Issue of Shares at Par, Premium and Discount

Companies raise capital by issuing shares, and the method of issuance determines how these shares are distributed among investors. The three main types of share issues are Initial Public Offering (IPO), Follow-on Public Offering (FPO), and Private Placement.

1. Initial Public Offering (IPO): An IPO is when a private company offers its shares to the public for the first time, transitioning into a publicly traded company. This method helps businesses raise funds for expansion, debt repayment, or operational growth. IPOs can be priced either through a fixed-price method, where a pre-determined price is set, or a book-building process, where investors bid for shares within a price range. Once issued, shares are listed on stock exchanges for trading. Regulatory authorities such as SEBI (in India) oversee IPOs to ensure transparency.

2. Follow-on Public Offering (FPO): After an IPO, companies may issue additional shares through an FPO to raise more capital. This can be dilutive, where new shares are created, reducing the ownership percentage of existing shareholders, or non-dilutive, where existing shareholders sell their shares to new investors. Companies use FPOs to fund expansion, acquisitions, or improve financial stability.

3. Private Placement: Instead of offering shares to the general public, companies may issue them to specific investors such as venture capitalists, institutional investors, or high-net-worth individuals. This method is quicker and avoids regulatory complexities, making it a preferred option for raising capital efficiently.

Issue of Shares at Par

When shares are issued at par, they are sold at their nominal value (also called face value). The nominal value is the price printed on the share certificate, typically set at ₹10, ₹100, or another standard amount. This means investors pay exactly the face value of the share without any additional premium or discount.

For example, if a company issues 1,000 shares with a face value of ₹10 each, the total capital raised will be ₹10,000.

Features of Shares Issued at Par:

1. Fair Valuation: The share price is neither inflated nor reduced, reflecting its actual worth as per the company’s books.

2. Common for New Companies: Startups and newly established firms often issue shares at par because they do not have a market reputation to justify a premium.

3. No Capital Gains for the Company: Since shares are issued at their face value, the company does not earn any extra capital beyond the nominal value.

4. Lower Investor Risk: Investors do not overpay, reducing risks associated with stock market volatility.

5. Transparency in Pricing: The fixed price prevents speculation and manipulation.

Shares issued at par are considered a straightforward and risk-free way to raise capital, especially for companies that are just entering the market.

Issue of Shares at Premium

When shares are issued at a premium, they are sold at a price higher than their nominal value. This happens when a company has strong financial performance, a good reputation, or high demand for its shares. The extra amount over the face value is called the securities premium and is credited to the company’s Securities Premium Account.

For example, if a company issues shares with a face value of ₹10 at ₹50 per share, the ₹40 excess is the premium.

Reasons for Issuing Shares at a Premium:

1. Strong Market Reputation: Companies with good earnings history can charge a premium due to high investor confidence.

2. Demand Exceeds Supply: If many investors want the shares, companies set higher prices.

3. Profitability and Growth Prospects: Companies with consistent profits and expansion plans attract investors willing to pay a premium.

4. Reserves for Future Needs: The premium amount can be used for writing off expenses, issuing bonus shares, or funding business expansion.

5. Enhances Market Perception: A higher issue price reflects strong company fundamentals, boosting investor trust.

Issuing shares at a premium benefits both the company (by raising more capital) and investors (who gain ownership in a promising business). However, it also carries risks, as the stock price may fluctuate post-issue, affecting investor returns.

Issue of Shares at Discount

When shares are issued at a discount, they are sold at a price lower than their nominal value. Companies generally avoid this method, as issuing shares below face value indicates financial instability. However, in special cases, businesses may offer discounted shares to attract investors.

For example, if a company issues shares with a face value of ₹10 at ₹8 per share, the ₹2 difference is the discount.

Reasons for Issuing Shares at a Discount:

1. Financial Difficulties: Companies struggling to raise funds may offer discounts to attract investors.

2. Encouraging Subscription: If there is low demand, a discount helps ensure the shares are fully subscribed.

3. Compensating Initial Investors: Sometimes, early investors or employees are given discounted shares as incentives.

4. Clearing Unsold Shares: Companies that fail to sell shares in an IPO or FPO may offer discounts to encourage purchases.

5. Special Approvals Required: In many countries, issuing shares at a discount requires regulatory approval to prevent misuse.