Introduction
Most companies are usually started privately by their promoter(s). However, the promoters‘ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term, especially when the business grows and looks to expand. So, companies invite the public to contribute towards the equity and issue shares to individual investors.
The way to invite share capital from the public is through a “Public Issue”. Generally, equity shares are issued to the public to raise the capital required by a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.
Company issues different types of shares namely; preference shares, ordinary shares, shares without voting rights or any other shares as are approved under the law. These allow the shareholders a stake in the company’s equity as well as a share in its profits, in the form of dividends, and the aptitude to vote at general meetings of shareholders.
Features
- They are permanent in nature.
- Equity shareholders are the actual owners of the company, and they bear the highest risk.
- Equity shares are transferable, i.e., ownership of equity shares can be transferred with or without consideration to another person.
- Dividend payable to equity shareholders is an appropriation of profit.
- Equity shareholders do not get fixed rate of dividend.
- Equity shareholders have the right to control the affairs of the company.
- The liability of equity shareholders is limited to the extent of their investment.
Reason
- To finance the Organic Growth of the Company, equity capital is best source of finance.
- To finance permanent working capital
- When there is merger and takeovers, purchase consideration involves payment of huge amount. In this case, Equity capital creates no financial burden to the company.
- When high-cost debt borrowed creates problem, capital restructuring becomes essential. Debt burden is reduced either by repayment or by converting the debt into equity.
Pros and Cons
Pros
- Equity Shares are very liquid and can be easily sold in the capital market.
- In case of high profit, they get dividend at higher rate.
- Equity shareholders have the right to control the management of the company.
- The equity shareholders get benefit in two ways, yearly dividend and appreciation in the value of their investment.
Cons
- Equity shareholders get dividend only if there remains any profit after paying debenture interest, tax and preference dividend. Thus, getting dividend on equity shares is uncertain every year.
- Equity shareholders are scattered and unorganized, and hence they are unable to exercise any effective control over the affairs of the company.
- Equity shareholders bear the highest degree of risk of the company.
- Market price of equity shares fluctuate very widely which, in most occasions, erode the value of investment.
- Issue of fresh shares reduces the earnings of existing shareholders.
Public Issue of Equity Shares
When an issue / offer of shares or convertible securities is made to new investors for becoming part of shareholders’ family of the issuer (Entity making an issue is referred as “Issuer”) it is called a public issue. To meet its long-term requirements, funds can be raised either through loan from lenders, Banks, Institutions etc. These loans carry financial burden as interest to be payable periodically. Another option to raise long term capital is through public issue. Public issue means raising funds from public. Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO). The significant features of each type of public issue are illustrated below:
- Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s shares or convertible securities on the Stock Exchanges.
- Further Public Offer (FPO) or Follow-on offer: When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called a FPO.
Offer Document: Offer document’ is a document which contains all the relevant information about the company, promoters, projects, financial details, objects of raising the money, terms of the issue, etc and is used for inviting subscription to the issue being made by the issuer. ‘Offer Document’ is called “Prospectus” in case of a public issue and “Letter of Offer” in case of a rights issue.
Modes of Issues
- Public Issue
- IPO
- Fresh Issue
- Offer for Sale
- FPO
- Fresh Issue
- Offer for Sale
- Rights Issue
- Bonus Issue
- Private Placement
- Preferential Issue
- Qualified Institutional Placement
Modes of Capital Issuances
IPO
- Initial Public Offering
- Done by Unlisted Company
- Fresh issue of securities / offers its existing securities for sale / Combination of both.
- Securities issued for the first time to public.
- Paves way of listing and trading of the issuer’s securities in the Stock Exchange(s).
FPO
- Further Public Offer / Follow-on Offer
- Done by already listed Company
- Fresh issue of securities / offers for sale of securities to public
Rights Issue
- Done by already listed Company
- Issue of securities to its existing shareholders (as on a Record date)
- Record Date is fixed by the issuer
- The rights offered in a particular ratio to the number of securities held by existing shareholders as on the record date
Bonus Issue
- Done by already listed Company
- Issue of shares to existing shareholders (as on a Record date)
- Existing shareholders need not make any payment for “Bonus” Shares
- Shares are issued out of the company’s free reserve or share premium account
- Issued in a particular ratio to the number of securities held on record date
Preferential Issue
- Done by already listed Company
- Issue of shares / convertible securities to a selected group of persons
- Subject to prescribed norms such as minimum pricing, minimum public shareholding and lock-in
Initial Public Offer (IPO) Process
- Decision to go for IPO
- Appointment of BRML and Legal counsel
- Due Diligence
- Drafting of Draft Red Herring
- Filing with SEBI & Stock Exchanges
- Preparation / Approvals
- Pre – Marketing
- SEBI Clearance & ROC Filing
- Roadshows
- Marketing and Estimation of Price Range
- Book Building
- Pricing & Allocation
- RoC filing of final Prospectus
- Listing
- Funds Transferred to issuer
- Launch / Completion
Foreign Direct Investment V/s Foreign Portfolio Investment
Investment in Capital instruments by PROI
- Listed Company
- In 10% or more of the post issue paid up equity capital on fully diluted basis
- Foreign Direct Investment
- Below 10% of the post issue paid up equity capital on fully diluted basis
- Foreign Portfolio Investment
- Unlisted Company
- Foreign Direct Investment
FC-TRS and FC-GPR
Foreign Currency Transfer of Shares
The literal full form of Form FC-TRS is Foreign Currency Transfer of shares.
