The process of issue of shares by a public limited company

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Author: Rabia Mittal, 3rd Semester of BA LLB of Baba Farid Law College (affiliated to Punjabi University, Patiala

INTRODUCTION

Businesses issue shares to raise funds for their operations. These shares signify and grant the owner a portion of ownership in the company. By buying shares, the shareholder is granted a specific set of rights. Depending on the kind of share, the owner might be able to partake in the company’s profits. This takes the shape of dividends, which are disbursed at scheduled intervals throughout the year. Other shareholders are granted the ability to influence the company’s direction.

The Companies Act, 2013 (‘Act’) governs the formation and operations of a public limited company. A public limited company provides shares to the general public . Its shares can be purchased by anyone, either privately through an Initial Public Offering (IPO) or through transactions on the stock market. It is tightly controlled and must disclose its actual financial condition to its shareholders.

COMPANY

Company is a voluntary association of people for some common purpose for the ultimate objective of carrying out some business and sharing profits.

As per section 2(20) Companies Act 2013 ,Company means a company incorporated under this act or under any previous company law.

Characteristics of a company:

1 Separate legal entity

2 Incorporated or registered under the Companies Act

3 Limited liability

4 Perpetual succession

5 common seal

6 Separate property

KINDS OF COMPANIES

(As per Companies Act 2013)

The main kinds of companies that can be incorporated under the Companies Act 2013 are

Private company defined under section 2(68) of the Companies Act 2013 a private company. Any company with minimum 2 persons as per section 3 and which has maximum paid up capital as prescribed and which through its article of association- restricts the right to transfer its shares, in case it is a company limited by shares or it is a company limited by shares and guarantee.
Company limited by shares – A company in which the liability of the members is limited to the amount that is unpaid on the shares held by them. The liability of the members is generally enforced during winding up of the company but it can be enforced at any time.
Company limited by guarantee-A company where the liability of the members is limited to the amount that a member may have undertaken to contribute to the asset of the company during winding up or towards the cost, charges and expenses of winding up or for adjustment of the rights of the contributories. – limits the maximum number of its members to 200(except one person company) excluding: Members who are currently employed with the company and former employees who were members of the company while in employment and have continued to be members , prohibits invitation to the public to subscribe to its securities (public offer) .

There is a restriction in transferring the shares.

Public company : As perception 2(71 ) of the Companies Act 2013 a public company means a company which, Is not a private company (it will not have the restrictions as imposed on private companies) and Has a minimum subscribed paid up share capital .. There is no restriction in transferability, and in time of incorporation, the term public limited is added to its name. A public limited company offers shares to the general public. It is more transparent in its working and also listed in the stock market.

WHAT ARE SHARES?

Shares represent ownership stakes in a company that are offered to traders and investors to generate capital for the business. They depict the connection between a business and its investors.

The ownership of shares is a direct representation of the amount of ownership that an individual or company has over another company.The importance of shares lies in the fact that it is the shareholders that decide what happens with the company as they take part in making key decisions.

In case of Shri Gopal Jalan v Calcutta Stock Exchange (1964)

Offer to buy shares are made by companies and once the application for the same is accepted, the allotment is said to have taken place .

ISSUE OF SHARES

Sweat equity

A company is free to issue sweat equity shares for a class of shares that have been already issued to its directors and employees at a discounted price or for consideration other than cash ,for their know-how ,for providing an intellectual property or making any other value additions to the company . However , for the company to be able to do so ,certain conditions have to be complied with .Those are as under:

A special resolution has been pass that authorises the company to issue sweat equity shares
The resolution specially mentions the market price of the shares and the number of shares that are to be issued and the class of directors or employees who are to benefit from such issue of shares .
At least a year has passed since the company had initiated their business
if the company is a listed company , then the sweat equity shares shall be issued based on notifications of SEBI

Preference shares

Preference shares are issued according to the provisions of Section 55.Preference shares are issued in such a manner that they are mandatory redeemed within the period of 20 years from the date of the issue.

In case the company cannot pay dividends on preference shares or redeem them, the company with the approval of 75% of the shareholders and the Tribunal may issue preference shares .Such an action will mean that the previous unredeemed Preference shares have been redeemed.

