Tag: Share Capital

Interest on debentures is the periodic payment made by a company to debenture holders as a return on the funds borrowed through the issue of debentures. It is a fixed charge against profits, meaning it must be paid regardless of the company’s profitability. Interest is usually calculated on the face value of debentures at a predetermined rate and paid semi-annually or annually. As per the Companies Act and relevant tax provisions, interest is treated as a business expense and is deductible for tax purposes. Payment must comply with terms in the debenture trust deed, and tax is often deducted at source (TDS) before payment to debenture holders.

Characteristics of Interest on Debentures:

• Fixed Obligation

Interest on debentures represents a fixed financial obligation for the company, payable at a predetermined rate irrespective of profit or loss. Unlike dividends on shares, it is not dependent on earnings but must be paid as per the terms of the debenture agreement. This fixed nature ensures debenture holders receive a stable return, making debentures a secure investment. For the company, however, it adds a constant financial burden, and failure to pay can lead to legal consequences or damage to creditworthiness, as it is a contractual liability.

• Priority in Payment

Interest on debentures has priority over dividends to shareholders. It is classified as a charge against profits, meaning it must be paid before any distribution of profits to equity or preference shareholders. This priority is due to the debt nature of debentures, where debenture holders are creditors, not owners. Even in financial difficulties, interest payment is legally binding unless the company is under formal restructuring. This feature provides security to investors but creates a fixed commitment for the company’s cash flow management and overall financial planning.

• Periodicity of Payment

Interest on debentures is paid at regular intervals, typically half-yearly or annually, as specified in the debenture trust deed. This periodicity allows investors to plan their income flow and makes debentures attractive for those seeking predictable returns. The company must maintain sufficient liquidity to meet these periodic payments on time. The fixed schedule also helps in accounting and budgeting, as companies can anticipate and allocate resources accordingly. Delays or defaults in such payments can lead to penalties, legal action, or loss of investor confidence in the company.

• Tax-Deductible Expense

Interest on debentures is treated as a business expense for the company and is deductible while calculating taxable profits. This tax-deductibility reduces the company’s overall tax liability, making debt financing via debentures more attractive compared to equity financing, where dividends are not tax-deductible. However, the company must comply with tax rules, including the deduction of tax at source (TDS) before paying the interest to debenture holders. This characteristic benefits the company financially but also requires careful compliance to avoid tax penalties or disallowances in future assessments.

• Legal Obligation

Payment of interest on debentures is a legal obligation under the Companies Act and the terms mentioned in the debenture agreement or trust deed. Failure to pay can lead to legal proceedings, damages, or enforcement of security by debenture trustees. Since debenture holders are creditors, the company is bound by law to fulfill this obligation. This legal enforceability ensures protection for investors but increases the risk for the company if its earnings or liquidity position deteriorates, as non-payment can affect reputation and borrowing capacity.

• TDS Applicability

Interest on debentures is subject to Tax Deducted at Source (TDS) as per the Income Tax Act. The company must deduct TDS at the prescribed rate before making the payment to debenture holders and deposit it with the government within the stipulated time. Failure to comply can result in penalties, interest charges, or disallowance of the expense for tax purposes. TDS compliance ensures tax collection at the source, providing a steady flow of revenue to the government, while also giving debenture holders credit for the tax deducted in their annual filings.

Journal Entries of Interest on Debentures:

IND AS-1, Presentation of Financial Statements, lays down the principles for presenting general-purpose financial statements, ensuring comparability both with the entity’s own prior periods and with other entities. For companies in India, the preparation and presentation of financial statements must comply with the Companies Act, 2013 (particularly Section 129 and Schedule III) and applicable Indian Accounting Standards notified under the Companies (Indian Accounting Standards) Rules, 2015.

Legal Framework under Companies Act, 2013:

Section 129 – Financial Statements

• Every company must prepare a financial statement for each financial year that:

  1. Gives a true and fair view of its state of affairs,

  2. Complies with accounting standards notified under Section 133, and

  3. Is in the form provided in Schedule III.

• Financial statements must be laid before the Annual General Meeting (AGM) along with the consolidated financial statements (if applicable).

• The Board of Directors must approve and authenticate the statements before presentation to shareholders.

Schedule III – Form of Financial Statements:

• Provides the structure and minimum disclosure requirements for the Balance Sheet, Statement of Profit and Loss, and accompanying notes.

