Study Notes on Issue of Shares and Capital Markets

ISSUE OF SHARES

Introduction to Capital

  • Definition: Capital is the essential requirement of every organization, empowering it to engage in various activities including:
      - Starting a venture.
      - Expansion of existing operations.
      - Availability of finance for various needs.
      - Diversification of business activities.
      - Repaying debts.
  • Importance: Adequate and timely financial resources are essential for economic development.

Mechanisms of Raising Capital

  • Source of Finance: Finance collected by a company from investors through the issue of securities is crucial for operational activities.

Regulations Governing Capital Issues in India

  • Companies planning to issue securities must comply with the following provisions:
      1. Securities Contract Regulation Act 1956: Regulates the contract for the sale of securities.
      2. Securities Contract Regulation Rules: Detailed rules governing the issuance of securities.
      3. Companies Act 1956 and 2013: Governs company registration, regulation of the company’s financial activities, including share issues.
      4. Companies Prospectus and Allotment of Securities Rules 2014: Rules regarding the prospectus and allotment of shares to investors.
      5. Securities and Exchange Board of India (SEBI) Act 1992: Establishes SEBI, which regulates the securities market in India, along with its related rules.
  • Compliance: Listed companies must ensure adherence to the SEBI Act and associated regulations.

Methods of Issuing Securities

  • A public company can issue securities through:
      - Public Offer: Made to the public through a prospectus which includes:
        - Initial Public Offer (IPO): The first sale of shares to the public.
        - Further Public Offer (FPO): Additional issuance of shares after the IPO.
      - Private Placement: Selling securities directly to a select group of investors rather than through a public offering.
      - Rights Issue: Offering existing shareholders the right to purchase additional shares before the company offers them to the public.
      - Bonus Issue: Issuing free additional shares to existing shareholders based on their current holdings.

Definition of Securities

  • Types of Securities: The term 'securities' encompasses various financial instruments, including but not limited to:
      - Shares
      - Scrips
      - Stocks
      - Bonds
      - Debentures
      - Marketable securities of a like nature issued by a corporate body.

Forms of Securities Issuance

  • Companies making a public offer can issue securities in:
      - Physical Form: As per the provisions of the Companies Act 2013.
      - Dematerialized Form: By complying with the provisions of the Depositories Act 1996 and the regulations thereunder as outlined in Section 29.

CAPITAL MARKET

Definition and Purpose

  • Meaning: A capital market is characterized as a market for long-term funds.
  • Function: It serves as a venue where:
      - Governments or corporations (companies) can raise capital to fund their activities.