Issue of Shares, Concepts, Meaning, Definitions, Objectives, Features, Types, Importance and Challenges

Issue of shares is the process by which a company offers its shares to investors to raise capital. It represents the company’s way of mobilizing funds from the public, existing shareholders, or selected investors for business operations, expansion, or other financial requirements. Shares represent ownership rights and entitle shareholders to dividends, voting rights, and a share in surplus assets during winding up.

Meaning of Issue of Shares

The issue of shares means the formal allotment of shares to applicants after receipt of subscription money. It involves offering the company’s authorized capital to investors, receiving application money, and finalizing allotment in accordance with the Articles of Association and the Companies Act, 2013. The process converts applicants into legal shareholders and provides the company with financial resources.

Legal Definitions Issue of Shares

• According to Section 2(52) of the Companies Act, 2013, “share means a share in the share capital of a company and includes stock**.”

• Issue of shares is understood as the offering and allotment of shares to investors in accordance with the Articles of Association and statutory provisions.

• Shares issued can be equity, preference, bonus, or sweat equity, and the issue can be at par, premium, or discount as permitted by law.

Objectives of Issuing Shares

• Raising Long-Term Capital

The primary objective of issuing shares is to raise long-term capital for the company. Unlike loans, share capital does not require repayment during the company’s lifetime. Funds raised through share issuance can be used for business operations, expansion, acquisitions, and modernization. By issuing shares, the company can secure permanent resources to support strategic plans, reduce reliance on borrowed funds, and strengthen its financial foundation for sustainable growth.

• Sharing Business Risk

Issuing shares allows the company to distribute business risk among shareholders. Equity shareholders bear profits or losses first, while creditors remain protected. By sharing the financial risk with investors, the company encourages investment and ensures that the burden of potential losses does not fall solely on promoters. Risk sharing attracts investors willing to participate in growth opportunities despite the uncertainties inherent in business operations.

• Ownership Distribution and Control

Shares define the ownership and control structure of a company. By issuing shares, the company distributes voting rights and decision-making authority among shareholders. The proportion of shares held determines influence in general meetings, board appointments, and strategic decisions. This ensures transparency, accountability, and structured corporate governance. It also helps balance control between promoters and new investors while maintaining effective management oversight.

• Compliance with Statutory Requirements

Companies must maintain minimum share capital as required under the Companies Act, 2013. Issuing shares ensures compliance with statutory capital requirements, which is mandatory for company formation and operation. Adequate capital demonstrates the company’s financial strength to regulators, investors, and creditors. Compliance through share issuance also protects the company from legal penalties and facilitates smooth corporate governance.

• Financing Business Expansion

Issuing shares provides funds for business expansion and modernization. Companies can undertake new projects, acquire assets, enter new markets, or upgrade technology without resorting to loans. Equity capital enables strategic growth while maintaining a balanced financial structure. Share issuance supports both domestic and international business development, ensuring that expansion plans are funded with permanent and risk-bearing capital.

• Improving Financial Stability

A strong share capital base enhances the company’s financial stability. Permanent funds obtained from share issuance provide a cushion against market fluctuations and operational challenges. It improves liquidity, strengthens the balance sheet, and assures creditors and investors of the company’s financial soundness. Financial stability achieved through share capital encourages further investment and enhances the company’s ability to attract long-term funds.

• Enhancing Investor Confidence

Issuing shares builds investor confidence by signaling transparency, credibility, and growth potential. Investors are more likely to subscribe when they perceive financial stability and risk management. Share issuance with proper disclosure and compliance attracts strategic and institutional investors. Enhanced investor confidence leads to higher subscription levels, better market reputation, and easier access to future funding opportunities.

• Facilitating Risk-Free Borrowing

Issuing shares strengthens the capital base, allowing companies to borrow efficiently if needed. A company with adequate share capital is considered more creditworthy by banks and financial institutions. While loans carry interest obligations, a strong equity base reduces dependency on borrowed funds and lowers financing costs. Share issuance thus indirectly facilitates cost-effective and risk-managed borrowing when required for business operations or expansion.