• Separate formats exist for companies complying with IND AS and those following Accounting Standards (AS).

Objective of IND AS-1:

• To prescribe a uniform basis for presentation of financial statements.

• To ensure that the financial statements:

  • Present a true and fair view.

  • Provide relevant, reliable, and comparable information.

  • Enable users to assess the financial position, performance, and cash flows of the entity.

Components of Financial Statements:

A complete set of financial statements as per IND AS-1 includes:

1. Balance Sheet (Statement of Financial Position) as at the end of the period.

2. Statement of Profit and Loss – including Other Comprehensive Income (OCI).

3. Statement of Changes in Equity – showing movements in equity components during the period.

4. Statement of Cash Flows – prepared as per IND AS-7.

5. Notes to Accounts – including significant accounting policies and explanatory information.

6. Comparative Information for the preceding period.

Fundamental Principles under IND AS-1:

a) Fair Presentation and Compliance with IND AS

• Entities must present financial statements fairly to reflect the economic reality.

• Full compliance with all applicable IND AS is presumed to achieve fair presentation.

• In extremely rare cases, where compliance with a requirement would be misleading, departure is allowed — with detailed disclosure of the reasons and the financial impact.

b) Going Concern

• Management must assess whether the entity is a going concern.

• If material uncertainties exist that may cast significant doubt, these must be disclosed.

c) Accrual Basis of Accounting

• Financial statements (except for cash flow information) must be prepared using the accrual basis — recognising transactions when they occur, not when cash is received or paid.

d) Consistency of Presentation

• Presentation and classification must be consistent from one period to the next unless:

  • A significant change in the nature of operations justifies a new presentation, or

  • A change is required by a new or revised IND AS.

Presentation and Disclosure Requirements:

Materiality and Aggregation

• Each material item must be presented separately in the financial statements.

• Similar items may be aggregated if immaterial.

• Materiality is judged in the context of the financial statements as a whole.

Offsetting

• Assets and liabilities, or income and expenses, must not be offset unless permitted or required by an IND AS.

Comparative Information

• Comparative figures must be disclosed for the preceding period for all amounts.

• Comparative narrative and descriptive information is also required when relevant.

Structure and Content

• Identification: Each component must be clearly identified with the name of the entity, statement title, reporting date, and currency used.

• Distinction: Entities must distinguish between current and non-current assets and liabilities unless a liquidity presentation is more relevant.

• Minimum line items: Schedule III prescribes the minimum line items to be presented on the face of the Balance Sheet and Statement of Profit and Loss.

Notes to Accounts:

The notes must:

1. Present information about the basis of preparation and specific accounting policies used.

2. Disclose the information required by IND AS that is not presented elsewhere.

3. Provide additional information necessary for a fair presentation.

Order of notes typically:

• Statement of compliance with IND AS.

• Summary of significant accounting policies.

• Supporting information for items presented in the financial statements.

• Other disclosures (e.g., contingent liabilities, commitments, related party transactions).

Statutory Disclosures under IND AS-1 & Companies Act

• Authorisation date for issue of financial statements.

• Significant judgments made by management.

• Key sources of estimation uncertainty.

• Capital management policies.

• Dividends proposed or declared.

• Disclosure of first-time adoption adjustments if applicable.

Responsibilities and Approval:

• Preparation: Primarily the responsibility of the management.

• Approval: Board of Directors must approve before submission to auditors.

• Authentication: Signed by the chairperson of the Board, managing director, CFO, or authorised directors.

• Filing: Filed with the Registrar of Companies (ROC) along with the Board’s and Auditor’s Reports.

Importance of Compliance:

Non-compliance with IND AS-1 and Companies Act provisions can result in:

• Legal penalties.

• Misrepresentation of financial position.

• Loss of investor confidence.

• Qualification in the Auditor’s Report.

Underwriting Commission is the payment made by a company to underwriters for guaranteeing the subscription of its shares or debentures. Underwriters assure that if the public does not subscribe fully, they will purchase the unsubscribed portion. This reduces the company’s risk of under-subscription. The commission is usually a fixed percentage of the total value underwritten and is regulated under the Companies Act (commonly up to 5% for shares and 2.5% for debentures). It may be paid in cash, securities, or both, as agreed in the underwriting contract.

