15 |
| Securities Premium | ₹5 |
Can Shares Be Issued at a Discount?
A discounted issue of shares happens when shares are issued below their nominal value. For example, a ₹100 share issued for ₹90 would involve a ₹10 discount. However, companies cannot assume that ordinary shares may freely be issued below nominal value. Legal restrictions and exceptions vary by jurisdiction, so companies must follow the law that applies to them.
This distinction is important for students. Accounting examples can explain the concept of discount, but actual companies must comply with current corporate law.
Share Application Money
Share application is an important part of a traditional issue of shares process. Investors submit an application along with the amount required under the offer terms. The company receives the money before deciding or completing the allotment. It then deals with the application amounts according to the allotment outcome and applicable rules.
If applications exceed the number of shares offered, the company faces oversubscription. It may reject some applications, make proportionate allotments, or use another permitted method.
Share Allotment
Allotment means the company assigns a specified number of shares to successful applicants. It creates an important stage in the relationship between the company and its shareholders. If an additional amount becomes due on allotment, the company asks successful applicants to pay it. The amount and deadline depend on the original terms of issue.
For example, a ₹10 share might require ₹3 on application and ₹4 on allotment. The company could collect the remaining ₹3 through a later call.
Calls on Shares
| Payment Stage | Example per Share |
|---|---|
| Application | ₹3 |
| Allotment | ₹4 |
| First and Final Call | ₹3 |
| Total | ₹10 |
Oversubscription and Undersubscription
An oversubscription in the issue of shares occurs when investors apply for more shares than the company offers. For example, a company may offer 100,000 shares but receive applications for 150,000. An undersubscription occurs when applications are lower than the number offered. The consequences depend on the offer structure and applicable securities and company laws.
Companies handling oversubscription may make proportionate allotments where legally permitted. They may also refund money related to rejected applications according to the applicable requirements.
Issue of Shares for Consideration Other Than Cash
The issue of shares may sometimes take place in exchange for assets, businesses, or services where the law and accounting rules permit it. This means cash does not always form the consideration. For example, a company might acquire an eligible asset and issue shares as part of the purchase consideration. The accounting treatment depends on the nature and terms of the transaction.
This type of transaction requires careful measurement and classification. Relevant accounting standards and local company law determine how the company records it.
Rights Issue and Bonus Shares
| Feature | Rights Issue | Bonus Issue |
|---|---|---|
| Offered to | Existing shareholders | Eligible existing shareholders |
| New subscription money | Generally yes | No |
| Main effect | Raises equity funding | Capitalises eligible reserves/accounts |
| Share count | Increases | Increases |
Accounting Treatment of Share Issues
Accounting for an issue of shares depends on the payment structure and the nature of the instrument. Companies must also distinguish equity instruments from financial liabilities. IAS 32 focuses on the presentation and classification of financial instruments. An instrument generally represents equity when it shows a residual interest in the company’s assets after deducting liabilities and meets the relevant requirements.
IAS 32 also provides guidance on transaction costs. Incremental costs directly attributable to an equity transaction are generally deducted from equity, subject to the standard’s requirements.
Advantages of Issuing Shares
Issuing equity can provide a company with long-term capital without the normal repayment schedule attached to a bank loan. This can support expansion and strengthen the company’s funding base. Shareholders may benefit when the company grows and their investment gains value. They may also receive dividends when declared according to the share terms and applicable law.
However, equity financing has trade-offs. New shares can dilute existing ownership and may change voting power within the company.
Importance for Investors
Investors should understand the terms before buying newly issued shares. They should review the share class, price, voting rights, dividend terms, risks, and company information. The offer price alone does not show whether an investment is suitable. Investors should consider the company’s financial position, business model, risks, and official offer documents.
Understanding share capital also helps students read a company’s balance sheet. It explains how owners provide capital and how that capital appears within equity.
Difference Between Issue and Transfer of Shares
| Basis | Issue | Transfer |
|---|---|---|
| Main parties | Company and investor | Existing holder and new holder |
| Shares | Newly issued/allotted shares | Existing shares |
| Company raises new funds | Usually, for cash issues | Normally no |
| Ownership changes | New interest is created/allotted | Existing interest changes hands |
Conclusion
The issue of shares plays an important role in corporate finance because it allows companies to obtain equity capital. Companies can use that capital to establish operations, purchase assets, expand, and pursue long-term plans.
Students should understand application, allotment, calls, premiums, rights issues, and bonus issues. They should also remember that accounting and legal treatment can vary by jurisdiction and by the contractual terms of the shares.
