Issue and Allotment of Equity

The share market is increasing, new companies are entering the market, and more people have started investing in different companies via shares. And as you progress through various fields of commerce, a basic understanding of the authorised share capital becomes very necessary. So, a simple definition of equity shares is that a public company issues them to raise capital from the general public. 

What do you mean by Equity Shares? 

Any company’s primary source of funding is known as equity shares. Another name for an equity share is stock. These equity shares are available to the public and the number of capital units (shares) that a corporation can issue, as mentioned in its memorandum of association/articles of formation, is known as authorised share capital. 

When people buy equity shares of a company, they become a shareholder of that corporation. After becoming a shareholder, people are entitled to share in the company’s profits and losses. They are regarded to be superior to bondholders as well as preference shareholders.

Benefits of Equity Shares for Investors

Here are several benefits of equity shares for Investors:

1. Right to Manage Affairs of the Company

The company’s management is subject to the control of equity shareholders. One of the significant rights of the equity shareholders is voting rights which they acquire when they purchase shares of a company from their authorised share capital. 

Each shareholder is given voting rights that allow him to vote on significant company issues. An investor’s control over a corporation increases as the number of equity shares they hold increases.

2. Higher Dividend in case of Profit 

Equity shares are risky in nature. Equity shareholders do not get a fixed rate of return or dividend on their investment like other investors. And dividends are usually declared when a corporation generates a profit. 

However, equity stockholders have a higher share in the company’s profit after distributing dividends to Bondholders and Preference shareholders. So we can say that in the case of equity share investments, the higher the risk, the greater the return.

So, the equity shareholders get benefits in two ways, yearly dividends and appreciation in the value of their investment. But when it comes to capital repayment and dividends, equity stockholders have no special treatment. 

3. Easy to Liquidate 

Liquidation of stocks is one of the most commonly used practices by shareholders and investors in the share market. It simply means selling shares of the company. On the stock exchange, investors can readily buy and sell equity shares. Liquidation can be done through a Broker. This high liquidity of stocks allows investors to buy and sell shares fast if the firm is performing poorly.

Structure of Capital of The Company

The structure of the capital of the company can be divided mainly into two parts:

1. Authorised Share Capital 

The maximum amount of capital for which the company can issue shares to its shareholders or promoters is authorised to share capital. The authorised share capital is stated in the Company’s Memorandum of Association under the “Capital Clause.” It is usually decided before the company’s establishment. 

Management usually does not use all of the authorised share capital to maintain decision control over the company. Another reason to keep stock in the corporate treasury is to leave opportunities for future issuance of more stock if the company needs to obtain funds urgently. The authorised share capital can be increased at any moment in the future by following the proper and necessary legal processes.

2. Paid-up Share Capital 

The paid-up share capital can be defined as “the amount of money for which shares of the Company were issued to the shareholders and payment was paid by the shareholders.” The company can never issue shares above its authorised share capital. Paid-up capital will always be less than or equal to authorised share capital.

There is no minimum need for the company’s paid-up capital as stated under the Companies Amendment Act, 2015. As a result, a company can now be founded with as little as Rs.1,000 in paid-up capital and in the case of a public company the minimum paid-up capital is Rs.5,00,000.

Issue of Shares 

The technique through which businesses distribute new shares to new or existing shareholders is known as the issue of shares. The Companies Act 2013 specifies the procedure and rules that must be followed when a corporation intends to issue shares to the general public. 

Individuals or corporations can be shareholders. If the corporation desires, they might collect the money from subscribers in instalments. A corporation can issue equity shares for cash or non-monetary consideration. When cash is exchanged for shares, the cash might be paid in intervals/instalments or all at once (lump sum).

Now, let us take a look at the procedure of issue of shares; it can be divided into three basic steps:

• Issue of Prospectus
• Receiving Applications
• Allotment of Shares 

Issue of Prospectus 

The general public issued the prospectus to state that a new business or company has come into existence and will require capital to carry out its functions. It contains detailed information about the business and how the money will be collected from potential investors. It is an invitation to the public by the company. 

Receiving Applications 

When the prospectus is distributed to the public, potential investors that want to sign up and subscribe to the company’s share capital will deposit their applications, along with the application money, in a designated bank within the time frame mentioned in the prospectus. The application fee must be at least 5% of the share’s nominal value.

Allotment of Shares 

This is the last step in the process of issue of shares. The allotment of shares is when a company gives shares to a new or existing shareholder based on their application. 

Shares can be allotted to the public once they have subscribed for the minimum subscription mentioned in the prospectus. Usually, there is a surplus of applications for shares; the shares are allotted on a pro-rata basis. Those whose shares were not allotted will have their application fees refunded. A letter of allotment is sent to those who have been assigned their portion of the shares in the company. 

Conclusion 

This article has covered the basic concept relating to equity shares. The meaning of equity shares is the structure of a company’s capital, i.e., authorised share capital and paid-up share capital. We also discussed the benefits of the equity shares that motivate the public to invest in them? And the procedure of allotment and issue of shares to the public.