Underwriting commission is normally calculated on the amount underwritten (i.e., gross number of shares/debentures underwritten × issue price per share/debenture).

Formula:

Commission = Gross underwritten quantity × Issue price per unit × Commission rate (%)

Notes

• Issue price = face value + any share premium (use full issue price).

• Commission rate and mode of payment are set in the underwriting agreement and must comply with Companies Act limits (commonly: up to 5% for shares; 2.5% for debentures — check local law/Articles).

• Commission is usually payable on gross liability (the number agreed to be underwritten), not on net liability, unless the agreement specifies otherwise.

• Commission may be paid in cash, by allotment of securities, or partly both, as per agreement.

Worked Example A — Single underwriter (simple)

Company issues 10,000 shares at ₹10 each. Underwriter X underwrites the whole issue at 3% commission.

Commission = 10,000 × ₹10 × 3% = 10,000 × 0.30 = ₹3,000

So Underwriter X’s commission = ₹3,000.

Worked Example B — Multiple underwriters (commission based on gross underwritten)

Company issues 12,000 shares at ₹15 (face ₹10 + premium ₹5). Underwriters: A = 6,000; B = 4,000; C = 2,000. Commission rate = 2%.

Compute for each on gross underwritten:

• A: 6,000 × ₹15 × 2% = 6,000 × 0.30 = ₹1,800

• B: 4,000 × ₹15 × 2% = 4,000 × 0.30 = ₹1,200

• C: 2,000 × ₹15 × 2% = 2,000 × 0.30 = ₹600

Total commission payable = ₹3,600.

(If the agreement specified payment only on shares actually taken by underwriters, recalc on actual taken quantity — always follow contract terms.)

Worked Example C — Mixed situation with firm underwriting (commission still on gross)

Use earlier Full Underwriting Example: Issue = 12,000 shares at ₹10. Underwriters A=6,000, B=4,000, C=2,000. Commission = 2.5%.

Commission per underwriter (on gross):

• A: 6,000 × 10 × 2.5% = 6,000 × 0.25 = ₹1,500

• B: 4,000 × 10 × 2.5% = 4,000 × 0.25 = ₹1,000

• C: 2,000 × 10 × 2.5% = 2,000 × 0.25 = ₹500

Total commission = ₹3,000.

(Here firm underwriting numbers are part of the gross liability — commission calculation is unaffected by whether some of those shares are firm, marked, or unmarked.)

Special practical points:

• If commission is specified per share instead of percentage, multiply per-share commission × gross underwritten quantity.

• If issue price varies across tranches, compute commission separately per tranche.

• If commission is partly in shares, compute cash equivalent of shares (issue price × number of commission-shares) to find cash portion.

• Always confirm whether the underwriting agreement uses gross liability or actual taken as the base for commission — that clause controls the computation in practice.

Underwriting is a financial service where an underwriter (typically an investment bank or financial institution) guarantees to purchase unsold shares or securities during a public issue if investor demand is insufficient. This ensures the issuing company raises the required capital even in case of under-subscription. Underwriters charge a commission for this risk-bearing service.

• Marked Applications

Marked applications are those received from the public that bear a distinctive mark, code, or stamp identifying a particular underwriter. These marks are used to determine which applications have been procured by a specific underwriter. The purpose is to allocate credit for subscriptions so that the liability of each underwriter can be calculated accurately. The number of marked applications received is deducted from the underwriter’s gross liability to determine the net liability. This system ensures fair recognition of the efforts of individual underwriters in securing subscriptions and avoids disputes over the allotment of shares among multiple underwriters involved in the same public issue.

• Unmarked Applications

Unmarked applications are those received from the public without any identifying mark, stamp, or code linking them to a particular underwriter. These applications are considered to have been received directly by the company and not through any specific underwriter. For liability calculation, unmarked applications are usually distributed among all underwriters in proportion to the shares underwritten by each. This method ensures equitable sharing of responsibility for unsubscribed shares and prevents any underwriter from avoiding their commitment. The fair allocation of unmarked applications is important to maintain trust and balance in underwriting agreements involving multiple underwriters.

