Share issue: what is it and why issue shares?

When the companies issue new shares to individuals who come forward to buy the shares.

When the companies issue new shares to individuals who come forward to buy the shares either as new or existing shareholders, then this process is known as share issue.

Shares can also be issued to both individuals and corporate bodies. Besides share issue, shares are also allotted, but there is a subtle difference between these two terms ‘share issue’ and ‘share allotment’. Whilst these two terms for most companies and in most instances means exactly the same process. We’ll be using both these terms to mean the same thing here in this article.

memorandum of association

Share Allotment

The company creates and issues the shares to the people who become the company’s shareholders, this process is known as share allotment. The shares are usually issued by the company at the starting phase of the business and some of the shares are also issued later on by the company when the company has sufficient grown itself.

memorandum of association

Share Transfer

When the existing shares are transferred from existing shareholder to someone else, this process is known as a share transfer. This will always come into effect when the company has been formed and, whilst the company may be engaged, it is not creating or allotting those shares.

Procedure of allotment of shares

The following points talk about the procedure of allotment of shares.

Generally, companies require sufficient money to finance their business, accordingly, they issue new shares to raise the money for their business.

  • There are various factors that have a governing impact on how many shares to issue. One such factor is the establishment of a company for the first time where a number of shares will often be issued. The company allows the issued shares to trade along with the money that the company has borrowed. The initial shareholders are also known as ‘subscribers’ as they are asked to subscribe to the Memorandum of Association of the new company.
  • For repaying some or all of the borrowings of the company, shares may be issued for such purposes.
  • In order to grow the business organically, there arises a need to have new funds.
  • Issued shares have the potential to fund your relevant new development or project, which will usually need relevant initial capital with the rewards which you can see in the years to come.
  • It is easier to raise cash from the shares issued that could be used to finance the purchase of another company. On the other hand, new shares could be issued to the existing shareholders of the target company—these shares had effectively been exchanged with the shares in the company being bought for getting the shares in the company that is buying it.
  • To reconstruct a damaged balance sheet. Most of the companies whether large and small, found themselves in need for allotment of shares to continue the trading in the current financial crisis.
  • The bonus or capitalized value of shares are issued to existing shareholders by the company. Instead of shareholders paying themselves for the shares, in this form of share issue, the profit is used by the company itself to fund the allotment instead. This often has the impact of reducing the share value in issue, which may, as a result, make them more marketable to investors.
  • If shareholders consider not obtaining a cash dividend, the company may provide them a ‘scrip’ dividend rather than the allotment of shares of the similar value as the cash dividend. This is usually famous among companies because issuing shares like that of a dividend does not affect the cash flow in the manner a cash dividend does.
  • If share option is exercised by a director or employees that have been imparted by the company, they may obtain the shares through shares allotment.
  • Shares are acquired by the new directors or senior employees who have joined the business or an existing employee who has just become a director. Often used by professional companies, this can both express and cement the commitment of every employee to the business—they’ll have a plain and immediate interest in the success of the company. The shares would either be transferred to the employee via new allotment of shares or through transfer from existing shareholders.