3. TERMS RELATING TO ISSUE OF SHARES.

CONTENTS:
• Issue of bonus shares
• Rights issue of shares
• Employee stock options
• Private placement

MEANING OF VARIOUS TERMS RELATING TO ISSUE OF SHARES

1. Issue of Shares at Par

When shares are issued by a company at a price equal to the face value, then the shares
are said to be issued at par. For example, if shares of the face value of Rs. 10/- are issued for
Rs. 10/- then the shares are said to be issued at par. Normally, new companies, which may not
have goodwill in the market, may issue shares at par.

2. Issue of Shares at Premium

When shares are issued at a price, which is more than the face value, then the shares are
said to be issued at premium. For example, if shares of the value of Rs. 107- are issued for Rs.
507- then the shares are issued at a premium of Rs.407- Reputed companies issue shares at a
premium, as there is heavy demand for shares of such companies.

3. Issue of shares at a discount

When shares are issued at a price which is less than the face value, then it is called as
shares issued at a discount. For instance, if a share of Rs. 10/- is issued for Rs.8/- then the
share is issued at a discount ofRs.2/-.
The Companies Act has imposed restrictions on the issue of shares at a discount.

ISSUE OF BONUS SHARES

Profitable companies issue bonus shares to equity shareholders. Issue of bonus shares is
called as Capitalization of Reserves (undistributed profits). The bonus shares enjoy all rights
and privileges of equity shareholders. The bonus shares are equity shares. The only difference
s that they are issued to equity shareholders free of cost or as a gift by the company.
When the company earns huge profits, the entire profit is not distributed by way of
dividend. It transfers a part of the profit to serves. Out of such reserves, the bonus shares can
be issued.

Conditions for Issue of Bonus Shares:

1. No bonus shares can be issued within 12 months of any public or rights issue.
2. The bonus issue is to be made out of free reserves built out of huge profits or share
premium collected in cash only. Reserves created by revaluation of fixed assets are not to be
taken into consideration, while calculating free reserves.
3. There should be a provision in the articles of association to this effect. If there is no such
provision, the company should pass a resolution at its general body meeting making
provisions in the articles for capitalization of reserves.
4. The bonus issue is not made unless the partly-paid shares, if any existing, are made fully
paid-up.
5. A company which announces its bonus issue after the approval of the Board of Directors
must implement the approval within a period of six months from the date of such approval
and decision are not to be changed.
6. After the issue of bonus shares, if the subscribed and paid-up capital exceeds the
authorized capital, a resolution should be passed by the company at its general body meeting
for increasing the authorized capital.
7. No bonus issue can be made by the company which will dilute the value or rights of the
holders of convertible debentures, fully or partly.
8. The residual reserves after the proposed capitalization (issue of bonus shares) should be
atleast 40% of the increased paid-up capital.
9. There, can be issue of bonus shares only twice in a period of 5 years.
RIGHT ISSUE OF SHARES
A right issue involves issuing securities in the primary market to the existing
shareholders. Under Section 81 of the Indian Companies Act, 1956 when a company issues
additional equity, it has to be 1st offered in to equity shareholders on pro rata basis. However,
the existing shareholders by passing a special resolution can forfeit this right, either fully or
partly, to enable the company to issue the additional equity to the public.
Section 81 of the Companies Act lays down conditions for the further issue of shares or
right issue of shares:
1. If the company wants to issue further shares (after the expiry of two years from its
formation or one year from the first allotment,' whichever is earlier), the new shares must be
offered to the Existing equity shareholders in the proportion to their holding on that date.
The object of this condition is that there should be an equitable distribution of shares. Also the
holding of shares by each member should not be affected by the issue of new shares.
2. The offer to the existing shareholders should be given by means, of a notice stating the number of
shares offered and the date within which the offer to be accepted. The shareholders must be given time
not less than 15 days from the date of offer, to accept or reject the offer.
3. The notice must clearly state that if the offer is not accepted within the prescribed date, it shall be
deemed to be rejected.
4. The notice must also inform the shareholder that he has a right to renounce all or any of the shares
offered to him.
ADVANTAGES
The main advantages of right issue are as follows:
1. It doesn’t increase the number of shareholders, and as such the control of management
remains in the hands of existing shareholders.
2. It is more economical. There is no need to appoint the several intermediaries.
3. The company need not undertake heavy advertising as the existing shareholders are
familiar with the company.
4. It is a kind of reward to existing shareholders as they get the shares at a price which is
must below the market price.
EMPLOYEE STOCK OPTION
Section 2 defines employees stock option “means the option given to the whole time directors,
officers, or employees of the company, which gives such directors, officers or employees the
benefit or right to purchase or subscribe at a future date, the securities offered by the
company at a pre-determined price.
SEBI has introduced certain guidelines for the issue of Employees Stock Option (ESOP):
1. Issue of stock options at a discount to the market price would be regarded as another
form of employee compensation and would be treated as such in the financial statements
of the company.
2. The issue of ESOP would be subject to approval by shareholders through a special
resolution.
3. There would be no restriction on the maximum number of shares to be issued to a single
employee. However, in cases of employees being offered more than 1% shares, a specific
disclosure and approval would be necessary in the annual general meeting.
4. A minimum period of one year between grant of options and its vesting has been
prescribed. After one year, the period during which the option can be exercised would be
determined by the company.
5. ESOP would be open to all permanent employees (whether working in India or abroad)
and to the directors of the company but not to promoter and large shareholders. With
specific approval of shareholders, the scheme would be allowed to cover the employees of
a subsidiary or of a holding company.
6. Certain minimum disclosures would be required in the Directors Report (regardless of
whether the stock options are issued at a discount or not) - such as the total number of
 shares covered by ESOP, the pricing formula, options granted, options vested, options
exercised, options forfeited, and so on.
PRIVATE PLACEMENT
The companies may also collect equity or debenture capital by way of private
placement. The capital issue is sold directly to a small group of investors mainly institutional
investors like insurance companies, banks, mutual funds, financial institutions, corporate
bodies and a few private investors.
STEPS INVOLVED IN PRIVATE PLACEMENT:

The following are the steps involved in private placement for a debt instrument (debentures
and bonds):
1. Terms and Conditions: The terms and conditions regarding the value of the instrument,
the maturity period, the rate of interest, should be clearly laid down. The terms and
conditions must be finalized at the Board meeting.

2. Credit Rating: Nowadays, it is mandatory to obtain credit rating from a recognized credit
rating agency. The credit rating agency evaluates the various aspects of the concerned
instrument and then gives proper rating.

3. Confidential Information Memorandum (CIM): This document is similar to offer

document in the case of issue of shares. It contains all relevant details about the company
and the instrument. A prospective investor may go through the CIM before making a
decision to invest in the company.
4. Trustees to the Issue: The Company has to appoint trustees to protect the interest of the
investors.
5. Trust Deed: The Company must finalize a trust deed with the trustees-to the issue.
6. Filing of Trust Deed: The trust deed must be filed with the ROC within the prescribed
time limit.
7. Pricing of the Issue: The Company takes a decision regarding pricing of the issue.
8. Allotment: After the closing of the issue expires, a decision is taken on allotment and the
certificates are issued. Over subscriptions are refunded. The details are sent to the
concerned stock exchange where it is likely to be listed. The above steps are followed for
private placement of the shares as well, except the terms and conditions of the issue are
decided by the shareholders in the general meeting and there is no need of appointing
trustees.