Basically, issues made by an Indian company can be classified as follows: 1. Public Issue 2. Private Placement 3. Rights Issue 4. Bonus Issue 5. Employees Stock Option Plan (ESOP).
Method # 1. Public Issue:
A public issue is an issue where anybody and everybody can subscribe for the securities. When an issue or offer of securities is made to new investors for becoming part of shareholders’ family of the issuer it is called a public issue.
Public issue can be further classified into:
(a) Initial Public Offer (IPO) and
(b) Further Public Offer (FPO).
Both IPO and FPO can be either a fresh issue or an offer for sale. In terms of companies Act 1956, an issue becomes public if it results in allotment to more than 50 persons.
(a) Initial Public Offer (IPO):
IPO means an offer of specified securities (i.e. equity shares and convertible securities) by an unlisted issuer to the public for subscription (including an offer for sale of its existing securities) for the first time. It is the first sale of stock by a company to the public. The Initial Public Offering can be made through the fixed price method, book building method or a combination of both. IPO enables listing and trading of the issuers securities in the securities market.
Allotments in public issues are not permitted in case the number of prospective allottees is less than 1000. An IPO cannot be made if there are outstanding convertible securities entitling any person to receive equity shares after the IPO. Every issuer must get IPO grading from at least one SEBI registered credit rating agency as on the date of registering the prospectus/red herring prospectus with the RoC (Registrar of Companies).
Convertible Security means a security which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder of the security and includes convertible debt instrument and convertible preference shares.
(b) Further Public Offer (FPO):
When a listed company makes either a fresh issue of securities to the public or in offer for sale to the public, it is called a FPO. It is also called Follow on Public Offer.
It is the subsequent public offer of securities of a listed company. FPO is also known as Seasoned or Subsequent Public offer.
The methods of offering a public issue (IPO/FPO) can be of two:
(i) Offer through Prospectus
(ii) Offer of Sale.
(i) Offer through Prospectus:
Public issue through prospectus is the most popular method of distribution of shares of a company. Prospectus is an offer document containing the details of the company. The name of the company, address, location of the industry, authorized, paid up and subscribed capital, date of opening and closing of subscription list, names of lead merchant banker, brokers and underwriters, name of the board of directors, activities of the company and other important data must be included in the prospectus. After going through these details, the public can decide either to subscribe or not to subscribe the shares. The draft of the prospectus must be approved by the board of directors, financial institutions, designated stock exchange etc. An abridged prospectus is being annexed to every share application form.
Any company making a public issue (or a listed company making a rights issue) of value of more than Rs. 50 lakhs is required to file a draft prospectus along with the specified fee with the SEBI through the lead merchant banker at least 30 days prior to registering the same with Registrar of Companies (RoC).
The permission of SEBI is mandatory for the issue. SEBI also prescribes that application for listing in stock exchanges should be submitted before a company going for public issue. Moreover, there should be an agreement with a depository for dematerialization of shares.
The issuer should appoint one or more merchant bankers, at least one of whom should be a lead merchant banker. He then appoints other intermediaries (underwriters, brokers, bankers to issue, syndicate members etc.) to the issue in consultation with the lead merchant banker. The issuer can determine the price of shares. The justification for the same should be given in the offer document. There are two methods of issue pricing viz., Fixed Price Issue and Book Built Issue.
In fixed price issue, the issuing company, in consultation with the lead merchant banker decides the price of the issue. The issue will be subscribed by the public on the basis of the issue price fixed and shares are allotted accordingly.
In book built issue, the issuer stipulates only a price band consisting of a floor price and a cap price, and the final price will be decided on the basis of demand for the issue. On the basis of final price decided by market demand the bids are evaluated and successful bidders get allotment.
The final prospectus with all the details including the final issue price and issue size should be filed with Registrar of Companies (RoC).
Advantages of Issue through Prospectus:
Following are the advantages of issue through prospectus:
i. Large number of investors could be contacted through prospectus.
ii. Services of intermediaries are not necessary for this.
iii. Concentration of shares in few hands is avoided as the shares are dispersed over a number of people.
Disadvantages of Issue through Prospectus:
Following are the disadvantages of issue through prospectus.
It is suitable only for large issues. The company has to incur additional expenses on advertisement, bank’s commission, underwriting commission, listing fee, legal charges etc.
(ii) Offer of Sale:
This is outright sale of shares through intermediaries like issue houses, brokers etc. Shares are not offered to the public directly. The intermediaries, after buying the entire shares, resell them to the investing public. Then it can be called offer for sale. In this case the issue houses act as agents of the company. The advantage of this method is that the company need not be bothered about the printing and advertisement of prospectus, allotment of shares etc. Foreign companies who want to participate in the share market and Indian investors and promoters who want to sell their shares usually adopt this method.
Method # 2. Private Placement:
Shares can be distributed through outright sale by companies to select group of persons (u/s 80 of the Companies Act 1956). This is known as placement or private placement. In other words, when an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement.
