Share Issue Mechanism

The share issue mechanism refers to the process by which a company raises capital by issuing shares to investors. It is an important method for companies to fund expansion, operations, or other financial needs. The shares can be issued to the public, private investors, or existing shareholders. Regulatory compliance, pricing, and market conditions play key roles in this mechanism. In India, the process is governed by the Companies Act, SEBI regulations, and listing agreements of stock exchanges.

Types of Share Issues:

There are several types of share issues: public issue, rights issue, bonus issue, and private placement. A public issue involves offering shares to the general public through a prospectus. Rights issues offer existing shareholders the right to purchase additional shares. Bonus issues involve giving free shares to existing shareholders from reserves. Private placement involves selling shares to a select group of investors, often institutions. Each method is chosen based on the company’s objectives and market conditions.

• Initial Public Offering (IPO)

An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time. This is done to raise funds, increase visibility, and enable listing on stock exchanges like NSE or BSE. The company appoints merchant bankers, prepares a Draft Red Herring Prospectus (DRHP), and gets approval from SEBI. Once approved, the issue is opened for subscription. Pricing can be fixed or through a book-building process, depending on market strategies.

• Rights Issue Mechanism

Rights Issue allows existing shareholders to buy additional shares at a discounted price in proportion to their existing holdings. This is a way to raise capital without diluting control. The company sends offer letters to eligible shareholders with a set deadline. Shareholders can accept, reject, or renounce the rights. This mechanism is regulated by SEBI and does not require shareholder approval through a general meeting. It is faster and more cost-effective than a public issue.

• Bonus Issue of Shares

In a Bonus Issue, a company issues free shares to existing shareholders by capitalizing its free reserves or securities premium. It rewards shareholders without taking in new funds. Bonus issues increase the number of outstanding shares but do not affect the company’s net worth. SEBI guidelines ensure the bonus issue is made from legitimate sources. The process involves board approval and intimation to stock exchanges. This mechanism enhances investor confidence and signals company strength.

• Private Placement and Preferential Allotment

Private Placement is the issue of shares to a select group of investors, such as institutional or high-net-worth individuals. Preferential Allotment is a type of private placement where shares are issued to a specific group under SEBI regulations. This method is faster and more flexible but must follow strict disclosure and pricing norms. It is commonly used for strategic partnerships or raising quick capital without undergoing public scrutiny or lengthy approval processes involved in public issues.

Book Building Process

Book Building Process is a price discovery mechanism used during IPOs or follow-on public offers. Investors bid for shares within a price band set by the company. Based on demand, the final price (cut-off price) is determined. There are two types: 75% Book Building and 100% Book Building. This process allows market-driven pricing and helps avoid under or overpricing. SEBI mandates transparency and timely disclosure during the book-building process to protect investor interest.

Role of Intermediaries:

Various intermediaries are involved in the share issue mechanism. These include merchant bankers, registrars, underwriters, legal advisors, and auditors. Merchant bankers manage the entire issue process, draft offer documents, and coordinate with SEBI. Registrars handle applications and allotments. Underwriters assure the company that the issue will be subscribed. These intermediaries ensure compliance, smooth processing, and transparency in the issue. Their role is crucial in maintaining investor trust and ensuring the success of the share issue.

Regulatory Framework in India:

The share issue mechanism in India is regulated by multiple authorities. The Securities and Exchange Board of India (SEBI) lays down guidelines for disclosures, pricing, and eligibility. The Companies Act, 2013 governs corporate approvals and procedures. The Stock Exchanges (BSE/NSE) monitor compliance with listing norms. Additionally, the Depositories Act ensures dematerialization of shares. Companies must comply with these regulations to ensure investor protection and transparency. Violations can lead to penalties or cancellation of issue approvals.

Post-Issue Activities and Listing:

After the share issue, the company undertakes post-issue activities like allotment of shares, refunds (if applicable), credit to demat accounts, and listing on the stock exchange. Listing enables the shares to be traded in the secondary market. The company must submit listing documents and meet all criteria. Post-listing, it must comply with disclosure norms and governance standards. These steps ensure liquidity for investors and credibility for the company in the capital markets.