A Company registered in India can issue shares to the general public (with SEBI approval), or a Private Limited Company can issue shares to persons and entities comprising of friends, relatives, business partners, and so on. Private Limited Companies are not allowed to approach the general public and make any invitation, asking them to subscribe to the shares of the Company.
There cannot be an issuance of shares to more than 200 shareholders in case of a Private Limited Company as per the Companies Act, 2013.
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Types of shares
A company may issue different kinds of shares that come with different rights and conditions considering the relation to the profit entitlement, capital entitlement if the business is wound up and voting rights criteria within the business.
The five main types of shares are:
1. Ordinary shares are the common type of shares which have no special rights or restrictions. They come with the highest risk factor, but they also have the potential to give the highest financial gains. These shareholders are entitled to voting rights, but they are paid last if the company is wound up.
2. Non-voting ordinary shares follow the same criteria as ordinary shares, except in the case of voting rights. Shareholders may have voting rights under certain circumstances or they may not have any voting rights. You can take the case of Tata Motors DVR (Differential Voting Rights), which are the same as equity shares, except they provide fewer voting rights.
3. Preference shares are those shares which carry a preferential right and give the holder, the first preference when annual dividends are distributed to the shareholders. Preferential shareholders are paid first (before ordinary shareholders), in case a business has to be liquidated. Preference shares come with no voting rights.
4. A cumulative preference share is a type of preference share. Dividends on cumulative preference shares have to be paid, if a Company has made profits. Dividends are paid out of the distributable profits. The dividend arrears on such shares are cumulative in nature. Such dividend arrears are paid before first to such shareholders before paying the equity shareholders.
5. Redeemable shares are those shares which come with an agreement that the company can buy them back at a future date - which can be at a fixed date or at the discretion of the business.
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Main methods for an issuance of shares:
Shares of a Company are made available to the general public for the first time through an IPO. This is the first step in listing and trading of a company’s shares on the stock market.
Follow on public offer is made, when an already listed company, makes either a fresh issue of shares to the public or an offer for sale on existing shares, by way of an offer document. Offer for sale (OFS) is typically allowed when the company must satisfy listing or continuous listing obligations.
Rights issue is made when a listed company proposes to issue fresh securities to existing shareholders, as per the current record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.
Preferential issue is an issue of shares of a listed Company to a select group of people, which is neither a rights issue nor a public issue. Preferential issue can be used by companies to raise capital quickly, subject to compliance with the Companies Act and SEBI regulations.
Private placement is an offer of shares of a company to a select group of persons through an issue of a private placement offer letter.
Qualified institutional placement (QIP) is a private placement of equity shares or convertible shares of a listed company, to Qualified Institutional Buyers (QIB) as per regulations prescribed by SEBI.
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