In this case, the issue houses or brokers can buy the securities from the company and sell them to his own clients. The brokers here act as wholesalers. They may resell them at a margin. In private placement the promoters may sell a portion of issue to the friends and well-wishers. The promoters have to make a minimum contribution before the issue goes to the public. Financial institutions, mutual funds, investment bank etc. subscribe to placement orders.
Private placement of securities by listed issuer can be of two types:
(a) Preferential Issue/Allotment
(b) Qualified Institutions Placement
(a) Preferential Issue/Allotment:
Preferential Issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis. An issuer can make preferential issue of specified securities only if, a special resolution by the shareholders has been passed.
The price of issue should be a price higher of the average of the weekly high and low of the closing price of the related shares quoted on the stock exchange during the (a) 6 months and (b) 2 weeks preceding the relevant date.
(b) Qualified Institutions Placement (QIP):
When a listed issuer issues/allots equity shares or securities convertible in to equity shares to Qualified Institutions Buyers on private placement basis, it is called a QIP.
An issuer can make a QIP only if a special resolution approving the qualified institutions placement has been passed by its shareholders.
The QIP should be managed by a merchant banker. The qualified institutions placement shall be made on the basis of a placement document which shall contain all material information.
The QIP should be made at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the relevant date.
Placement method is useful, when the market is depressed. The issue cost is very low. Small companies may also find it useful as they cannot spend huge money on prospectus and advertisement. The disadvantage of this method is that the shares may be concentrated in few hands who may take control of the company.
Method # 3. Rights Issue:
Shares offered to the existing shareholders of a company are called rights issues. The shares are offered in a particular proportion to the existing share ownership. The proportion may be decided on the basis of capital requirement of the company. Such shares are marketable in the market by the owners. Successful companies adopt this method for fund raising.
Procedures for Rights Issue:
(i) According to section 81 of the Companies Act 1956, a company can make a rights issue after the expiry of two years from the date of formation or at any time after the expiry of one year from the date of allotment of shares for the first time after its formation, whichever is earlier.
(ii) An issuer making a rights issue shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue.
(iii) The issue price should be decided before determining the record date.
(iv) The company should send a circular to all existing shareholders stating the fact of rights issue. The circular should include information on how the additional fund collected is going to be used.
(v) The company should normally give a time limit of at least 15 days to one month to shareholders to raise their right before it is offered to the public.
(vi) If the rights are not fully taken up- the balance is to be equitably distributed among the applicants for additional shares.
No company shall make a rights issue of equity shares if it has outstanding fully or partly Convertible debt instruments at the time of making rights issue.
The issuer shall not withdraw rights issue after announcement of the record date. The prospectus prepared by a company for its rights issue is called Letter of Offer (LoO).
Rights issue is advantageous to the company as the cost of issue is minimum. Underwriting, advertising and brokerage expenses could be avoided in this case. The control of the company is undisturbed as the shareholders get shares according to the proportion of existing number of shares held.
Method # 4. Bonus Issue:
Bonus issue is the issue of shares to the existing shareholders out of the free reserves of the company. The existing shareholders get this as a bonus without payment of any money. Companies usually adopt this method to bring up the value of shares with market value. As the free reserves are capitalized there is an increase of equity capital.
A listed company can issue bonus shares if:
(a) It is authorized by its articles of association for issue of bonus shares
(b) It has not defaulted in payment of interest/ principal in respect of fixed deposits/debt securities issued by it.
(c) It has not defaulted in respect of the payment of statutory dues of the employees.
(d) It has made partly paid up shared fully paid up.
SEBI Regulations on Bonus Issue:
Chapter IX of SEBI ICDR Regulations 2009 discusses the conditions with respect to bonus issue.
They are given below:
(i) The articles of association should contain provision for issue of bonus shares.
(ii) It should be made out of free reserves built out of genuine profits/securities premium collected in cash only. Reserves created by revaluation of fixed assets are not capitalized.
(iii) The declaration of bonus issue, in lieu of dividend, is not to be made.
(iv) The bonus issue should be implemented within 15 days from the date of its approval by the Board of Directors (BoD) of the issuer.
(v) Bonus issue shall not dilute the value or rights of debenture holders.
(vi) A bonus issue once announced cannot be withdrawn.
Method # 5. Employees Stock Option Plan (ESOP):
An Employee Stock Option Plan (ESOP) is a way in which employees of a company can own the share of the company they are working. There are different ways in which employees can receive stocks and shares of their company. Employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP. A stock option is an opportunity to buy stock at a pre-set price sometime in the future. The main purpose of an ESOP is to reward and motivate employees.
Employee Stock Option is an option given to the whole time directors, officer or employees of a company to purchase the securities offered by the company at a predetermined price, at a future date. Employee Stock Option Plan (ESOP) means a plan under which the company grants this option to their employees.
The option granted to an employee shall not be transferable to any person- the option can only be exercised by the employee to whom the option is granted. Shares can be issued under employee stock option only with the approval of shareholders by way of Special Resolution.