The procedure of issuing shares of both private limited companies and public limited companies is different. A public limited company can issue shares to the general public whereas a private limited company can issue to persons and entities comprising of friends, relatives, business partners, etc.
As per the Companies Act, 2013, private limited companies are prohibited from making any invitation to the public to subscribe to shares of the company. They also can’t issue shares to more than 200 shareholders.
In this blog, we look at types of shares, some of the main methods for the issue of shares of a company in India, both private limited and public limited companies and the process of issuing shares.
The division of shares is made in the following two types:
- Equity shares
- Preference shares
They vary based on their profitability, voting rights and treatment in the event of liquidation.
Classification Of Equity Shares based on Share Capital
Here is a look at the classification of equity shares based on share capital:
- Authorised Share Capital: As per the rule of the Company Act 2013, every company, in its Memorandum of Associations, requires to state the maximum amount of capital that can be raised by issuing equity shares. The limit, however, can be increased by paying additional fees and after the completion of certain legal procedures.
- Issued Share Capital: This refers to the specified part of the company’s capital, which has been offered to investors through the issuance of equity shares. For example, if the nominal value of one stock is Rs 100 and the company issues 50,000 equity shares, the issued share capital will be Rs 50,00,000.
- Subscribed Share Capital: The part of the issued capital, which has been subscribed by investors is known as subscribed share capital. Continuing with our previous example, if the nominal value of one stock is Rs 100 and the company issues 50,000 equity shares out of which 40,000 shares were applied so 40,00,000, refers to subscribed share capital.
- Paid-Up Capital: The amount of money paid by investors for holding the company’s stocks is known as paid-up capital. As investors pay the entire amount at once, subscribed and paid-up capital refer to the same amount.
Classification Of Equity Shares based on Definition:
Here is a look at the equity share classification based on the definition:
- Bonus Shares: The bonus share definition implies those additional shares which are issued to existing shareholders free-of-cost, or as a bonus. For example 1:3 which means 1 share free on every 3 shares held.
- Rights Shares: Right shares meaning is that a company can provide new shares to its existing shareholders - at a particular price and within a specific period - before being offered for trading in stock markets.
- Sweat Equity Shares: If as an employee of the company, you have made a significant contribution, the company can reward you by issuing sweat equity shares.
- Voting And Non-Voting Shares: Although the majority of shares carry voting rights, the company can make an exception and issue differential or zero voting rights to shareholders. This means, that the shareholders are not able to partake in any executive decision regarding that organisation but they are part owners of the enterprise.
- These shares do not permit any voting rights to their shareholders.
Classification Of Equity Shares based on Returns:
Based on returns, here is a look at the types of shares:
- Dividend Shares: A company can choose to pay dividends in the form of issuing new shares, on a pro-rata basis.
- Growth Shares: These types of shares are associated with companies that have extraordinary growth rates. While such companies might not provide dividends, the value of their stocks increases rapidly, thereby providing capital gains to investors.
- Value Shares: These types of shares are traded in stock markets at prices lower than their intrinsic or book value. Investors can expect the prices to appreciate over some time, thus providing them with a better share price.
The main benefit that preferential shareholders receive is a preference in receiving profits of a company as compared to ordinary shareholders. Also, in the event of liquidation of a particular company, the preferential shareholders are paid off before ordinary shareholders. However, they do not enjoy any voting rights, here, are the different types of shares in this category:
- Cumulative And Non-Cumulative Preference Shares: In the case of cumulative preference shares, if a particular company doesn’t declare an annual dividend, the benefit is carried forward to the next financial year. Non-cumulative preference shares don't provide for receiving outstanding dividends benefits.
- Participating/Non-Participating Preference Share: In participating preference shares, shareholders receive surplus profits, after payment of dividends by the company. This is over and above the receipt of dividends. Non-participating preference shares carry no such benefits, apart from the regular receipt of dividends.
- Convertible/Non-Convertible Preference Shares: Convertible preference shares can be converted into equity shares, after a period of time, while non-convertible preference shares carry no such benefits.