- It is a form used by shareholder resident outside India and resident Indian or vice versa when they transfer their shares.
- The form FC-TRS will be submitted to its authorized dealer bank, who will submit the same to the RBI.
- The form FC-TRS must be filed with the AD bank within sixty days of receipt/ remittance of funds or transfer of capital instruments whichever is earlier.
- The onus of reporting is on the resident (transferor or transferee) or the person resident outside India holding capital instruments on a non repatriable basis.
Foreign Currency- Gross Provisional Return
- Form FC-GPR (Foreign Currency-Gross Provisional Return) is Issue of capital instruments by an Indian company to a person resident outside India
- It is a form issued by RBI under Foreign Exchange Management Act,1999. When the company receives the foreign investment and against such investment the company allots shares to such foreign investor then it is the duty of the company to file details of such allotment of shares with The RBI within 30 days and for the Company must use the Form FC-GPR for submitting details with RBI.
Late Submission Fee (LSF) for FC – TRS and FC – GPR –
FC – TRS
- The LSF shall be applicable for the transactions undertaken on or after November 7, 2017.
- The payment of LSF is an option for regularizing reporting delays without undergoing the compounding procedure.
- The late submission fee is for reporting delays only
- The payment of LSF is an additional facility for regularizing reporting delays without undergoing the compounding procedure..
| Amount involved in reporting | Late Submission Fee | Maximum amount of LSF applicable |
| Upto 10 million | 0.05% | INR 1 million or 300% of the amount involved, whichever is lower |
| More than 10 million | 0.15% | INR 10 million or 300% of the amount involved, whichever is lower |
| The % of LSF will be double every twelve months | ||
FC – GPR
In case of delay beyond the prescribed time period shall be liable to penalty of 1% of the total amount of investment subject minimum of INR 5,000 and Maximum of INR 5,00,000 per month or part for 1st six months of delay and twice that rate thereafter, to be paid online into a designated account in RBI.
Timeline for Form Foreign Currency- Gross Provisional Return-
Time limit for filing Form FC – GPR
Reporting procedure must be followed:
- Within 30 days of receipt of share application money ARF to be Filed
- Within 180 days of receipt Allotment to be done
- Within 30 days of Allotment FC – GPR to be Filed.
Timeline in a brief:
- Foreign Funds received
- Within 30 days of receiving money file ARF (Advance Remittance Form) with the RBI
- RBI will issue UIN after submission of ARF
- Within 180 days from the date of receiving the money, allot the shares
- File FC – GPR within 30 days from the date of allocation of shares.
Right Issue of Equity Shares
A rights issue is a primary market offer to the existing shareholders to buy additional shares of the company within a specified date at a discounted price than the current market price. It is important to note that the rights issue offer is an invitation that provides an opportunity for existing shareholders to increase their shareholding. It is a right that a shareholder may or may not choose to exercise and not an obligation to buy the shares.
Rights issue is the fastest mode of raising capital for the company. It is a low-cost affair for the company as they can save on underwriter’s fees, advertisement expenses, etc. The confidence of the existing shareholders is retained by making the discounted offer to existing shareholders. The company can raise additional funds without increasing the debt burden.
Right issue provides an opportunity for existing shareholders to increase their stake in the company at a lesser price than the current market price. The rights issue retains the control of the company with existing shareholders when subscribed by the existing shareholders without renouncing their rights to outsiders.
Procedure of Right Issue of Equity Shares
| S.No | Particulars | Time Period | Documents |
| 1 | Send Notice of Board Meeting in writing to every director at his registered address with the company by hand delivery or by post or by electronic means | Before 7 days from the date of Board Meeting | Notice of Board Meeting |
| 2 | Pass the Resolution in Board Meeting for Right issue of Equity Shares. | – | Board Resolution |
| 3 | Prepare Offer Letter and dispatch it through registered post or speed post or through electronic mode. | – | Offer Letter |
| 4 | After receiving Share money, send Notice of Board Meeting in writing to every director at his registered address. | Sec 173(3) – Before 7 days from the date of Board Meeting | Notice of Board Meeting |
| 5 | Pass Board Resolution for allotment of shares | Within 60 days from the date of Money received | Board Resolution |
| 6 | File PAS – 3 with Registrar of Company | Within 15 days from the date of allotment of shares | Form PAS-3 |
| 7 | For issuing of share certificate once again send Notice of Board Meeting in writing to every director at his address registered with the company by hand delivery or by post or by electronic means. | Before 7 days from the date of Board Meeting. | Notice of Board Meeting |
| 8 | Pass the Board Resolution for issue of Share Certificate in Board Meeting. | As per Sec 56 – Within 2 months from the date of allotment of shares. | Form SH-1 |
Bonus Issue of Equity Shares
The issue of bonus shares is one of the common features in the Corporate world. When the Company has accumulated large surplus of profits and it decides to convert this surplus into share capital, then the Company can issue bonus shares to its shareholders in proportion to their respective holding. Bonus Shares are issued by way of capitalisation of profits or reserves of the Company. It is also popularly known as “Capitalisation Shares” as these shares are issued on capitalisation of profits or reserves. The main purpose is to broad base the share capital of the Company. The issue of bonus shares does not entail any cash outflow. Section 63 of the Companies Act, 2013 contains the provisions for issue of bonus shares.
