Issue of Shares – Meaning, Definitions, Classes & Types of Shares, Process, Methods

In this article we will discuss about the Issue of Shares – Meaning, Definitions, Classes & Types of Shares, Process, Methods – Company Accounts / Corporate Accounting

Meaning of Shares

Meaning of Shares – Shares also known as Equities or Stocks, are company-owned units. They are the interests of a shareholder in a company. A Share is the fractional part of the share capital of the company. It gives various rights and liabilities to its holder not only to participate in profits and assets but also to enjoy other privileges listed in the Companies Act 2013. Shares are used to raise the capital that the company’s shareholders own. When a company issues shares, it sells a portion of the company to investors in exchange for capital.

Types of Shares

Types of Shares –

Certainly! Shares can be classified into various types based on their characteristics, rights, and features. Here are some common types of shares:

1. Equity Shares (Ordinary Shares or Common Shares):
   • These are the most common type of shares issued by companies.
   • Equity shareholders are the owners of the company and have voting rights in corporate decisions.
   • They are entitled to dividends, though the amount can vary based on the company’s profitability and dividend policy.
   • Equity shares represent residual ownership in the company, meaning shareholders have a claim on the company’s assets and earnings after all other obligations are fulfilled.
2. Preference Shares:
   • Preference shares have preferential rights over equity shares in terms of dividend payments and repayment of capital in case of liquidation.
   • They typically do not carry voting rights, although some may have limited voting rights in certain circumstances.
   • Preference shares can be further classified into:
     • Cumulative Preference Shares: Accumulate unpaid dividends if the company is unable to pay them in a particular year.
     • Non-cumulative Preference Shares: Do not accumulate unpaid dividends.
     • Participating Preference Shares: Allow shareholders to participate in the company’s profits above a specified dividend rate.
     • Non-participating Preference Shares: Do not provide shareholders with the right to participate in additional profits beyond the fixed dividend rate.
3. Convertible Shares:
   • Convertible shares can be converted into another class of shares (usually equity shares) at a predetermined conversion ratio and price.
   • This feature provides investors with the option to convert their investment into a different class of shares in the future, often to take advantage of favorable market conditions or to participate in the company’s growth.
4. Non-Convertible Shares:
   • Non-convertible shares cannot be converted into any other class of shares.
5. Redeemable Shares:
   • Redeemable shares are shares that the company can buy back from shareholders at a predetermined price and time.
   • This feature provides flexibility to the company in managing its capital structure and returning capital to shareholders.
6. Cumulative Shares:
   • These shares accumulate unpaid dividends in case the company is unable to pay them in a particular year.
7. Non-cumulative Shares:
   • Non-cumulative shares do not accumulate unpaid dividends.
8. Founder’s Shares:
   • Founder’s shares are typically issued to the founders of the company and may carry special rights or privileges, such as enhanced voting rights or priority in dividend payments.
9. Class A Shares and Class B Shares:
   • These are different classes of shares within the same company, often with different voting rights or dividend preferences.
   • Class A shares may have higher voting rights compared to Class B shares, for example.

Different Classes of Shares

Different classes of shares refer to categories of shares that a company may issue, each with its own set of rights, privileges, and characteristics. These classes are often created to cater to specific needs or preferences of investors or to allocate voting rights and dividends in a particular manner. Here are some common classes of shares:

1. Ordinary Shares / Equity Shares (Common Shares):
   • These are the basic shares that represent ownership in the company.
   • They usually carry voting rights, allowing shareholders to participate in the company’s decision-making processes.
   • Ordinary shareholders are entitled to dividends, although the amount may vary depending on the company’s profitability and dividend policy.
2. Preference Shares:
   • Preference shares have preferential rights over ordinary shares in terms of dividends and/or repayment of capital in the event of liquidation.
   • They may be further categorized into:
     • Cumulative Preference Shares: These accumulate unpaid dividends if the company is unable to pay them in a particular year.
     • Non-cumulative Preference Shares: Unlike cumulative preference shares, non-cumulative preference shares do not accumulate unpaid dividends.
3. Class A Shares:
   • Class A shares often have higher voting rights compared to other classes of shares.
   • They may be issued to founders, management, or early investors, granting them greater control over company decisions.
4. Class B Shares:
   • Class B shares may have fewer voting rights compared to Class A shares.
   • They are commonly issued to later-stage investors or employees.
5. Convertible Shares:
   • Convertible shares can be converted into another class of shares (usually ordinary shares) at a predetermined conversion ratio and price.
   • This feature provides flexibility to investors who may want to convert their investment into a different class of shares in the future.
6. Non-Convertible Shares:
   • Non-convertible shares cannot be converted into any other class of shares.
7. Redeemable Shares:
   • Redeemable shares are shares that the company can buy back from shareholders at a predetermined price and time.
   • This feature provides flexibility to the company in managing its capital structure.

Issue of Shares

The issue of shares refers to the process by which a company raises money by selling ownership stakes in the form of shares of stock to investors. This is typically done through an initial public offering (IPO), in which the company makes its shares available for purchase on the stock market for the first time. The proceeds from the sale of shares can fund the company’s operations, expansion, or other business purposes. The number of shares a company issues, and the price at which they are sold, can significantly impact the company’s valuation and ownership structure.

Process / Procedure of Issue of Shares

Process / Procedure of Issue of New Shares

1] Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation to the public to subscribe to shares of the company. A prospectus contains all the information of the company, its financial structure, previous year balance sheets and profit and Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits from the public at large it is compulsory for a company to issue a prospectus or a document in lieu of a prospectus.

2] Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and deposit the requisite application money in the schedule bank mentioned in the prospectus. The application process can stay open a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of shares will be cancelled. The application money must be refunded to the investors within 130 days since issuing of the prospectus.

3] Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there is always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company.

Methods of Issue of Shares

There are various methods by which a company can issue shares to raise capital. These include:

Initial Public Offering (IPO)

IPO is the process of offering shares to the public for the first time. The company hires an investment bank to act as an underwriter, which helps determine the offering price and manages the sale of the shares. Companies typically use this method to raise a significant amount of capital and gain a listing on a stock exchange.

Secondary Offering

A secondary offering is when a company issues additional shares to the public after it has already gone public. This method is typically used by companies that have already completed an IPO and are looking to raise additional capital or allow current shareholders to sell some of their holdings.

Private Placement

A private placement is when an organization issues shares to a small group of investors. They are usually institutional investors or high-net-worth individuals. This method is typically used by companies that have yet to be ready to go public. But they are looking to raise capital without the added regulatory requirements and costs associated with an IPO.

Rights Issue

A rights issue is when a firm offers current shareholders the right to purchase additional shares at a discounted price. This method allows existing shareholders to maintain their ownership percentage in the company while also raising additional capital.

So that’s all about the Issue of Shares – Meaning, Definitions, Classes & Types of Shares, Process, Methods – Company Accounts / Corporate Accounting