Types Of Shares And Their Issue- Types and Classification

Types of Shares and Their Issue: When a corporation wishes to obtain cash to expand its business or operating needs, it has two options: borrow money or issue stocks that give investors a stake in the firm. Shares are the lowest denomination of a company’s stock, representing a fraction of the company’s ownership. In layman’s terms, a share is a unit of ownership in a certain company. If one is a shareholder of a company, it means that the person, as an investor, owns a portion of the issuing company. As a shareholder, he stands to gain from the company’s earnings while simultaneously bearing the costs of the company’s losses.

What are shares?

Shares are units of equity ownership in a corporation. Shares exist as financial assets that provide for an equal distribution of any residual profits. The companies declare these residual profits, if any, in the form of dividends. Shareholders of a stock that pays no dividends do not participate in the distribution of profits. Instead, they anticipate participating in the growth of the stock price as company profits increase.

Shares represent equity stock in a firm, with the two main types of shares being common shares and preferred shares. As a result, most use “shares” and “stock” interchangeably.

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Types Of Shares And Their Issue

After discussing what a share is, Let’s discuss the different types of shares.

• Equity Shares
• Preference Shares

Equity Shares

Equity shares are a long-term source of funding for any company. The company issues these non-redeemable shares to the public. Investors in such shares have the opportunity to vote, share earnings, and claim a company’s assets. In the case of equity shares, you can state the value in various ways, such as par value, face value, book value, and so on. Equity shares are also known as ordinary shares, and they make up the majority of the shares issued by a company.

Equity shares are transferable and actively exchanged in stock markets by investors. As an equity shareholder, one can vote on corporate matters and collect dividends. On the other hand, dividends are not fixed and the company pays them out of their profit. One should also remember that equity stockholders face the most risk due to market volatility and other variables impacting stock markets in proportion to their investment size.

Classification Of Equity Shares Based On Definition

Let’s discuss the classification of equity shares based on the Definition

Bonus Shares

A company issues bonus shares to present shareholders at no extra cost, based on the number of shares that a shareholder holds. These are the company’s accumulated earnings turned into free shares rather than dividends.

Rights Shares

The term “Right Shares” refers to the shares a company provides to its current owners at a reduced price. The corporation’s shareholders have the right to approve or reject the offer, and there are minimal conditions for share subscriptions if the shareholder accepts the proposal.

Sweat Equity Shares

The company distributes sweat equity shares to the staff and directors in exchange for intellectual property rights, know-how, or other value additions to the company. Companies only distribute these shares to the employees or directors when exercising their ESOP (Employees Stock Option Plan) grant option.

Voting And Non-Voting Shares

Even though the majority of shares have voting rights, the company can create an exception and grant differential or zero voting rights to shareholders.

Classification Of Equity Shares Based On Returns

Now Let’s discuss the classification of equity shares based on Returns

Dividend Shares

A dividend is a monetary or non-monetary incentive given to its shareholders. Companies can pay out dividends in various ways, including cash, shares, or any other form. Dividends are often a portion of a company’s profit that it distributes to its shareholders. A company might opt to pay dividends by issuing new shares on a pro-rata basis.

Growth Shares

Companies that have seen rapid growth usually hold these kinds of shares. While such companies may not pay dividends, the value of their stocks rises fast, rewarding investors with capital gains.

Value Shares

Shareholders trade these shares at lower prices than their original worth on stock exchanges. Investors might anticipate that prices would rise over time, giving them a higher share price.

Preference Shares

Preference shares promise the bearer a set and consistent dividend, with payment before equity share distributions. The capital raised via the issuance of preference shares is referred to as preference share capital.

The primary distinction between preference and equity shareholders is that preference shareholders have a stronger position than equity owners. Preference shareholders receive a fixed and consistent dividend from the company’s revenue before equity owners receive any dividend.

Classification Of Preference Shares

Cumulative And Non-Cumulative Preference Shares

If a company does not declare an annual dividend on cumulative preference shares, the benefit is carried over to the following financial year. Non-cumulative preference shares do not provide for the payment of overdue dividends.

Participating/Non-Participating Preference Share 

Participating preference shares allow owners to collect excess profits after the firm pays dividends, and this is in addition to the receiving of dividends. Apart from receiving dividends regularly, non-participating preference shares provide no such benefits.

Convertible/Non-Convertible Preference Shares

A company can convert the Convertible preference shares into equity shares if the company’s Articles of Association (AoA) are satisfied. However, non-convertible preference shares have no such benefits.

Redeemable/Irredeemable Preference Share 

A company can repurchase or claim redeemable preference shares at a set price and time, and these shares do not have a maturity date. On the other hand, irredeemable preference shares are not subject to such restrictions.

Issue of Shares

The procedure through which businesses distribute new shares to shareholders is known as the issue of shares. Companies and individuals can both be shareholders. While circulating the shares, the company adheres to the procedures outlined in the Companies Act of 2013.

The amount on the company’s shares may be gradually collected in easy installments that are spread over a time frame based on its increasing financial responsibility, which is a notable aspect of the company’s capital. The first installment is collected with the application. It is hence referred to as application money, the second is on allocation (also known as allocation or allotment money), and the third is referred to as a 1st call, 2nd call, and so on.

Steps Involved In The Issue Of Shares:

Issue Of Prospectus

The company distributes the prospectus to the general public. The prospectus is an announcement to the public that a new venture has emerged and that it will require capital to operate the trade activity. It contains detailed information about the business and how prospective investors will collect the money.

Receipt Of Applications

Once the company distributes the prospectus, potential investors submit an application with the application money and deposit it with a designated bank specified in the prospectus.

Allocation Of Shares

Companies allocate shares after the minimum subscription has been met. This is usually done on a pro-rata basis since there is always an oversubscription of shares. The company distributes the Letters of Allotment to those who have been assigned their share of the company. This forms a genuine contract between the enterprise and the claimant, who will now be a part-time owner of the enterprise.

The Bottom Line

As a result, there are two kinds of shares: equity shares and preference shares. Each has its own set of sub-categories. Following that, we explored the procedures that companies must follow when they issue shares to the general public.

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