Initial Subscription of Shares, Reasons, Types

Initial Subscription of shares refers to the process of offering and receiving applications for shares when a company first issues them to the public. It occurs during the company’s initial public offering (IPO) or any new issue. Investors apply for shares by submitting application forms along with the required application money. If the company receives applications for at least 90% of the issued shares, the subscription is considered successful as per SEBI guidelines. If the subscription falls short, the issue may be canceled, and application money refunded. Initial subscription ensures capital inflow for business operations and helps determine investor interest in the company’s shares.

Reasons of Initial Subscription of Shares:

• To Raise Capital for Business Operations

Companies issue shares initially to raise long-term capital needed to start or expand business operations. This capital may be used for purchasing fixed assets, funding research and development, meeting working capital needs, or paying off debt. Unlike loans, share capital does not require repayment, making it a stable source of finance. The funds raised through initial subscription help the company establish its foundation and gain financial independence. It also improves the company’s credibility among stakeholders. Therefore, initial share subscriptions are a critical step in mobilizing financial resources for sustainable growth and expansion.

• To Distribute Ownership Among Public Investors

Initial subscription allows companies to distribute ownership among a wide base of public investors. By offering shares to the public, a company transitions from private to public ownership. This widens the shareholder base, which increases trust, improves liquidity of shares, and may enhance market reputation. A diversified ownership also brings transparency and better governance due to regulatory compliance. Public participation ensures that the company is not overly dependent on a few promoters or investors, reducing risk. Through initial subscription, companies align their interests with those of the public, creating a mutually beneficial investment environment.

• To Meet Regulatory and Listing Requirements

Initial subscription of shares helps companies meet regulatory and stock exchange listing requirements. Regulatory bodies like SEBI mandate that a minimum percentage of a company’s shares must be held by the public to ensure transparency, fairness, and investor protection. For example, a company must secure at least 90% subscription of its public issue to proceed. Listing on a stock exchange through public subscription improves access to capital markets and enhances the company’s visibility. Compliance with these legal requirements through initial subscription is essential for a company to operate as a public limited entity and access further fundraising options.

Types of Initial Subscription of Shares:

• Public Subscription

Public subscription involves offering shares directly to the general public through a prospectus. It is the most common form of initial subscription, especially during an Initial Public Offering (IPO). Investors apply for shares by submitting application forms along with the required funds. If the issue is fully or oversubscribed, shares are allotted proportionately. This method allows wide participation, increases public trust, and helps the company raise substantial capital. It also enhances liquidity and corporate image. Regulatory approval from bodies like SEBI is required, and disclosures must be made to ensure transparency, making public subscription a heavily monitored process.

• Private Placement

Private placement refers to the offering of shares to a selected group of investors such as institutional investors, high-net-worth individuals (HNIs), or banks, rather than the general public. It is quicker and involves fewer regulatory procedures compared to public subscription. Private placements help companies raise capital efficiently without issuing a full-fledged prospectus. This type is preferred by startups and private companies that wish to avoid the costs and disclosures associated with a public issue. SEBI guidelines restrict the number of subscribers to 200 per financial year, and shares are usually sold at a negotiated price to raise the required funds.

• Rights Issue

A rights issue involves offering additional shares to existing shareholders in proportion to their current holdings. It is a way for companies to raise fresh capital without bringing in new investors. Shareholders receive the “right” to purchase new shares at a discounted price within a specific timeframe. Though not a traditional initial subscription (since the company is already operational), it is sometimes used during a first capital call. It allows loyal shareholders to maintain their ownership percentage and supports the company’s funding needs with minimal dilution. Rights issues are regulated and disclosed publicly, requiring board and shareholder approval.

• Preferential Allotment

Preferential allotment refers to issuing shares to a select group of persons on a preferential basis, typically at a pre-decided price. It includes private equity investors, venture capitalists, or strategic business partners. This method allows the company to quickly raise funds with fewer regulatory formalities compared to a public issue. Though not open to the general public, it is considered a type of initial share subscription when used during early funding stages. SEBI has strict guidelines for pricing, disclosure, and lock-in periods to prevent misuse. It’s especially useful for companies looking for strategic investments or quick capital infusion.