5 Methods of Share Issues

In the world of corporate finance, companies often need to raise capital to fund various initiatives, such as expanding operations, acquiring assets, or reducing debt. One of the most common methods for a company to raise funds is by issuing shares. Shares represent ownership in a company, and issuing them allows a company to attract investors who are willing to provide capital in exchange for a stake in the business. There are several methods available for a company to issue shares, each with its own set of advantages, disadvantages, and implications for both the company and its shareholders. Here, we will explore the five most common methods of share issuance: public issue, offers for sale, private placements, bonus issues, and rights issues.

A public issue is one of the most common and widely recognized methods for a company to issue shares. In a public issue, a company invites the general public to purchase shares of its stock. This process typically takes place through a formal offering known as an Initial Public Offering (IPO) if the company is going public for the first time. In a public issue, the company offers a specific number of shares for sale at a predetermined price. These shares are usually listed on a stock exchange, such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), and can be bought and sold by investors on the open market. The shares are made available to the public through a subscription process, where investors submit applications to purchase the shares.

For example, a company might decide to make a public issue of 1,000,000 new ordinary shares at a price of $1.20 per share, with each share being payable in full on application. In this case, the company is inviting investors to buy shares at a price higher than their nominal value of $1.00 per share. This method is an effective way for companies to raise a large amount of capital in a relatively short period of time, especially when the company has a strong market reputation or a compelling business proposition. Public issues are typically accompanied by extensive marketing and public relations campaigns to generate interest and attract investors.

One of the main advantages of a public issue is that it provides a company with access to a large pool of potential investors, which can help raise significant capital. Moreover, once the shares are listed on the stock exchange, they can be traded freely, providing liquidity for shareholders. Additionally, the public issue process enhances the visibility of the company and its prospects, which can help attract future investors or even facilitate the company’s expansion plans. However, public issues are not without their challenges. They often require significant regulatory compliance, legal procedures, and underwriting by investment banks or other financial intermediaries, which can be expensive and time-consuming. Additionally, public issues expose the company to greater scrutiny from the public, analysts, and regulators, which can be challenging for some organizations.

An alternative to the public issue method is the offer for sale. This method involves a company selling a new issue of shares to an issuing house, which then sells the shares to other investors. The issuing house acts as an intermediary between the company and the investors and assumes the risks associated with selling the shares. In essence, the company sells the shares to the issuing house at an agreed-upon price, and the issuing house is responsible for reselling the shares to the public.

In the offer for sale method, the issuing house typically bears the risk of selling the shares, meaning that if the shares are not sold to investors, the issuing house may be left holding unsold shares. This is in contrast to a public issue, where the company directly engages with the investors and bears the risks associated with selling its shares. The issuing house is typically compensated with a commission or fee for its services, and the company raises capital by selling its shares to the issuing house at a price that reflects the market conditions and investor demand.

Offers for sale are often used by companies that wish to raise capital but do not have the resources or desire to conduct a full public issue. This method is commonly used when the company wants to limit its exposure to the market or when the company is already well-known and has a strong track record. The offer for sale method can also be an attractive option for companies that do not want to deal with the complexities of an IPO. However, the disadvantage of the offer for sale method is that the company may not receive the full market value for its shares, as the issuing house may negotiate a lower price to cover its risk and costs. Furthermore, the issuing house’s involvement adds an additional layer of complexity and cost to the process.

Private placements represent another method for a company to issue shares. A private placement involves the sale of shares to a select group of investors, usually financial institutions, large private clients, or institutional investors, rather than offering the shares to the general public. The shares are typically sold at a negotiated price, and the transaction is not subject to the same level of regulatory scrutiny as public issues or offers for sale. This makes private placements a more private and streamlined process compared to public share offerings.

Private placements are often used by companies that do not want to go through the extensive public offering process or that wish to raise capital quickly without the need for a public subscription. These placements can be particularly attractive for companies that need to raise funds in a timely manner or that have established relationships with institutional investors who are willing to invest large sums of money. The advantage of private placements is that they are typically faster, more flexible, and less expensive than public issues or offers for sale. However, the downside is that the company may not have access to as large a pool of investors as it would through a public issue, and the share price may not reflect the broader market sentiment.

A bonus issue, also known as a scrip issue, is another method of share issuance that companies may use. In a bonus issue, a company distributes additional shares to its existing shareholders free of charge. The number of bonus shares issued is usually in proportion to the shareholder's existing holdings. For example, a company might declare a 1-for-5 bonus issue, which means that for every five shares a shareholder owns, they will receive one additional share for free.

Bonus issues do not involve any cash transactions, as the shares are issued by capitalizing a portion of the company’s reserves. The company does not raise any new capital through a bonus issue, as the shares are simply distributed to shareholders in exchange for a portion of the company's retained earnings or reserves. Bonus issues are typically seen as a way for companies to reward existing shareholders by offering them more shares without requiring additional investment. This method is commonly used by companies with strong cash reserves or those looking to increase the liquidity of their shares.

While bonus issues may seem like a reward for shareholders, they also have a dilutive effect on the value of the shares. Since the total number of shares outstanding increases, the value of each individual share is reduced proportionally. However, the overall value of the shareholder's holdings remains the same, assuming no other factors affect the stock's price.

Finally, the rights issue is another method of share issuance that companies may use. A rights issue occurs when a company offers additional shares to its existing shareholders in proportion to their current ownership stake. The shares are typically offered at a discounted price, making them more attractive to shareholders who are given the “right” to purchase them. Importantly, shareholders are not obligated to purchase the new shares; they can choose to exercise their right to buy the shares at the discounted price or let the right expire.

Rights issues are often used by companies to raise capital quickly, especially when they are looking to reduce debt or fund new investments. The advantage of a rights issue is that it allows the company to raise capital from its existing shareholder base, which can be a less costly and less time-consuming option than a public offering. Additionally, rights issues can be an effective way to protect existing shareholders from dilution, as they are given the first opportunity to purchase the new shares. However, rights issues can also be seen as a signal that the company is in financial distress, as they are often used by companies looking to raise capital during difficult times.

In conclusion, there are several methods by which a company can issue shares to raise capital, each with its own advantages and disadvantages. Public issues, offers for sale, private placements, bonus issues, and rights issues all serve different purposes and cater to different needs, depending on the company’s goals, financial condition, and investor base. Each method has its own regulatory requirements, costs, and implications for shareholders, and companies must carefully consider which method best aligns with their strategic objectives. By understanding the various methods of share issuance, companies can choose the most appropriate option to achieve their capital-raising goals while balancing the interests of their shareholders.