Question

Explain the procedure for issue of shares.

Answer 1

Meaning: -
Total share capital of a company is divided into many units of small denominations. Each such unit is called a share. In other words, a share is a small part of the total capital of a company. It is a unit that measures the financial interest of its holder in a company. It also gives certain rights to its holders i.e. a shareholder has a right to shares the profits of the company throughout its life as well as the assets of the company at the time of winding up. 
The decision regarding the issue of shares is an important decision for a company. It is because necessary details such as the type of shares to issue, how many shares to issue, and the face value of shares, etc. is to be decided carefully. The issue of shares goes through the following stages: 
In this Procedure two main steps are involved: - 

 

(A)    Preliminary Work 

 

1. Financial Planning: -
Before issuing shares some important decisions are required to be taken by the Board of Directors like types of shares to be issued, a number of shares to issue, the face value of shares, etc. 

 

2. Drafting and filing of the prospectus: -

A resolution is passed in the board meeting for the issue of prospectus. Accordingly, a prospectus is drafted. It contains information like kinds of shares, face value, application money, date and place of payment of application money and other particulars that make terms and conditions of issue of shares clear. 

 

3. Appointment of bankers: -
When the company issues prospectus to the public, it has to open a separate account for the deposit of share application money. The board of directors has to pass a resolution for the appointment of the banker.

4. Appointment of underwriters: -
The company enters into an agreement with the underwriter before the issue of shares to the public. Underwriters guarantee the company to purchase the unsold shares. They work on a commission basis.

5. Listing of shares with the stock exchange:-
Stock Exchange is an organization established for facilitating buying and selling securities. It assigns controls and regulates the business in buying and selling of securities.

(B) Preliminary Work

1. Issue of the prospectus: -
A copy of the draft prospectus must be filed with the registrar of companies. The prospectus should be issued within 90 days from the filing it with the Registrar. The company gives an advertisement in all leading newspapers regarding the issue. 

 

2.  Receiving applications: -
An application form is supplied along with every copy of the prospectus. The prospective subscribers are requested to forward the applications to the company's bankers along with application money. On receipt of applications, bank issues receipts to the applicants. After the last date of the issue, the bank sends all the application forms to the company along with detail of the application money received. 

3.  Sorting of applications: -
After collecting applications form the bank they are scrutinized and sorted out. Incomplete, incorrect and invalid applications are taken out. Valid applications are arranged serially, either alphabetically or according to the number of shares applied for. 

4. Preparation of list: -
After sorting out applications, the share applications are entered in the application sheet. The particulars of each application are entered into the application sheet. The list is then put before the Board of Directors for further necessary action.