Features of Issue of Shares

• Capital-Raising Instrument

The issue of shares is primarily a mechanism for raising capital. Companies offer shares to the public, existing members, or selected investors to mobilize funds for business operations, expansion, or modernization. Unlike loans, funds raised through shares do not require repayment during the company’s lifetime. This permanent capital provides financial stability and forms the backbone for the company’s growth and long-term projects, making the process a critical financial instrument.

• Represents Ownership

Shares represent ownership in the company. When an investor subscribes to shares, they become a shareholder and acquire rights such as voting, dividend participation, and claim on surplus assets during winding up. Issuing shares thus converts investors into part-owners of the company. The proportion of ownership is determined by the number and type of shares held. This ownership element differentiates shares from debt instruments like debentures or loans.

• Regulated by Law

The issue of shares is strictly regulated by the Companies Act, 2013, and SEBI regulations for listed companies. Companies must comply with legal provisions regarding minimum subscription, offer methods, allotment procedures, and disclosures in prospectus or offer letters. Regulatory oversight ensures fairness, protects investors’ rights, and prevents misuse. Legal compliance is essential to validate the issuance and to avoid penalties or cancellation of allotment.

• Permanent Source of Finance

Share capital provides a permanent source of finance for the company. Unlike borrowed funds, which must be repaid along with interest, capital raised through shares remains invested in the company throughout its lifetime unless voluntarily redeemed. This stability enables long-term planning, supports expansion projects, and reduces financial risk. Permanent capital also assures creditors of the company’s ability to meet obligations and strengthens the company’s balance sheet.

• Can Be Issued in Various Forms

Shares can be issued in different forms, such as equity, preference, bonus, sweat equity, or with differential rights. The company may also issue shares at par, premium, or discount, depending on circumstances. This flexibility allows companies to design share offerings that meet financial needs, attract investors, reward employees, or maintain control. The type of shares issued affects rights, risk, and returns for shareholders.

• Conversion of Applicants into Shareholders

The issue of shares converts applicants into legal shareholders after proper allotment. Shareholders acquire ownership rights, including voting and dividend entitlement. The allotment process is critical and must follow statutory provisions and company articles. Once shares are allotted, investors are recorded in the Register of Members, making the ownership official. This transformation ensures transparency, protects investor rights, and establishes the legal basis for company ownership.

• Enables Risk Sharing

Shares allow companies to distribute business risk among shareholders. Equity shareholders bear profits or losses first, while creditors and lenders are protected. By sharing risk with investors, the company can attract long-term funding without burdening promoters with full responsibility. Risk-bearing capital encourages entrepreneurial ventures and enables investors to participate in potential growth, aligning their interests with the company’s performance.

• Facilitates Corporate Governance

Issuing shares impacts corporate governance by defining ownership and control. Voting rights, decision-making authority, and representation in general meetings are linked to shareholding. This ensures accountability, transparency, and structured management. Share issuance also enables existing shareholders to retain control through rights issues or differential voting shares, balancing capital mobilization with governance requirements. Proper governance strengthens investor confidence and corporate reputation.

Types of Shares

Shares represent the ownership of a company. Companies issue shares to raise capital, and they can be classified in several ways based on rights, privileges, payment, and repayment terms. Understanding the types of shares is essential for investors, management, and regulatory compliance. Broadly, shares can be categorized into Equity Shares, Preference Shares, Bonus Shares, Sweat Equity Shares, Redeemable/Irredeemable Shares, and Shares with Differential Rights.

1. Initial Public Offering (IPO)

An Initial Public Offering (IPO) refers to the first sale of a company’s shares to the public. It converts a private company into a public company and allows it to raise long-term capital for expansion, modernization, or debt repayment. IPOs enable investors to become shareholders and participate in the company’s growth.

Fixed Price IPO

• Shares are offered at a pre-determined price.
• Investors know the exact cost per share before subscription.
• Simpler to execute but may underprice or overprice depending on market conditions.

Book-Building IPO

• Price is determined through bids by investors within a price band.
• Reflects market demand and ensures better pricing.
• Commonly used for large public offerings to optimize capital raised.

2. Follow-on Public Offer (FPO)

Follow-on Public Offer (FPO) is an offer of additional shares to the public by a company already listed on a stock exchange. FPOs are used to raise additional funds for expansion, working capital, or repayment of debt. Unlike IPOs, the company is already public and has a market valuation.