• Firm Underwriting Applications

Firm underwriting refers to the commitment by an underwriter to subscribe to a fixed number of shares irrespective of the public subscription level. These applications are made by underwriters in their own name or for their clients, and they are treated separately from public applications. Firm underwriting ensures that a certain minimum subscription is guaranteed, reducing the company’s risk of under-subscription. The shares taken under firm underwriting are in addition to any shares an underwriter must take due to shortfall from public subscriptions. This method provides the issuing company with greater certainty of raising the intended capital from the issue.

• Pure Underwriting

Pure underwriting refers to an arrangement where an underwriter agrees to take up all the shares or debentures that are not subscribed by the public. There is no separate commitment to purchase a fixed number of shares in advance, unlike firm underwriting. The underwriter’s liability is calculated only after considering the applications received from the public (both marked and unmarked). If the public subscribes fully, the underwriter’s liability becomes nil. This form is purely a safeguard against under-subscription and is often used when the company is confident of good public response but wants to ensure the issue’s success.

Example:

Company issues 10,000 shares at ₹10 each. Underwriter A agrees to underwrite the full issue (pure underwriting).
Public applications received: 8,000 shares (all marked for A).

Calculation:

• Gross Liability of A = 10,000 shares

• Less: Public applications (marked) = 8,000 shares

• Net Liability = 10,000 – 8,000 = 2,000 shares

Answer: A must take 2,000 shares.

• Full Underwriting

Full underwriting means the entire issue of shares or debentures is underwritten, either by a single underwriter or by multiple underwriters collectively. In this arrangement, underwriters commit to subscribing to any unsubscribed portion of the total issue, ensuring complete capital raising. The company is fully protected against the risk of under-subscription. Full underwriting is common for large public issues, especially Initial Public Offerings (IPOs), where raising the total intended amount is critical. It gives assurance to both the company and investors that the issue will succeed, enhancing market confidence and making it easier to attract potential subscribers.

Example:

Company issues 12,000 shares at ₹10 each.

• A underwrites 6,000 shares

• B underwrites 4,000 shares

• C underwrites 2,000 shares
  Public applications:

• Marked for A = 4,800 shares

• Marked for B = 2,500 shares

• Marked for C = 1,200 shares
  Unmarked = 1,000 shares

Step 1: Distribute unmarked in proportion of shares underwritten:

Total underwritten = 6,000 : 4,000 : 2,000 → Ratio 3:2:1

• A gets 1,000 × 3/6 = 500

• B gets 1,000 × 2/6 = 333

• C gets 1,000 × 1/6 = 167

Step 2: Calculate net liability:

• A = 6,000 – (4,800 + 500) = 700 shares

• B = 4,000 – (2,500 + 333) = 1,167 shares

• C = 2,000 – (1,200 + 167) = 633 shares

Answer:

A must take 700, B 1,167, C 633 shares.

• Partial Underwriting

Partial underwriting occurs when only a portion of the total issue of shares or debentures is underwritten. The company itself takes the risk for the remaining portion that is not covered by underwriters. This type of underwriting is used when the company expects that part of the issue will be subscribed by the public without underwriting support. Partial underwriting reduces underwriting commission costs, as only part of the issue is covered. However, it increases the company’s risk of under-subscription for the uncovered portion. This method is often used by companies with a good public reputation or small capital requirements.

Example:

Company issues 10,000 shares at ₹10 each.

Underwriter A underwrites 6,000 shares; Company retains risk for remaining 4,000.

Public subscription = 7,500 shares (5,000 marked for A, 2,500 unmarked).

Step 1: Unmarked shares proportion for A:

Unmarked = 2,500 shares

Proportion for A = (6,000 / 10,000) × 2,500 = 1,500 shares

Step 2: Net liability of A:

A’s gross liability = 6,000 shares

Less: Applications received for A = 5,000 + 1,500 = 6,500 shares

Since 6,500 > 6,000, A’s net liability = Nil

Answer:

A has no liability; company must bear any shortage on its own retained portion.

Underwriting, as per the Companies Act, refers to a contractual arrangement where an underwriter agrees to subscribe to the shares or debentures of a company if the public does not subscribe to them fully. This ensures the company receives the required capital for its business needs. Underwriting agreements may be for the whole or a part of the issue and can be made with individuals, firms, or financial institutions. The concept provides security to the issuing company against the risk of under-subscription.