- Redeemable/Irredeemable Preference Share: A company can as the name suggests, may buy back its own shares that were sold for the first time from the shareholders.
- Irredeemable preference shares, on the other hand, have no such conditions.
Few more share types:
- Ordinary Share
This is the most common type of share issued by an enterprise that grants voting rights to the shareholders and has no other special rights.
- Deferred Share
These shares grant fewer rights than common shares, wherein dividends are paid only after a certain period of time and various other constraints
- Management Share
In management shares, the shareholders are granted special voting rights. Herein, for every share that a shareholder holds, they are permitted to exercise two votes.
- Alphabet Share
These types of shares are a subcategory of common shares, wherein shareholders are divided into multiple classes and all these classes are granted different voting rights.
How You can offer shares to Investors?
As per the companies act 2013, all the companies can raise funds through various ways such as preferential issues, right issues, IPOs, ESOPs and sweat equity shares. Among all the ways of issuing shares, preferential shares are the best option. However, I’ve described all of the ways in detail:
Initial Public Offering:
IPO refers to Initial Public Offer. Whenever a public limited issue its shares to the general public for the first time it’s called an Initial Public Offering. The IPO is made in the primary market.
Follow on Public Offering:
Follow on public offering is done by an already listed company by either making a fresh issue of shares to the public or offering for sale of existing shares to the public through an offer document. Offer for sale is only allowed when the company must satisfy listing or continuous listing obligations.
In case, of a right issue, existing shareholders are given the right (not the obligation) to purchase shares at a lower price on or before a specified date. The rights are offered in a particular ratio to the number of securities held prior to the issue.
A rights issue gives preferential treatment to existing shareholders. This method is used by companies when they want to raise capital without diluting the stake of existing shareholders and can be used by both the private limited company and public limited company.
A preferential Issue is neither a rights issue nor a public issue. It’s an issue of shares of a listed company to a select group of persons. If the company goes into bankruptcy a person holding preferential shares has the right to be paid from company assets before common stockholders. They usually do not have voting rights and are rewarded only by dividends.
This method again like the right issue can be used by private as well as a public limited company. In this, shares are offered to a selected group of persons through the issue of a private placement offer letter. This includes body corporates, foreign body corporates as well as foreign individuals.
For a private limited company, this method is more complicated as compared to the right issue as obtaining company valuation is mandatory, for which a separate bank investment account needs to be open. ROC has to be informed prior to receiving funds, post it filing has to be done. Thus, this entire process takes 10-15 days.
Qualified Institutions Placement:
Qualified institutions placement is again a private placement of equity shares or convertible shares but only of listed companies to Qualified Institutions Buyers as per regulations prescribed by SEBI.
There are 3 steps in the procedure of issuing the shares:
1. Issue of Prospectus
2. Receiving Applications
3. Allotment of Shares
- Prospectus Issue:This is the first step of the Issue of Shares through issuing a prospectus. In this, an enterprise releases a prospectus to the public. The prospectus has all the necessary details of that share issuing authority along with details regarding how they will collect money from investors.
- Receiving Application:The second step in the issue of shares is the receiving of application as and when an investor wishes to purchase a share of that asset or enterprise while following the necessary rules and regulations as stated in the prospectus issued earlier.
They also have to deposit the amount against shares they are willing to purchase. Both the money and the application have to be deposited to any scheduled bank.
- Share Allocation:This is the last step in issuing shares wherein when the formalities are completed from the investor’s side, the enterprise issues the shares to the investors. As there is a minimum subscription limit, one has to wait till that quota is fulfilled.
After the limit is fulfilled, shares get allocated to those investors who have subscribed for the capital shares. Then a letter of allotment is sent out to those who have been allocated shares.
Shares are confusing topics to everyone; generally, hence I got this blog on ‘Company Shares: A Simple (But Complete) Guide to make it a little simpler. If you want to set up a company in India and need help with any legal services, please feel free to contact us anytime at firstname.lastname@example.org. Thank you for reading, we are always happy to be able to provide useful information on topics like this!