Procedure of Issuing Shares in a Company

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Shares are a cheaper source of financing than debt and loans for most businesses.
Shares are a cheaper source of financing than debt and loans for most businesses. (Image: Photos.com/Photos.com/Getty Images)

A share is a unit of ownership that represents an equal proportion of the capital of a company. There are two types of shares: ordinary shares and preference shares. An ordinary share gives its owner the right to share the profits of the company and voting rights in the company's meetings. Preference shares give the holder the right to a fixed dividend, which must be paid before dividends of ordinary shareholders are paid.

Issue of Prospectus

When a company plans to raise capital through issuing shares, it places an official invitation to the public to purchase their shares. This is done through a manuscript called a prospectus. The prospectus contains details concerning the entity issuing the shares, the amount of money to be paid on application and allotment of the shares.

Receipt of Applications

At this level, interested investors express their willingness to purchase the shares. This is done through filling out an application form. The application is mailed back to the issuer together with the required amount of application money. The amount may be the full value of the share or a portion of it, depending on the terms and conditions of the application.

Allotment

After the receipt of all applications by the prescribed time, the company assesses all applications and decides which application to accept. This is called the allotment of shares. Successful applicants are thereafter issued a "letter of allotment" that gives them a mandate to pay the specified allotment money.

Calls

After the receipt of the application and allotment money, the company can demand money owing from shareholders at any time depending on its capital requirements. These demands are referred to as calls. A company can only place a maximum of three calls. If a company places fewer than three calls, the last call it makes is known as the final call.

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References

  • ”Advance Accountancy”; S. N Maheshwari, et al; 2001
  • ”Business Accounting 2”; Frank Wood, et al.; 2005
  • ”Intermediate Accounting”; Kielso, et al; 2007
  • ”Intermediate Accounting”; Smith J.M, et al; 2005
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