Further Issue of Shares

FURTHER ISSUE OF SHARES
If an already listed company, which has gone through an IPO offers new or in better words, additional shares
to the public for sale, so as to expand their equity base or pay off debts, it is known as Further Issue of shares.
A company (including Private company) having a share capital can increase its subscribed capital by issue of
further shares to persons who are holders of equity shares of the company in proportion to the paid up share
capital on those shares, by sending a letter of offer.
TYPES OF FURTHER ISSUE OF SHARES

• Rights Issue of shares
• Issue of shares credited as fully paid up by way of capitalization of reserves
• Issue of shares through a private placement
• Issue of shares through public subscription
• Employee Share Option Schemes (ESOS)/ Employee Share Purchase Schemes (ESPS)
• Share swaps
• Scrip dividends (applicable Rules are set out in Section 7 of the Rules)
RIGHTS ISSUE OF SHARES
• A rights issue is an invitation to existing shareholders to purchase additional new shares in the
company.
• In a rights offering, each shareholder receives the right to purchase a pro-rata allocation of additional
shares at a specific price and within a specific period (usually 16 to 30 days).
• Shareholders are not obligated to exercise this right.
• Cash-strapped companies can turn to rights issues to raise money when they really need it.
TYPES OF RIGHTS OFFERINGS

There are two general types of rights offerings: direct rights offerings and insured/standby rights offerings.
• In direct rights offerings, there are no standby/backstop purchasers (purchasers willing to purchase
unexercised rights) as the issuer only sells the number of exercised shares. If not subscribed properly,
the issuer may be undercapitalized.
• Insured/standby rights offerings, usually the more expensive type, allow third-parties/backstop
purchasers (e.g. investment banks) to purchase unexercised rights. The backstop purchasers agree
to the purchase prior to the rights offering. This type of agreement ensures the issuing company that
their capital requirements will be met.
ISSUE OF SHARES CREDITED AS FULLY PAID UP BY WAY OF CAPITALIZATION OF RESERVES
Capitalization of Profits’ denotes the process of conversion of accumulated profits or reserves of a company
into capital by means of a share issue. This share issue is called as bonus issue, capitalization or free issue. It
involves the issue of new shares to existing shareholders by converting the accumulated profits or reserves
into share capital of the company.
ADVANTAGES AND DISADVANTAGES OF ISSUING BONUS SHARES

Companies low on cash may issue bonus shares rather than cash dividends as a method of providing income
to shareholders. Because issuing bonus shares increases the issued share capital of the company, the
company is perceived as being bigger than it really is, making it more attractive to investors. In addition,
increasing the number of outstanding shares decreases the stock price, making the stock more affordable
for retail investors.
However, issuing bonus shares takes more money from the cash reserve than issuing dividends does. Also,
because issuing bonus shares does not generate cash for the company, it could result in a decline in the
dividends per share in the future, which shareholders may not view favourably. In addition, shareholders
selling bonus shares to meet liquidity needs lowers shareholders' percentage stake in the company, giving
them less control over how the company is managed.
ISSUE OF SHARES THROUGH A PRIVATE PLACEMENT
A private placement is a sale of securities to a pre-selected number of individuals and institutions. Private
placements are relatively unregulated compared to sales of securities on the open market. Private sales are
now common for startups as they allow the company to obtain the money they need to grow while delaying
or foregoing an IPO.
ADVANTAGES AND DISADVANTAGES OF PRIVATE PLACEMENT

Private placements have become a common way for start-ups to raise financing, particularly those in the
internet and financial technology sectors. They allow these companies to grow and develop while avoiding
the full glare of public scrutiny that accompanies an IPO.
Buyers of private placements demand higher returns than they can get on the open markets.
As an example, Lightspeed Systems, an Austin-based company that creates content-control and monitoring
software for K-12 educational institutions, raised an undisclosed amount of money in a private placement
Series D financing round in March 2019.5 6 The funds were to be used for business development.
ISSUE OF SHARES THROUGH PUBLIC SUBSCRIPTION
In a public issue, the shares are offered for sale in order to raise capital from the general public, for which
the company issues a prospectus. The investors who want to subscribe for the shares make an application
to the company, which then allots shares to them. The entity which makes an issue is called an Issuer.
In case, a company wants to come out with FPO and have changed its name within a year, at least 50% of
the revenue of the last one-year must have come from the activities defined by the new name. The size of
the issue should not be more than five times the pre-issue net worth of the company as mentioned in the
balance sheet of the previous financial year.
EMPLOYEE SHARE OPTION SCHEMES (ESOS)/ EMPLOYEE SHARE PURCHASE SCHEMES (ESPS)
Employee stock options (ESOs) are a type of equity compensation granted by companies to their employees
and executives. Rather than granting shares of stock directly, the company gives derivative options on the
stock instead. These options come in the form of regular call options and give the employee the right to buy
the company's stock at a specified price for a finite period of time. Terms of ESOs will be fully spelled out for
an employee in an employee stock options agreement.
Stock options are a benefit often associated with start-up companies, which may issue them in order to
reward early employees when and if the company goes public. They are awarded by some fast-growing
companies as an incentive for employees to work towards growing the value of the company's shares. Stock
options can also serve as an incentive for employees to stay with the company. The options are cancelled if
the employee leaves the company before they vest. ESOs do not include any dividend or voting rights.
SHARE SWAP
Share swap is the exchange of one equity-based asset for another associated with the circumstances of a
merger or acquisition. A share swap occurs when shareholders' ownership of the target company's shares
are exchanged for shares of the acquiring company. During a stock swap, each company's shares must be
accurately valued in order to determine a fair swap ratio.
BENEFITS AND LIMITATIONS

