Issue of Equity & Preference Shares

Issue of Equity & Preference Shares

The issue of Shares is the process in which companies allot new shares to shareholders. Shareholders can be either individuals or corporates. The company follows the rules prescribed by the Companies Act 2013 while issuing the shares. Issue of Prospectus, Receiving Applications, and Allotment of Shares are three basic steps of the procedure of issuing the shares. The process of creating new shares is known as the Allocation of allotment. Let us see the two types of shares of a company and the procedure for the issue of shares that a company must follow.

Preference Shares

A preference share carries two exclusive preferential rights over the other type of shares, i.e. equity shares. These two special conditions of preference shares are

    • A preferential right concerning the dividends declared by a company. Such dividends can be at a fixed rate on the nominal value of the shares held by them. So the dividend is first paid to preference shareholders before equity shareholders.

    • Preferential right when it comes to repayment of capital in case of liquidation of the company. This means that the preference shareholders get paid out earlier than the equity shareholders.

Equity Shares

An equity share is a share that is simply not a preference share. So shares that do not enjoy any preferential rights are thus equity shares. They only enjoy equity, i.e. ownership in the company.

The dividend given to equity shareholders is not fixed. It is decided by the Board of Directors according to the financial performance of the company. And if in a given year no dividend can be declared, the shareholders lose the dividend for that year, it does not cumulate.

Equity shareholders also have proportional voting rights according to the paid-up capital of the company. Essentially it is one share one vote system. A company cannot issue non-voting equity shares, they are illegal. All equity shares must come with full voting rights.

The procedure of Issue of New Shares

1] Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation to the public to subscribe to shares of the company. A prospectus contains all the information of the company, its financial structure, previous year balance sheets, and profit and loss statements, etc.

It also states how the capital collected will be spent. When inviting deposits from the public at large a company must issue a prospectus or a document instead of a prospectus.

2] Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and deposit the requisite application money in the scheduled bank mentioned in the prospectus. The application process can stay open for a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of shares will be canceled. The application money must be refunded to the investors within 130 days since issuing of the prospectus.

3] Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there is always oversubscription of shares, so the allotment is done on a pro-rata basis. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part-owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment, the company can collect the share capital as it wishes, in one go or installments.

The difference between the two is

Equity Shares Preference shares
Voting Rights Equity Shares have voting rights and can vote on all major decisions Preference shareholders do not have voting rights
Preference for dividend The dividend is paid to equity shareholders only after paying the dividend to Preference shareholders They have first right over the dividend payments
Amount of dividend The dividend paid to equity shareholders depends on the profit earned. More profit means more dividend The dividend paid to preference shares is fixed irrespective of profit
The Process to issue equity shares and preference shares Step 1: Increase the authorized share capital Step 2: Call the board meeting to approve the offer letters and send the same to the proposed investors Step 3: Call the EOGM to approve the offer Step 4: Get the offer letters signed by the investor and ask them to deposit the Process to issue preference shares is same as equity shares