Modes of issue of securities under the Companies Act, 2013

Section 23 of the Companies Act, 2013 (“CA, 2013”) sets out how a public company or a private company “may” issue securities. It should be noted that there was no corresponding provision under the Companies Act 1956. This is the first time that Indian company law has brought together in one place how a company, whether a public company or a private company, can issue securities. It means that both a public company and a private company can issue securities through private placement, bonus issue, and rights issue i.e. without access to members of the public. However, only a publicly traded company can offer securities to the public. Such an issue of securities to the public would require the publication of a prospectus.
In this article, let us have a look at the modes of issue of securities under the Companies Act, 2013.

Meaning of shares

A share is a unit of ownership in an organization, company, or association. Moreover, it is considered a resource or asset because if the organization generates profit or gain, the amount relating to the shares held by the shareholder will be given to the shareholders as dividends. Each individual who holds a stake is known as a shareholder or investor for that particular money source or association.

It should be noted that the association is authorized to offer shares for purchase by others through the Companies Act 2013 and must follow the guidelines pre-defined by the Companies Act.

The issue of offers is generally of two types – preference shares and common shares. While preference shares do not allow shareholders any such voting rights, common shares take into account voting rights for investors or shareholders.

Regardless, the profit is given to both the preference shareholders and the common shareholders should there be a favor or a profit. In another case, when bankruptcy occurs, preference shareholders or investors are favored in matters of dividend distribution. In this way, they get a profit before common shareholders or investors and have an advantage.

Meaning of Issuing of Shares

The meaning of share issue is that the shares of an organization or any monetary resource are distributed among the investors or shareholders who want to buy them. These investors or shareholders can be either companies or individuals who participate in the purchase of specific shares at a specific price.

Modes of issuing shares

Some of the significant strategies for issuing shares are as follows:

• Private placement
• Make available for purchase
• Deal through an intermediary
• Deal with Inside Coterie
• Deal through Managing Brokers
• Special subscription
• Public issue or initial public offer (IPO)

Private placement

In this strategy, the issuing organization sells its shares secretly or privately to at least one institutional agent, who then offers them to its customers and partners. This strategy is very profitable and prudent. In addition, the organization gets cash quickly and there is no danger of not receiving the minimum membership or subscription.

Private placement has some disadvantages. The monetary foundation may demand a colossal reduction, rebate, or other conditions for the private acquisition of shares. In addition, they do not have to sell the protections on the stock market, but keep them to themselves.

This denies the public the opportunity to buy shares of a reputable organization and may centralize the holding of the organization in a few hands. The private placement is reasonable for small problems, especially during a downturn in the economy.

Offer for sale

Under this technique, the issuing organization allocates or agrees to distribute shares to the issuer at an agreed cost. The issuing house or monetary organization distributes an archive called an “offer for sale”. It issues to people in the form of bonds or stocks that can be bought at exorbitant costs. The application structure or form is linked to the proposal report. Following the receipt of applications, the issuing house will cancel the distribution for candidates who become immediate allottees of bonds or shares.

This technique spares the organization the expense and inconvenience of selling shares directly to the contributing public. It guarantees the sale of the entire issue and the saving of the stamp duty due when the shares are transferred. However, the entire premium earned is held by the claimant, not the issuing organization.

Sales through intermediaries

In this strategy, the organization appoints intermediaries such as commercial banks, financial institutions, and stockbrokers to help monitor the market for new shares on a commission basis. The organization provides clear application documents or forms to each intermediary, who affixes their seal to them and distributes them to prospective financial supporters. Each intermediary receives a commission from the sum of applications for shares bearing his seal. However, brokers do not ensure the sale of shares.

This strategy is useful when the organization has offered 49% of the issue to the general population, which is essential for the stock listing. The speed of the stock offering can be exceptionally slow and there is vulnerability to selling a wide range of stocks presented through intermediaries. Still, this technique saves the regulatory hassles and costs associated with offering shares directly to the general public.

Sales to Inside Coterie

An organization may apply for membership or subscription by directors or promoters. This strategy helps to save the cost of public affairs. For the most part, the level of the new share issue is held for membership or subscription by the inner coterie, who in this way can share in the future profits of the organization.

Selling through Managing Brokers

Offering or selling shares through supervising specialists or managing brokers is becoming popular, especially among new organizations. Supervising specialists encourage organizations to legitimately plan and condition share issues. They assist organizations in pre-issue preparation, prospectus, IPO, and promotion. Additionally, they enlist the help and cooperation of sharing brokers.

Privileged subscription

At the point when the current organization needs to issue more shares, it needs to be offered to existing investors on a pro-rata basis. This is known as “issue rights”. Offering shares through privileged issues is less difficult and less costly compared to selling through a prospectus.

Be that as it may, current investors will prefer new issues just when the past performance and future possibilities of the organization are excellent. The current organization can also give free bonus shares to current investors by subscribing to its surplus and reserves.

Public issue or initial public offer (IPO)

In this technique, the organization issues a prospectus or directive to the public inviting proposals for the subscription. Financial backers interested in securities apply for securities they wish to purchase. Promotions and advertisements are also featured in the main documents. According to the Companies Act, joint-stock companies must provide the commercial register with a set of statements or a prospectus instead of an outline.

Whenever subscriptions are obtained, the organization allocates shares keeping in view the prescribed needs or requirements. The prospectus or prospectus should be drafted and provided under the Companies Act and SEBI Rules. Failure to do so may attract criminal and civil liability.

Public issue, or direct sale of shares, is the best-known strategy for selling new issues of shares. This technique allows an organization to obtain liquid assets from a huge number of financial supporters, who are usually scattered throughout the country. This technique guarantees a wider dispersion of shares, in turn encouraging the division of ownership and keeping away from the concentration of money power in a few hands.

However, this strategy is very tedious and includes countless authoritative problems. This strategy also does not ensure the acquisition of sufficient liquid assets, except when the issue is approved or underwritten. Thus, this strategy is suitable for well-respected organizations that need to raise huge capital and can bear huge expenses for a public cause.

Final words

Issuance of shares is the process in which companies allocate new shares to shareholders. Shareholders can be individuals or companies. When issuing shares, the company follows the rules prescribed by the Companies Act, 2013. Issuing a prospectus, receiving applications, and allotting shares are the three basic steps in the process of issuing shares. The process of creating new shares is known as allotment or allocation. Hope it has helped you understand the concept of all the modes of issue of securities.