Issuing shares is a crucial step for any growing company in India. Whether you’re looking to raise funds, bring in new investors, or restructure ownership, the process of issuing shares must be done according to the legal guidelines set by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).
In this detailed guide, we’ll walk you through the process of issuing shares of a company in India, including the types of shares, the legal requirements, and the step-by-step procedure for a smooth share issuance.

What Are Shares?

Shares represent ownership in a company. When a company issues shares, it divides its capital into equal units, which can then be sold to investors or existing stakeholders. The shareholders become part-owners of the company, with rights to a portion of the company’s profits (dividends) and voting rights in major company decisions.

Types of Shares Issued by a Company in India

1.    Equity Shares:
o    These are the most common type of shares issued by companies. Equity shareholders have voting rights and a share in the company’s profits (in the form of dividends). However, in the case of liquidation, they are the last to be paid.
2.    Preference Shares:
o    Preference shareholders are given preference over equity shareholders when it comes to dividends and repayment in the event of liquidation. They usually do not have voting rights.
3.    Bonus Shares:
o    Issued to existing shareholders in proportion to their current holdings, bonus shares are issued out of the company's accumulated profits.
4.    Rights Shares:
o    Issued to existing shareholders, giving them the right to purchase additional shares at a discounted price before the shares are offered to the public.

Why Issue Shares?

1.    Raising Capital: Issuing shares allows a company to raise funds without incurring debt.
2.    Attracting Investors: Offering shares to new investors can bring in much-needed funding while giving them an ownership stake in the company.
3.    Strengthening Financial Position: Issuing shares can improve the company’s equity base, which may help in securing loans or making strategic investments.
4.    Employee Benefits: Companies can issue shares as part of employee stock options (ESOPs), which help in attracting and retaining talent.

Steps to Issue Shares of a Company in India

1. Board Approval
•    The first step is for the Board of Directors to approve the decision to issue shares. This includes deciding on the number of shares, the price, and whether the shares will be issued as equity or preference shares.
2. Determine the Type of Shares
•    Decide whether the shares will be issued as equity shares, preference shares, bonus shares, or rights shares. Each type has different legal and financial implications, so it’s essential to choose the right type based on the company’s needs.
3. Valuation of Shares
•    Determine the price at which the shares will be issued. If it's a private company, the valuation can be based on various factors like assets, earnings, market potential, and industry standards. For public companies, share price is typically determined by the stock market.
4. Issue a Shareholder’s Resolution
•    If required, pass a special resolution by the shareholders at the Annual General Meeting (AGM) or an Extraordinary General Meeting (EGM), giving approval for the issuance of shares. The special resolution should also cover the terms and conditions of the share issue.
5. File the Necessary Forms with the Registrar of Companies (RoC)
•    File the required forms with the RoC:
o    Form MGT-14: For filing the special resolution.
o    Form PAS-3: For filing details of the allotment of shares.
o    Form SH-7: If there is an increase in authorized capital.
6. Share Allotment
•    After obtaining the necessary approvals, issue the shares to the selected investors or stakeholders. An Allotment Letter is issued to the allottees confirming the shares they have received.
7. Update Share Register
•    The company must maintain an updated register of shareholders with the details of the new share allotment, including names, addresses, and number of shares held by each shareholder.
8. Issue Share Certificates
•    After allotment, the company issues share certificates to the shareholders, indicating their ownership in the company. Share certificates must be signed by authorized directors and officers of the company.
9. Update the Company’s Records
•    Ensure that all records, including the Memorandum and Articles of Association (MoA & AoA), reflect the changes in the capital structure and shareholder details.

Legal and Regulatory Requirements for Issuing Shares

1.    Company’s Articles of Association (AoA): The AoA should allow the company to issue shares and govern the process. If needed, amend the AoA to include provisions regarding share issuance.
2.    Compliance with Companies Act 2013: The share issuance process must comply with the provisions of the Companies Act, 2013, which governs share capital, shareholder rights, and the legal procedures involved.
3.    SEBI Regulations (for listed companies): If the company is listed on the stock exchange, the share issuance process must comply with the regulations set by SEBI, including disclosure requirements and compliance with the Securities Contracts (Regulation) Act.
4.    Shareholder’s Approval: If the issue of shares results in a significant change in the company’s ownership structure or increases the authorized capital, shareholder approval is mandatory through a special resolution.

Documents Required to Issue Shares

1.    Board Resolution: Authorizing the issue of shares.
2.    Special Resolution: Passed by the shareholders, if necessary.
3.    Form MGT-14: For filing special resolutions with RoC.
4.    Form PAS-3: For allotment of shares.
5.    Form SH-7: For alteration of authorized capital (if applicable).
6.    Share Certificates: For the shareholders receiving the shares.
7.    Allotment Letter: To inform the shareholder about the shares allotted to them.

Common Questions About Issuing Shares

1.    Can a company issue shares without raising authorized capital? No, a company must first increase its authorized capital (if required) before issuing shares exceeding the current authorized capital.
2.    How long does it take to issue shares? The process may take several weeks, depending on the internal approval process, filing with the Registrar of Companies, and issuance of share certificates.
3.    Can a company issue shares to the public? Public companies can issue shares to the public through Initial Public Offerings (IPOs) or rights issues, subject to SEBI regulations.
4.    What happens if a shareholder does not pay for the shares? If a shareholder fails to pay for the shares allotted to them, the allotment can be canceled, and the company can issue the shares to other investors.

Conclusion

Issuing shares is a critical step for companies in India looking to raise capital, attract investors, and expand their business. Understanding the legal requirements, following the correct procedures, and ensuring compliance with regulatory bodies like RoC and SEBI are essential for a successful share issuance process.
If you're planning to issue shares for your company, consider consulting with corporate legal experts to ensure a smooth and compliant process. Proper planning and execution of share issuance can unlock growth opportunities and enhance your company’s financial standing.

Call to Action : Looking to issue shares for your company? Our expert team can guide you through the entire process, ensuring full compliance with legal requirements. Contact us today for a consultation!