Some of the major benefits are as follows:
• One of the biggest benefits of a share swap is that it restricts the extent of cash transactions in
mergers and acquisitions. Even the companies that are sitting on a pile of cash find it difficult
to invest such a huge amount of cash in the execution of the transactions. So, a no-cash
deal arrangement of share swap fits perfectly in such a situation.
• Its also means a limited requirement of financial support, which in turn results in savings in terms
of borrowing costs. For companies that are low on cash reserve, share swap can be seen as a boon
as it helps them merge by leveraging their market value.
• Given that the share swap mechanism results in a lower cash transaction, it happens to attract
lower tax liability and less attention in the eyes of the regulators who otherwise scrutinize these
deals very minutely.
Some of the major limitations are as follows:

• At times the share swap arrangement might act against the target companies in case of hostile
takeovers. If the acquiring company is able to influence the majority of the voters in the target
company, they can easily acquire the shares of the target company without any extra cash in the
form of the share swap. A such, some economists criticize share swap mechanism as they believe it
to be more capitalist friendly.
• The sole idea behind a merger or acquisition is the inherent synergy between the combining entities
and share swap can be a risk to that. In some cases, the newly formed entity might become too big
to sustain or might end cannibalizing into each other’s market share. The merger might also fail due
to dissatisfaction among the workforce owing to contrasting work cultures.
SCRIP DIVIDENDS (APPLICABLE RULES ARE SET OUT IN SECTION 7 OF THE RULES)
Scrip dividend, also known as liability dividend, are issued by the company to its shareholders in the form of
a certificate instead of the cash dividend that provides a choice to its shareholders to get dividends at a later
point of time or they can take shares in place of dividends. Companies issue such dividends when they do
not have a sufficient amount of cash to pay as a dividend.
ADVANTAGES AND DISADVANTAGES

Some of the advantages are as follows:
• The company does not require to pay cash immediately or later date if shareholders opt for taking
shares, and the company can use this cash for capital investment.
• Shareholders can increase the shareholding without incurring any extra transaction cost.
• It will increase the company’s total share capital.
• Shareholders can take the tax advantage if the dividend is in the form of shares.
• The share price will not change much in case of the issue of the scrip dividends.
• This type of dividends gives extra time to the company, which is the difference between the dividend
declaration date and payment date.
Some of the disadvantages are as follows:

• It is not a good sign for the company as an investor, and other stakeholders will think that the
company has a cash flow issue.
• If shareholders are required to pay tax on dividends, then they have to sell some shares because, in
this dividend, shareholders don’t receive cash.
• If the share price increase, then technically, the company has to pay an excess dividend as compared
to the dividend declared.
• There will be no growth in shareholder’s wealth because earning per share and share price will
decrease after the scrip dividend issue.

Further Issue of Shares

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FURTHER ISSUE OF SHARES

TYPES OF FURTHER ISSUE OF SHARES

RIGHTS ISSUE OF SHARES

TYPES OF RIGHTS OFFERINGS

ISSUE OF SHARES CREDITED AS FULLY PAID UP BY WAY OF CAPITALIZATION OF RESERVES

ADVANTAGES AND DISADVANTAGES OF ISSUING BONUS SHARES

ISSUE OF SHARES THROUGH A PRIVATE PLACEMENT

ADVANTAGES AND DISADVANTAGES OF PRIVATE PLACEMENT

ISSUE OF SHARES THROUGH PUBLIC SUBSCRIPTION

BENEFITS AND LIMITATIONS

Some of the major limitations are as follows:

ADVANTAGES AND DISADVANTAGES

Some of the disadvantages are as follows:

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