Issue of Shares

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Issue of Shares: Types and Their Importance

Issue of shares refers to the process through which a company allocates new shares to new or existing shareholders to raise capital. This process is essential for financing business operations, expanding equity base, and repaying debts. Let's explore the different types of share issues in detail:

Types of Issue of Shares

  • Public Issue
    • Definition: A public issue, or public offering, refers to the issuance of shares or convertible securities in the primary market by the company’s promoters to attract new investors.
    • Process: The company issues a prospectus and invites the public to subscribe for the shares. Interested investors apply, and shares are allotted to them.
    • Purpose: Raises capital from the general public and diversifies the shareholder base.
    • Example: A company may issue shares to the public to finance a new project or expansion.
  • Initial Public Offer (IPO)
    • Definition: The sale of a company's shares to the public for the first time, involving either fresh issue of shares or an offer for sale by existing shareholders.
    • Process: The company lists its shares on a recognized stock exchange and offers them to the public.
    • Purpose: Provides a way for privately held or unlisted companies to go public, raising funds and increasing visibility.
    • Example: A startup going public to raise funds for scaling its operations.
  • Further Public Offer (FPO)
    • Definition: Also known as Follow-on Public Offer, it involves an already listed company offering additional shares to the public.
    • Process: The company issues new shares to expand its equity base or pay off debts.
    • Purpose: Helps in raising additional capital for growth or debt repayment.
    • Example: A listed company offering new shares to finance a major acquisition.
  • Rights Issue
    • Definition: Shares are offered to existing shareholders at a concessional rate on a specified date.
    • Process: Shares are offered in proportion to existing holdings.
    • Purpose: Raises additional funds while giving preference to current shareholders.
    • Example: A company issuing rights shares to fund a new product line.
  • Composite Issue
    • Definition: A combination of public issue and rights issue by an already listed company.
    • Process: Shares are allotted concurrently on both public and rights basis.
    • Purpose: Combines the benefits of raising capital from both existing shareholders and the general public.
    • Example: A company needing substantial funds for a large project might opt for a composite issue.
  • Bonus Issue
    • Definition: Free additional shares distributed to current shareholders in proportion to their holdings.
    • Process: Issued from the company’s free reserves or securities premium account.
    • Purpose: Rewards shareholders and increases the number of shares without raising new capital.
    • Example: A profitable company issuing bonus shares to existing shareholders.
  • Private Placement
    • Definition: Shares are offered to a selected group of investors such as mutual funds, banks, or insurance companies.
    • Process: The company raises capital without going through the public issue process.
    • Purpose: Quick and efficient way to raise funds from strategic investors.
    • Example: A company needing funds for a time-sensitive project may opt for private placement.
  • Preferential Issue
    • Definition: Shares are allotted to a selected group of investors on a preferential basis.
    • Process: Typically involves venture capitalists or institutional investors.
    • Purpose: Attracts strategic investors who can provide not just funds but also expertise.
    • Example: A company looking for strategic partnerships may offer shares preferentially to industry experts.
  • Qualified Institutional Placement (QIP)
    • Definition: Equity shares or non-convertible securities are offered to qualified institutional buyers (QIBs).
    • Process: QIBs include mutual funds, venture capital funds, and other financial institutions.
    • Purpose: Raises capital from institutions with substantial financial resources.
    • Example: A company raising funds through QIP to enhance its financial stability.
  • Institutional Placement Programme (IPP)
    • Definition: A follow-on offer of equity shares by a publicly listed company to QIBs.
    • Process: Shares are allotted exclusively to QIBs to achieve minimum public shareholding.
    • Purpose: Ensures compliance with regulatory requirements for public shareholding.
    • Example: A company increasing its public float to meet stock exchange listing requirements.

Importance of Issuing Shares

The primary purpose of issuing shares is to raise funds for various business needs. The capital raised can be used for:

  • Business Operations: Financing day-to-day operations and ensuring smooth functioning.
  • Expansion Projects: Funding new projects, acquisitions, or entering new markets.
  • Debt Repayment: Reducing financial leverage by paying off existing debts.
  • Strategic Growth: Attracting strategic investors who can provide not just capital but also expertise and networking opportunities.

By understanding the various types of share issues and their purposes, companies can strategically decide how to raise capital most effectively while aligning with their long-term business objectives.