Question

600-800 words.

Describe the process by which new stock (or a new bond series) is issued in order for a company to raise capital. Explain in details with examples and proper references.

Answer 1

PROCEDURE OF ISSUING NEW STOCK \ SHARES \ BONDS

Companies issues securities as a means of raising addditional capital to fund business operation or take up new investment. Public companies need approval from their shareholders before issuing shares. A share issuance requires issuing a prospectus,recieving application of shares,allotment of shares and call on shares.

1} Issuing Prospectus :

A prospectus is a document used by a public company as an open invitation to the public to buy shares of a company. A company must submit a copy of its prospectus to the securities and exchange commissionbefore the publication date. however,private companies or public companies issuing shares privately do not need to issue prospectus. The prospectus gives brief information about the issuing company:name of directore,past performance,terms of issue and the investment for which the company is raising capital. It also gives opening and closing dates of the share issue,aplication fees,allotment and call dates and bank details for deposit and minimum shares for application.

2} Application of Shares :

After getting an invitation,interested investor prospects can submit their application through the prescribed form,along with an application fees before the closing date given in the prospectus. When the number of shares applied for exceeds the number of share issued,there is an over subscription,but when applications are less than expected, there is under-subscription. Applications occur at a designated bank where a reciept is issued.The issuing company does not withdraw the application money until completion of allotment procedure.The application fee collected for share issue should be atleast 5 percent of the nominal value of the share amount.

3} Allotment of Shares :

When the directors of the issuing company with the consultation of stock market authorities prepares to sell shares to an applicant,they communicate through an allotment letter. Most people use allotment and issuance of shares interchangebly. however for a public company,share allotment strictly involves allocating the right to shares to certain applicants. The allotment letter communicates allotment time and date of paying for the shares.Not all applicants recieve allotment letter,unsuccessfull applicants recieve regret letter and their application money will be given back. Share allotment can be pro rata, in which all applicanta are accepted,but each is given lesser share then applied for.

4} Call on Shares :

Calls are used to collect remaining shares after application and allotment as per provisions of prospectus. It includes first call,second call and so on,depending on the number of installments.The last call includes the word "final". The call amount should not exceed 25 percent of the shares nominal value,and a month must have elapsed from the payment date of the previous call. A 14 day notice must be given indicating time and place.