Further issue of share capital

If a company wishes to increase the subscribed share capital ,then such shares shall be offered to the equity shareholders ,employees and other persons of the company in such a proportion as were their previous holding.However a person is free to renounce the offer may to him and notice of the same shall contain his statement to this regard. Alteration of share capital will have to be informed to the registrar within a span of 30 days from the date of increase or decrease in share capital.

Bonus shares

Bonus shares are additional shares that are given to the shareholders ,at additional costs.

These are often based on the number of shares he was previously holding.

A company is free to issue fully paid up bonus shares, to its members out of:

Free Reserves
Securities premium account
Capital redemption reserve account.

PROCESS OF ISSUE OF SHARES

The procedure of distributing shares for a public limited company (PLC) occurs when a company offers ownership interests as shares to investors to generate capital.

Initial public offering (IPO): This refers to the event when a privately held company first offers its shares to the public, known as an IPO. The IPO enables the company’s shares to be registered and exchanged on stock markets.

Follow-on public offering: A public offering conducted after an IPO to generate funds or satisfy listing criteria.

Rights offerings: A method for publicly listed companies to generate funds while avoiding dilution of ownership by providing securities to existing shareholders.

Preferential offerings: A method for companies to distribute shares to designated groups.

Private placements: A method of offering shares to prospective investors.

Qualified Institutional Placement (QIP): A method for publicly traded companies to offer equity or convertible shares to Qualified Institutional Buyers.

The issuance of shares is the process by which companies distribute new shares to their shareholders. Shareholders may consist of individuals or corporations. The company adheres to the regulations set by the Companies Act 2013 when distributing the shares. The issuance of shares involves three essential fundamental steps: issuing the prospectus, accepting applications, and allocating shares.

A distinct characteristic of the company’s capital is that the value of its shares can be gradually gathered in straightforward payments distributed over a period based on its improving financial liabilities. The first instalment is received with the application and is referred to as application money; the second is collected upon allocation (referred to as allocation or allotment of money), and then the remaining instalment is called as 1st call, 2nd call, and so forth. The word-final is added to the last instalment. This process does not restrict a business from requesting the full quantity of shares during the application period.

The major stages in the process of issuing shares are outlined below:

Issuance of Prospectus: The company first provides the prospectus to the general public. The prospectus serves as a notification to the public that a new venture has emerged and will need capital to run the business operations. It includes comprehensive information about the business and the method by which funds are to be raised from potential investors.

Receipt of Applications: Once the prospectus is distributed to the public, potential investors considering committing to and subscribing to the enterprise’s share capital would submit an application along with the application fee and deposit it with a designated bank as specified in the prospectus.

Distribution of shares: After the minimum subscription is completed, the shares may be distributed. Typically, there is always an oversubscription of shares, so the distribution is conducted on a pro-rata basis. Letters of Allotment are dispatched to individuals who have received their portion of shares. This leads to a genuine agreement between the business and the claimant, who will now hold a stake in the business.

The procedure for issuing shares for a public limited company (PLC) can be effective as it can: Draw in investors

Public companies can attract investors more easily since their shares can be transferred without needing director approval.

Offer liquidity

Shareholders gain from liquidity as shares can be transferred more readily.

Enhance visibility

The heightened visibility of the company and its results can render it more appealing to prospective buyers.

Offer a plan for departure.

Going public can provide founders the opportunity to leave the business if they desire.

Gather funds

Businesses can generate funds by offering shares to the public via an initial public offering (IPO).

A PLC can issue various types of shares, such as ordinary shares, preference shares, bearer shares, cumulative preference shares, and redeemable shares.

CONCLUSION

In a nutshell, Public limited companies are essential to India’s economic framework, allowing businesses to tap into the capital market and improve transparency. They offer investors chances for ownership across various sectors while encouraging strong corporate governance.

Nonetheless, the intricacy of adherence and operational oversight associated with PLC status requires thoughtful evaluation from both business leaders and investors. Secured business loans can supply the essential funds for PLC to grow its operations, introduce new products, or penetrate new markets without having to issue additional shares, which could dilute the equity of current shareholders.

REFERENCES