Dilutive FPO

• New shares are issued, increasing total share capital.
• Leads to dilution of existing shareholders’ holdings.
• Used when the company requires additional funds without borrowing.

Non-Dilutive FPO

• Existing shareholders sell their shares to the public; no new shares are issued.
• Does not increase the company’s share capital.
• Used for providing liquidity to existing investors or promoters.

3. Equity Shares

Equity shares, also called ordinary shares, represent ownership in a company and provide voting rights to shareholders. Equity shareholders receive dividends based on profits declared by the company. They are residual claimants, meaning they get paid last during winding up. Equity shares carry the highest risk but offer potential for high returns and capital appreciation. These shares are most common and are crucial for raising permanent capital for long-term business growth.

4. Preference Shares

Preference shares provide shareholders with preferential rights regarding dividends and repayment of capital. Preference shareholders receive a fixed dividend before any dividend is paid to equity shareholders. They can be cumulative, non-cumulative, participating, non-participating, redeemable, or irredeemable. Preference shares are less risky than equity shares because of fixed returns, but they usually lack voting rights, except in certain conditions, and their dividends are limited compared to potential equity returns.

5. Bonus Shares

Bonus shares are issued free of cost to existing shareholders by capitalizing company reserves or profits. They do not involve inflow of new funds but increase the number of shares held by shareholders. Bonus shares reward shareholders, maintain market confidence, and demonstrate financial strength. They adjust the shareholding proportionally but do not dilute ownership percentages, as all existing shareholders receive additional shares in proportion to their current holdings.

6. Sweat Equity Shares

Sweat equity shares are issued to employees or directors in return for their services, expertise, or intellectual property contributions to the company. This type of share incentivizes and rewards employees without monetary payment. Sweat equity shares are governed by the Companies Act, 2013, which specifies conditions for issuance, valuation, and limits. These shares align employee interests with company performance and promote retention of skilled human capital.

7. Redeemable and Irredeemable Shares

• Redeemable Shares: Can be bought back by the company after a specified period or event. Usually applicable to preference shares. Redemption is subject to conditions under the Companies Act, 2013.

• Irredeemable Shares: Cannot be repaid during the company’s lifetime and remain invested permanently. Typically includes equity shares.

Redeemable shares allow flexibility in managing capital, while irredeemable shares provide a permanent capital base.

8. Equity Shares with Differential Rights (DVRs)

Equity shares with differential rights include shares with different voting powers or dividend entitlements. For example, some shares may carry extra voting rights but lower dividends, or vice versa. DVRs allow companies to raise funds while retaining control for promoters or founders. They are issued under specific conditions and with shareholder approval, providing strategic flexibility in capital structure and corporate governance.

9. Convertible Shares

Convertible shares are preference shares or debentures that can be converted into equity shares after a specified period. They allow investors to enjoy fixed returns initially and participate in equity benefits later. Convertible shares are useful for raising funds with low immediate risk for investors and provide companies with flexibility in managing future capital structure.

10. Partly Paid Shares

Partly paid shares are issued when shareholders pay only a part of the nominal value at the time of subscription, with the balance payable in installments. This allows the company to raise funds gradually and reduces immediate financial burden on shareholders. Once all installments are paid, the shares become fully paid-up and carry full rights.

Regulatory Framework

The issuance of shares in India is primarily governed by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI). These regulations ensure that the process is transparent, fair, and protects the interests of investors.

• Companies Act, 2013

This act lays down the legal requirements for the issuance of shares, including the procedures for public offerings, private placements, and other methods. It also specifies the rights and obligations of shareholders, procedures for share transfers, and penalties for non-compliance.

• SEBI Regulations

SEBI, as the primary regulator of capital markets in India, has established guidelines and norms for public issues, rights issues, and preferential allotments. These include the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, which outline the disclosures, eligibility criteria, pricing mechanisms, and timelines for various types of share issues.

Steps in the Process of Issuing Shares

Step 1. Decision to Issue Shares

The first step is the board of directors’ decision to issue shares. The company determines the amount of capital required, the type of shares to be issued (equity, preference, bonus, or sweat equity), and the purpose of raising funds. This decision must comply with the company’s Articles of Association and authorized share capital, ensuring that the issuance is legally permissible.