• Written Agreement Requirement

The Companies Act mandates that underwriting must be backed by a written agreement between the company and the underwriter. This agreement should clearly state the number of shares or debentures underwritten, the underwriting commission, and other terms and conditions. A copy of this agreement must be filed with the Registrar of Companies. The written form ensures legal enforceability, transparency, and protection for both parties. Without such documentation, any oral agreement will not be considered valid under the law and cannot be enforced in a court of law.

• Underwriting Commission Limit

The Companies Act places a maximum limit on the underwriting commission a company can pay. For shares, the maximum commission is 5% of the issue price, and for debentures, it is 2.5% of the issue price, unless otherwise specified by the Articles of Association. The payment must be disclosed in the prospectus and should not exceed the rate mentioned in the Articles. This provision ensures that the company’s funds are not excessively drained in commissions and that the cost of raising capital remains reasonable and transparent.

• Disclosure in Prospectus

Full disclosure of the underwriting arrangements is compulsory in the company’s prospectus under the Companies Act. The disclosure must include the name of the underwriter, the number of shares or debentures underwritten, and the commission payable. This transparency helps potential investors evaluate the security of the issue and the extent of third-party backing. It also reduces the risk of misrepresentation or fraud. Non-disclosure can make the company liable for penalties and can also be treated as a violation of investor protection norms enforced by regulatory authorities like SEBI.

• Obligation to Take Up Unsubscribed Shares

Underwriters are legally obligated to take up the number of shares or debentures they have agreed to underwrite if the public fails to subscribe to them fully. This obligation ensures the company’s capital-raising goals are met without financial shortfall. The underwriter must make the payment within the stipulated time frame as agreed in the underwriting contract. Failure to do so may result in legal action by the company to enforce the agreement. This provision acts as the backbone of the underwriting system, ensuring reliability and trust between the issuer and the underwriter.

• Payment of Underwriting Commission

The underwriting commission can only be paid if it is authorized by the company’s Articles of Association and approved by the board of directors. Payment must be made in cash, by the allotment of shares or debentures, or partly in both, as stated in the agreement. The commission cannot exceed the prescribed limits and must be paid only after the shares or debentures have been allotted. These conditions prevent misuse of funds, ensure fairness, and maintain the financial discipline of the company in compliance with statutory requirements under the Companies Act provisions.

• Prohibition of Excess Allotment to Underwriters

Underwriters cannot be allotted more shares or debentures than what is required under the underwriting agreement, except when they voluntarily apply for more as part of the public issue. Allotting excess shares without proper application is considered a breach of the Companies Act. This restriction ensures fairness to other investors, prevents market manipulation, and maintains the credibility of the share allotment process. By following this guideline, companies avoid preferential treatment and uphold principles of equity and transparency in capital market transactions.

• SEBI Regulations and Companies Act Compliance

Although the Companies Act governs underwriting, companies must also comply with Securities and Exchange Board of India (SEBI) regulations. SEBI requires that underwriters be registered and meet specific capital adequacy norms. They must maintain records of their underwriting obligations, fulfill financial commitments promptly, and avoid conflicts of interest. This dual compliance ensures investor protection, enhances market stability, and improves corporate governance. Non-compliance with either set of rules can result in penalties, suspension from capital market activities, and legal consequences for both the company and the underwriter.

Fresh Issue of Shares refers to the process by which a company issues new shares to raise additional capital for its business needs. This capital can be used for expansion, repayment of debt, modernization, or meeting working capital requirements. A fresh issue increases the company’s share capital and may dilute the ownership percentage of existing shareholders. It is generally offered to the public through an Initial Public Offering (IPO) if the company is going public, or through a Follow-on Public Offering (FPO) if already listed. The issue must comply with the provisions of the Companies Act, 2013, and guidelines of the Securities and Exchange Board of India (SEBI), ensuring transparency, fairness, and protection of investors’ interests in the capital-raising process.

Reasons of Fresh Issue of Shares:

• Business Expansion

A primary reason for issuing fresh shares is to raise funds for expanding business operations. Companies often need significant capital to enter new markets, open additional branches, increase production capacity, or launch new products. Fresh equity financing helps achieve these objectives without increasing the company’s debt burden. The raised funds can be invested in infrastructure, technology, or workforce development. By issuing new shares, companies can also attract strategic investors who bring expertise and resources. Expansion through fresh share issues supports long-term growth, enhances competitiveness, and may lead to higher profitability and shareholder value over time.

