When a company decides to raise funds, it can choose to offer shares to existing shareholders or offer new shares in a rights issue. Both of these methods allow a company to raise money without incurring large costs, such as advertising and underwriting fees. The benefits of a rights issue are obvious. Shareholders receive discounted prices and the company saves on advertising and underwriting costs. These types of issues are commonly used by companies that need additional funds for ongoing operations.
The main difference between the two types of issues is the type of shares that are issued. The shares can be issued at a discount or a premium, which refers to the amount that is paid for each share. The premium is usually set by the board of directors and must adhere to SEBI guidelines. The money collected from shares sold at a premium is credited to a Securities Premium A/c. This is not revenue profit, but a capital profit.
The second type of issue is a private issue, which is done to a select few people. The shares are offered to the public, and the public is offered a chance to purchase them. The company issues a prospectus that informs potential investors of the offering and the terms of the offer. A successful applicant will either receive physical or dematerialised shares. Once the shares have been issued, the company must follow SEBI’s guidelines for issuing shares and debt instruments.
Another type of issue involves the issue of new securities. These are called rights issues. These securities are sold to current shareholders at a discounted price, and they expire after a certain period of time. In addition, these securities are not sold on the open market, but are sold to select investors, often large banks, mutual funds, insurance companies, and pension funds. This is an extremely rare type of issue, and is only a part of the overall process.
While the two most common types of share issues are listed below, there are several other variations. The types of issue may be different based on the company’s requirements, as well as the goals of the founders. Typically, shares issued for a new company are non-preference. However, a company can use other methods to weight their shares and make them more tax-efficient. For example, some shares may not have voting rights, but may have special tax benefits.
A public issue is the most popular type of share issue, although it is also the most expensive. In this case, the company is required to issue a prospectus containing information about the company. This process is costly and involves hiring an agency to convince the public to purchase more shares. If the public wants to invest in a company, the prospectus can cost as much as $1.20 per share, so it would be better to issue less than a million shares.
Preference shares are a hybrid between equity and debt. They are driven by the terms of issue. While preference shares do not have voting rights, they do have the advantages of limited liability. They are categorized into two basic types: Equity shares and Preference shares. Preference shares carry a greater degree of preferential rights to capital and fixed dividends than other classes. The terms and conditions for a preferred issue are described in the rule.