Step 2. Approval from Shareholders

Before issuing shares, the company may require approval from existing shareholders through a general meeting. Special or ordinary resolutions may be needed, depending on the type of shares issued and regulatory requirements. Approval ensures transparency, protects shareholder rights, and prevents unauthorized capital expansion that could affect ownership and voting power.

Step 3. Preparation of Prospectus or Offer Document

For public issues, the company must prepare a prospectus containing essential information such as:

• Company history and objectives

• Financial statements and capital structure

• Purpose of the issue and utilization of funds

• Rights and liabilities of shareholders

This document is crucial for informing potential investors and complying with SEBI regulations.

Step 4. Filing with Registrar of Companies (RoC)

The company files the prospectus, offer letter, and other required documents with the Registrar of Companies (RoC). Filing ensures statutory compliance and allows regulators to scrutinize the offer for accuracy, legal adherence, and protection of investors’ interests.

Step 5. Opening the Issue for Subscription

The company opens the issue for subscription by investors. Applications are received along with the application money. Investors may include the public, existing shareholders (rights issue), or select individuals (private placement). The application period is clearly stated in the prospectus or offer document.

Step 6. Receiving Applications and Application Money

Applicants submit forms along with the required payment. The company acknowledges receipt and maintains records of applications. It is essential to ensure that minimum subscription requirements are met, failing which, the issue cannot proceed and collected money must be refunded.

Step 7. Scrutiny of Applications

The company examines all applications to verify eligibility, correctness, and adherence to statutory requirements. Defective or incomplete applications are rejected, and the application money is returned. Scrutiny ensures accuracy and fairness in the allotment process.

Step 8. Allotment of Shares

After verification, the company allots shares to applicants. Allotment can be:

• Proportional allotment in case of oversubscription

• First-come, first-served basis or as per SEBI guidelines

Allotment is completed once the applicant’s name is entered in the Register of Members. A share allotment letter is sent as confirmation.

Step 9. Issuance of Share Certificates

After allotment, the company issues share certificates to shareholders within 2 months (private companies) or 4 months (public companies). The certificate serves as legal proof of ownership and contains details like shareholder name, number of shares, class, and distinctive numbers.

Step 10. Filing Allotment Return with RoC

The company must file the return of allotment (Form PAS-3) with the RoC within 30 days. This ensures official recognition of the shareholding, updates statutory records, and maintains compliance with the Companies Act, 2013.

Step 11. Listing on Stock Exchange

For public companies, after share allotment, shares may be listed on a stock exchange. Listing enables trading in the secondary market, improves liquidity for investors, and enhances the company’s visibility and credibility.

Importance of Issue of Shares

• Raising Long-Term Capital

The issue of shares is an essential mechanism for raising long-term capital for a company. Unlike loans or debentures, share capital does not require repayment during the company’s lifetime. The funds raised can be used for expansion, infrastructure development, research, and other strategic purposes. By issuing shares, a company secures permanent financial resources, which ensures stability, supports sustainable growth, and reduces dependency on external debt financing.

• Ownership Distribution and Control

Shares represent ownership in a company, and issuing them determines the control structure. Shareholders acquire voting rights, allowing them to participate in decision-making processes through general meetings. The proportion of ownership influences board appointments and strategic decisions. This ensures structured governance and transparency, providing shareholders with a legal and financial stake in the company’s affairs while allowing promoters to retain appropriate control depending on the type of shares issued.

• Risk Sharing

Issuing shares helps the company distribute business risk among shareholders. Equity investors bear profits and losses first, protecting creditors and lenders from direct risk. By involving multiple shareholders, the company shares financial exposure while allowing investors to participate in potential gains. This risk-sharing mechanism encourages investment, as shareholders are compensated through dividends and capital appreciation, promoting entrepreneurial activity while ensuring that the financial burden does not fall solely on promoters or the company.

• Enhancing Financial Stability

A strong base of share capital improves the company’s financial stability. Permanent funds obtained from shareholders provide a cushion against operational risks, market fluctuations, and economic downturns. This financial security enhances the company’s credibility with creditors, suppliers, and investors. Adequate capital ensures liquidity, enables long-term planning, and strengthens the balance sheet, making the company more resilient and capable of pursuing expansion or innovation without over-reliance on borrowed funds.

