This article has been written by Prithiv Raj Sahu, a student of KIIT School of Law, Bhubaneswar. Picture credits to

Issue of Shares is the process in which companies allot new shares to shareholders. Shareholders can be either individuals or corporates. The company follows the rules prescribed by Companies Act 2013 while issuing the shares. Issue of Prospectus, Receiving Applications, and Allotment of Shares are three basic steps of the procedure of issuing the shares. The process of creating new shares is known as Allocation or allotment.  The types of shares of a company and the procedure for issue of shares that a company must follow

Types of Shares

1. Equity share capital and preference share capital

2. Shares with differential voting rights

3. Sweat equity shares

4. Issue of securities at a premium

5. Prohibition to issue the shares at discount

6. Issue of shares on preferential basis

7. Further issue of shares

8. Bonus shares

9. Employee stock option scheme

Difference between Equity Shares and Preference Shares

EQUITY SHARES – when you hear the word shares, people almost always refer to equity shares or ordinary shares. With equity shares, a company offers you partial ownership and thus, involves a lot of business risk. The members, who own equity shares, also acquire the right to vote for critical decisions in the company. These decisions may include electing a new leader, acquisition, merger, etc. And they play a crucial role in raising capital for the company. Equity capital forms the basic foundation of the company and its credit worthiness. The dividends or pay-outs to equity shareholders predominantly depend on the earnings of the company. Once the company has settled all other claims and expenses, it will pay its equity shareholders.

PREFERENCE SHARES – Between equity shares and preference shares, it is the latter that offers a certain source of income. With preference shares, a company promises its shareholders a fixed amount as dividend. And the preference shares take precedence over ordinary shares or equity shares. They also have an edge over equity shareholders when it comes to repaying of capital. Since the rate of dividends is fixed, it is usually compared with debentures.

RIGHTS ISSUE (SEC 62) – A Company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to—

  1. Existing shareholders.
  2. Employees under a scheme of employees’ stock option, subject to special resolution passed by company.
  3. Any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b). Approve in Board Meeting File PAS-3 within 15 days from the date of allotment.

BONUS ISSUE (SEC 63) – A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of –

  1. Free Reserves;
  2. Securities Premium;
  3. Capital Redemption Reserve:

No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless Authorised by Articles; on the recommendation of the Board, been authorised in the General Meeting. Not defaulted in payment of interest or principal of   fixed deposits or debt securities; Not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus; Partly paid-up shares are made fully paid-up; The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same. The bonus shares shall not be issued in lieu of dividend. Approve in Board meeting File PAS-3 within 15 days from the date of allotment.

PRIVATE PLACEMENT (SEC 42) – Any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer- cum-application, which satisfies the conditions specified in this section

To selected group of persons which has been identified by Board. On the recommendation of the Board, been authorized in the General Meeting File MGT-14 within 30 days from the date passing of special resolution with the Registrar and application letter shall be in the form of an application in Form PAS-4. Allot securities within 60 days from the date of receipt of the application money. Company shall maintain a complete record of private placement offers in Form PAS-5. Return of allotment of securities shall be filed with the Registrar within 15 days of allotment in Form PAS-3.

Procedure of Issue of New Shares

  1. Issue of Prospectus – Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation to the public to subscribe to shares of the company. A prospectus contains all the information of the company, its financial structure, previous year balance sheets and profit and Loss statements etc.
  2. Receiving Applications – When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and deposit the requisite application money in the schedule bank mentioned in the prospectus. The application process can stay open a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of shares will be cancelled. The application money must be refunded to the investors within 130 days since issuing of the prospectus.
  3. Allotment of Shares – Once the minimum subscription has been reached, the shares can be allotted. Generally, there is always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company.


Even though the existing shareholders have a pre-emptive right to the new stock of shares, the scope of such interference in the director’s discretion is limited; it is only in exceptional situations where the further issue of shares is restrained. 

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