Conditions as specified for Issue of Bonus Shares as per Section 63, Read with Rule 14 of Companies (Share Capital & Debentures) Rules, 2014
- Source of Issue of Bonus Shares – A company ay issue fully paid-up bonus shares to its members, in any manner, out of –
- Its free reserves
- The securities premium account or
- The capital redemption reserve account
- Authorization by its Article of Association – The Bonus issue shall be authorized by Articles of Association. In case the Articles of Association does not authorize the Issue of bonus shares, the same is required to be amended by following the provisions of Section 14 of the Act.
- Authorization of Bonus Issue in General Meeting – The issue of bonus shares shall be authorized in the General meeting of the Company, by way of passing ordinary resolution, in case Articles of Association provides for Special resolution, then by way of passing Special Resolution. The above said resolution shall be passed on by the recommendation of the Board of Directors.
- Bonus Shares are not allowed in case of Partly Paid Shares – The Company cannot issue bonus shares to the Shareholders holding partly paid-up shares, however the partly paid shares as outstanding on the date of allotment, are made fully paid-up, before issuing bonus shares.
- Prohibition on issue of Bonus Shares – The company can capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, only if:
- it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
- it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus.
- Bonus shares in lieu of Dividend – The bonus shares shall not be issued in lieu of dividend.
- Bonus issue cannot be withdrawn – Rule 14 of Companies (Share Capital & Debentures) Rules, 2014, provides that the Company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
Procedure of Bonus Issue of Equity Shares (1/2)
| S.No | Particulars | Time Period | Documents |
| 1 | Send Notice of Board Meeting in writing to every director at his registered address with the company by hand delivery or by post or by electronic means | Before 7 days from the date of Board Meeting | Notice of Board Meeting |
| 2 | Pass the Resolution in Board Meeting for Bonus issue of Equity Shares as well as fixing the date, time and venue of the general meeting | – | Board Resolution |
| 3 | Send Notice of General Meeting in writing to all the Shareholders, Directors & Auditors of the Company (Sec 101) | Before 21 clear days from the date of General Meeting | Notice of General Meeting |
| 4 | Pass Resolution in Meeting for Bonus Issue | Within 45 days from the date of day of the General Meeting being called | Special Resolution |
| 5 | Filing of MGT-14 with ROC for passing of Special Resolution | Within 30 days from the date of General Meeting | Form MGT-14 |
| 6 | Prepare Offer of Letter and dispatched through registered post or speed post or through electronic mode to all the existing shareholders. | – | Offer Letter |
| 7 | After receiving of share money send Notice of Board Meeting in writing to every director at his address registered with the company by hand delivery or by post or by electronic means. | Before 7 days from the date of Board Meeting. | Notice of Board Meeting |
| 8 | Pass Board Resolution for allotment of shares. | Within 60 days from the date of receiving of money | Board Resolution |
| 9 | File PAS-3 with Registrar of Company. | Within 15 days from the date of allotment of shares. | Form PAS-3 |
| 10 | For issuing of share certificate, send Notice of Board Meeting in writing to every director at his address registered with the company by hand delivery or by post or by electronic means. | Before 7 days from the date of Board Meeting. | Notice of Board Meeting |
| 11 | Pass the Board Resolution for issue of Share Certificate in Board Meeting. | Within 2 months from the date of allotment of shares. | Form SH-1 |
Taxation of Equity Shares
Under the Income Tax Rules, equity shares are considered as capital assets. Hence, the gains on equity shares are taxed as per their holding period. For the gains from equity shares to be taxable, a holding period of above 12 months is considered as long term. Any gains from holding in equity share for less than 12 months is considered short term capital gain and taxed accordingly.
Tax rates for long-term and short-term capital gains
Long term capital gain from equity shares
Long term capital gain is taxed at the rate of 10% plus surcharge and cess without indexation on gains above INR 1 lakh in a financial year. It is important to note three points here:
- The limit of INR 1 lakh is inclusive of gains on equity mutual funds if any.
- Gains up to INR 1 lakh is not taxed.
- Dividend income from equities is taxed as per the applicable slab rates.
Short term capital gain on equity shares
The short-term capital gains are taxed at the rate of 15% plus surcharge and cess.
