3.11 Allotment Of Shares

SHARE ALLOTMENT

The other methods of issue of shares include:

  • Bought-out deals.
  • Private placement.
  • Rights issue.
  • Bonus issue.
  • Foreign issue (depository receipts).
  1. Shares Bought-Out / Buy-Out Deals:
    It means selling the equity of a company to one or very few institutions or investors like venture capital and private equity companies. This is a process whereby an investor or a group of investors buy out a significant portion of the equity of an unlisted company with a view to sell the equity to the public within an agreed time frame. The company places the equity shares, to be offered to the public, with a sponsor.
  2. Private Placement / Negotiated Sale Of Shares:
    When an issuer makes an issue of securities to a select group of persons not exceeding 49, it is called a private placement. This method of financing by the companies involves direct selling of securities to a limited number of institutional or high net worth investors. This method is typically followed by the companies which are in the growing stage.
  3. Rights Issue Of Shares:
    Under Section 81 of the Companies Act, 1956, when a firm issues additional equity capital, it has to first offer such securities to the existing shareholders on a pro-rata basis. The rights offer should be kept open for a period of 60 days and should be announced within one month of the closure of the books. The shareholders can also renounce their rights in favor of any other person at a rate determined by the market. The rights issue will also be priced lower than the public issue since it will be offered to the existing shareholders.
  4. Bonus Issue Of Shares:
    When the company has accumulated profits in the reserves and surplus account of the company, then the company would declare dividend as bonus to the existing shareholders. An important benefit for the shareholders from bonus or stock dividend is they can escape tax to be paid on cash dividends as it is not applicable for stock dividends.
  5. Euro Issues:
    The government has allowed Indian companies to fl oat their stocks in foreign capital markets. The Indian corporates, which face high rates of interest in the domestic markets, are now free to tap the global capital markets for meeting resource requirements at lesser costs and fewer administrative hassles. The instruments which the company can issue are global depository receipts (GDRs), euro-convertible bonds (ECBs) and foreign currency convertible bonds (FCCBs). These instruments are converted into equity, the underlying shares are listed and then traded on the domestic exchange.
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