Issue of shares refers to the process by which a company offers a portion of its ownership to the public or private investors in exchange for capital. This process allows the company to raise funds for various purposes, such as expansion, debt repayment, or financing new projects. The shares represent a portion of ownership in the company, and shareholders are entitled to a share of the profits, as well as voting rights on key decisions.
Meaning: When a company issues shares, it essentially divides its ownership into a number of equal parts called shares. Each share represents a unit of ownership, and the shareholders become part-owners of the company. The value of a share is determined by the market and is subject to fluctuations based on the company’s performance, investor sentiment, and other factors.
Process:
- Planning: The company’s board of directors decides on the number of shares to be issued, the pricing, and the method of issuing the shares.
- Regulatory compliance: The company must comply with relevant securities laws and regulations, which may include registering the offering with the appropriate regulatory body and preparing a prospectus that provides detailed information about the company and the share offering.
- Marketing: The company may engage investment banks or brokerage firms to help market the shares to potential investors, generating interest in the offering.
- Pricing and allocation: The company, often with the help of its financial advisors, sets the price of the shares and decides how they will be allocated among investors.
- Issuing and listing: Once the shares are issued, they may be listed on a stock exchange, where they can be bought and sold by investors.
Examples:
- Initial Public Offering (IPO): When a private company decides to go public, it offers shares for the first time through an IPO.
- Secondary Offering: A company that is already public may issue additional shares to raise more capital. This is called a secondary offering or follow-on offering.
- Rights Issue: A company may issue new shares to existing shareholders in proportion to their existing shareholding, giving them the first right to purchase the new shares.
Issues and problems:
- Dilution: Issuing new shares can dilute existing shareholders’ ownership and earnings per share, which may lead to a decrease in the share price.
- Market volatility: The share price may be affected by market fluctuations, economic conditions, and investor sentiment.
- Regulatory compliance: The process of issuing shares involves adhering to strict regulations, which can be time-consuming and expensive.
- Underpricing: Companies may underprice their shares to attract investors, leading to a potential loss of capital that could have been raised if the shares were priced higher.
- Overvaluation: Overvalued share prices may result in financial losses for investors when the share price corrects itself to a more reasonable valuation.
Overall, issuing shares can be an effective way for companies to raise capital, but it also comes with risks and challenges for both the company and its investors.