• Repayment of Debt

Companies may issue fresh shares to raise funds for repaying existing loans or debentures. High debt levels increase financial risk due to interest obligations and potential cash flow strain. By replacing debt with equity through fresh share issues, companies can improve their debt-to-equity ratio, reduce interest expenses, and strengthen their financial position. This approach also enhances creditworthiness, making it easier to secure favorable borrowing terms in the future. Moreover, eliminating or reducing debt can free up cash for reinvestment in operations. While existing shareholders may face dilution, the reduction in financial risk often benefits the company’s long-term stability.

• Working Capital Requirements

Working capital is essential for meeting day-to-day business expenses such as paying suppliers, salaries, utilities, and maintaining inventory. Companies sometimes face cash flow shortages due to seasonal fluctuations, increased operational costs, or growth demands. Issuing fresh shares provides an infusion of permanent capital that can be used to cover these short-term financial needs without creating repayment obligations. Adequate working capital ensures smooth operations, avoids disruptions, and enables the company to take advantage of business opportunities quickly. This method of financing is especially beneficial for companies that want to maintain liquidity without relying heavily on short-term borrowings.

• Funding for Acquisitions or Mergers

Fresh issue of shares is often used to finance acquisitions or mergers, allowing a company to acquire another business without taking on excessive debt. The funds raised can be used to purchase assets, pay for goodwill, or meet integration expenses. In some cases, shares are directly issued to the shareholders of the acquired company as part of the purchase consideration. This equity-based financing method preserves cash reserves and aligns the interests of new and existing shareholders. By funding acquisitions through fresh share issues, companies can expand their market presence, diversify product offerings, and achieve economies of scale effectively.

• Compliance with Regulatory Capital Requirements

Certain industries, particularly banking, insurance, and financial services, are required by law to maintain a minimum level of capital adequacy to safeguard stakeholders’ interests. If a company’s capital falls below the required level, it may issue fresh shares to meet these regulatory norms. This not only ensures legal compliance but also enhances investor confidence and market credibility. Raising capital through fresh issue strengthens the company’s balance sheet, supports its ability to absorb potential losses, and ensures continued operation under regulatory frameworks. Failure to meet these requirements can result in penalties, restrictions, or loss of operating licenses.

Types of Fresh Issue of Shares:

• Initial Public Offering (IPO)

An Initial Public Offering is the first sale of shares by a company to the public to raise capital. Through an IPO, a private company becomes a publicly listed entity, allowing its shares to be traded on stock exchanges. It enables the company to access a large pool of investors, raise substantial funds, and enhance its visibility and credibility in the market. IPO proceeds are often used for expansion, debt repayment, or working capital. The process involves meeting SEBI regulations, issuing a prospectus, and following strict disclosure norms to protect investor interests and ensure transparency in the capital-raising process.

• Follow-on Public Offering (FPO)

Follow-on Public Offering refers to the issuance of additional shares by a company that is already listed on a stock exchange. Unlike an IPO, which is for new listings, an FPO is conducted to raise further capital from the public. Companies opt for FPOs to fund expansion, reduce debt, or meet other financial needs. The offering can be dilutive, where new shares are issued, or non-dilutive, where existing shareholders sell their holdings. FPOs are regulated by SEBI and require disclosures similar to IPOs, ensuring investors are informed about the company’s performance and the purpose of raising additional funds.

• Rights Issue

Rights Issue allows existing shareholders to purchase additional shares in proportion to their current holdings, usually at a price lower than the market value. This method gives priority to current investors before offering shares to outsiders. The main advantage is that it maintains the control and voting power of existing shareholders while raising capital without increasing debt. Rights Issues are often used to fund expansion, acquisitions, or repay liabilities. Shareholders can either subscribe to their rights, sell them to others, or let them lapse. This type of fresh issue is cost-effective as it avoids extensive marketing expenses.

• Private Placement

Private Placement involves selling shares directly to a select group of investors, such as institutional investors, banks, mutual funds, or high-net-worth individuals, rather than the general public. This method is quicker and less expensive compared to a public issue, as it avoids extensive regulatory requirements and marketing costs. Private placements are often used when companies require funds urgently or want to bring in strategic investors who can offer expertise and resources. While it limits the investor base, it provides flexibility in negotiation and pricing. SEBI regulations govern such issues to ensure fairness and prevent misuse of the capital-raising process.