• Compliance with Legal Requirements

Issuing shares ensures compliance with statutory requirements under the Companies Act, 2013. Companies are required to maintain a minimum authorized and paid-up capital to operate legally. Proper share issuance demonstrates adherence to regulatory frameworks, protecting the company from legal penalties or disputes. It also reassures stakeholders that the company is operating transparently, maintaining accurate records, and respecting shareholder rights, which strengthens corporate governance and investor trust.

• Facilitating Growth and Expansion

Share capital enables the company to finance expansion projects, modernization, and acquisitions. By issuing new shares, the company can mobilize funds without increasing debt, supporting strategic initiatives that enhance market presence and competitiveness. This flexibility allows companies to undertake significant investments, innovate, and grow sustainably. Capital raised through shares empowers management to pursue long-term objectives without compromising financial stability.

• Encouraging Investor Confidence

Issuing shares builds investor confidence by signaling financial stability, transparency, and growth potential. Investors are more likely to participate when they perceive credibility and effective governance. Successful share issuance demonstrates the company’s commitment to shareholder rights, timely dividends, and equitable treatment. High investor confidence leads to better subscription rates, improved market perception, and enhanced ability to raise capital in the future.

• Facilitating Borrowing and Creditworthiness

Adequate share capital enhances the company’s ability to borrow funds from banks or financial institutions. A strong equity base improves creditworthiness, as shareholders’ permanent capital provides security for lenders. While loans carry repayment obligations, equity capital ensures financial flexibility and reduces risk. Investors and creditors perceive companies with substantial share capital as stable and reliable, enabling them to secure funds for operations or expansion at favorable terms.

Challenges of Issue of Shares

• Raising Adequate Capital

One of the main challenges is raising sufficient capital through share issuance. Small or new companies may find it difficult to attract investors due to lack of track record, market reputation, or financial performance. Insufficient subscription may delay business operations or expansion. Companies must carefully design the share offering, ensure compliance, and market the issue effectively to attract investors and raise the required funds.

• Investor Confidence and Market Perception

Maintaining investor confidence is crucial when issuing shares. If investors perceive high risk, low returns, or poor management, they may avoid subscription, leading to under-subscription. Market perception, financial disclosures, and corporate reputation play a significant role in the success of a share issue. Companies must provide transparent information, communicate effectively, and demonstrate credibility to attract potential investors.

• Legal and Regulatory Compliance

The issuance of shares is strictly regulated under the Companies Act, 2013, and SEBI regulations for listed companies. Non-compliance can result in penalties, invalid allotment, or legal disputes. Companies must ensure adherence to filing requirements, prospectus disclosures, pricing regulations, and timelines. Meeting regulatory obligations can be complex and requires careful planning and professional guidance, particularly for public or large-scale issues.

• Ownership Dilution

Issuing new shares may lead to dilution of existing shareholders’ ownership and control. This is a significant concern for promoters or major shareholders who wish to retain decision-making authority. Companies need to balance the need for capital with the desire to maintain control. Differential voting rights (DVRs) or preferential issues can mitigate this challenge, but strategic planning is required to maintain governance balance.

• Risk of Under-Subscription

Companies face the risk of under-subscription, where fewer investors apply than the shares offered. Under-subscription prevents the company from raising required funds, may affect its credibility, and could result in refunding application money. Proper marketing, realistic pricing, and investor awareness campaigns are essential to minimize this risk and ensure the issue is fully subscribed.

• Pricing Challenges

Determining the issue price is another challenge. Overpricing may discourage investors, while underpricing may reduce funds raised and shareholder value. Market conditions, company valuation, investor sentiment, and economic factors influence pricing. Companies must carefully analyze financials and consult with market experts to set a fair and attractive price.

• Managing Investor Expectations

Issuing shares brings the responsibility of meeting investor expectations regarding dividends, voting rights, and returns on investment. Failure to meet expectations can lead to shareholder dissatisfaction, reputational damage, or legal challenges. Companies must maintain transparency, provide accurate financial reporting, and follow consistent dividend policies to retain investor trust.

• Administrative and Procedural Challenges

The process of issuing shares involves meticulous administrative work, including application processing, allotment, refund management, and updating statutory records. Any errors can result in legal disputes or operational delays. Companies must implement proper record-keeping, internal controls, and professional oversight to ensure smooth execution and compliance with statutory requirements.