• Preferential Allotment

Preferential Allotment refers to the issuance of shares to a specific group of investors at a predetermined price, often lower than the market rate, subject to SEBI guidelines. This method is used to quickly raise capital, reward promoters, bring in strategic partners, or convert loans into equity. It provides flexibility in choosing investors and customizing terms. Unlike public issues, preferential allotment is less time-consuming and involves fewer formalities. However, it requires shareholder approval through a special resolution. By selectively allotting shares, companies can strengthen control structures, attract experienced investors, and raise funds for specific business purposes efficiently.

• Bonus issue

Bonus Issue involves issuing additional shares to existing shareholders free of cost, in proportion to their current holdings. Instead of distributing profits as cash dividends, the company capitalizes its reserves and issues bonus shares. For example, a 1:2 bonus means one additional share for every two shares held. Bonus issues do not bring in new funds but increase the number of outstanding shares, thereby reducing the market price per share and improving liquidity. They reward shareholders, signal financial strength, and can make shares more affordable to small investors, enhancing trading activity in the stock market.

• Employee Stock Option Plan (ESOP) Issue

An ESOP Issue involves granting employees the right to purchase company shares at a predetermined price, often below the market rate, after a certain vesting period. This method is used to reward and retain talented employees, align their interests with company performance, and foster a sense of ownership. While it does not raise immediate capital, when employees exercise their options, the company receives funds, effectively making it a fresh issue. ESOPs also serve as a non-cash incentive, reducing the need for high salaries while motivating employees to contribute to long-term growth and increasing shareholder value.

Challenges of Fresh Issue of Shares:

• Dilution of Ownership

When a company issues fresh shares, the ownership percentage of existing shareholders decreases unless they purchase additional shares to maintain their stake. This dilution can lead to reduced control over decision-making, especially for promoters or major shareholders. In public companies, significant dilution may shift voting power toward new investors or institutional shareholders. This challenge often makes existing owners cautious about approving large fresh issues. Although fresh capital supports growth, the loss of influence in strategic matters can create conflicts of interest and resistance among shareholders, affecting the smooth execution of future corporate plans and decision-making processes.

• Market Perception and Share Price Impact

The announcement of a fresh issue of shares can sometimes negatively affect market perception. Investors may interpret it as a sign that the company is facing financial pressure or that current cash flows are insufficient. A large issue can also increase the supply of shares in the market, leading to a fall in share prices. If the issue price is significantly lower than the current market price, it may cause dissatisfaction among existing shareholders. Poorly timed or inadequately justified fresh issues can therefore harm the company’s image, weaken investor confidence, and impact long-term valuation in capital markets.

• Regulatory Compliance and Costs

Issuing fresh shares requires strict compliance with provisions of the Companies Act, 2013, SEBI guidelines, and stock exchange regulations. The process involves preparing a prospectus, obtaining approvals, and making detailed disclosures, which can be time-consuming and costly. Additional expenses include legal fees, underwriting charges, advertising, and administrative costs. Any delay or error in compliance may result in penalties, legal disputes, or rejection of the issue. For smaller companies, the regulatory burden and related expenses may outweigh the immediate financial benefits, making fresh issues less attractive compared to other financing options like loans or internal accruals.

• Under-subscription Risk

A major challenge in fresh issue of shares is the possibility of under-subscription, where the public or targeted investors apply for fewer shares than offered. This can happen due to poor market conditions, high issue price, weak investor confidence, or inadequate promotion of the issue. Under-subscription may force the company to scale down planned projects or seek alternative funding, which could delay operations. It can also signal a lack of market trust, damaging the company’s reputation. Companies often appoint underwriters to reduce this risk, but that adds to the cost of raising capital, affecting the net proceeds from the issue.

• Short-term Pressure on Performance

Fresh issue of shares raises expectations among investors for immediate growth and returns. This can create pressure on management to deliver quick results, sometimes at the expense of long-term strategic goals. The influx of funds may lead to hasty investments or overexpansion if not managed carefully. Moreover, the company must now generate higher profits to provide adequate dividends and sustain share value, especially after the ownership base expands. Failure to meet these expectations can result in a drop in share price, negative analyst reports, and reduced investor confidence, ultimately affecting the company’s overall market position and stability.