To grow their operations, expand into new markets, or develop new products, companies often need additional capital. One of the primary ways they raise this capital is by issuing shares. Depending on their financial goals and legal structure, companies have multiple methods available to issue these shares. Each method has its own rules, process, and audience.
This article explains the six main methods through which companies can issue shares, written in simple and clear language.
Table of Contents
1. Public Issue (IPO and FPO)
A public issue is the most common and widely recognized method of issuing shares. In this method, the company offers its shares to the general public through a stock exchange.
When a company offers its shares to the public for the first time, it is known as an Initial Public Offering or IPO.
If the company is already listed and decides to issue more shares to raise additional capital, it is called a Follow-on Public Offer or FPO.
Companies choose this route when they want to raise a large amount of capital and get listed on the stock exchange. Public issues are strictly regulated by government bodies like SEBI in India or the SEC in the United States to ensure transparency and investor protection.
2. Private Placement
Private placement is a method where a company issues its shares to a selected group of investors rather than to the general public. These investors may include banks, mutual funds, venture capital firms, or high-net-worth individuals. This method is faster and involves less regulatory compliance than a public issue, making it an attractive option for companies that need quick funding.
In India, the number of investors in a private placement is legally restricted to not more than 200 in a financial year. Companies usually choose this method when they want to raise funds efficiently without the delays and costs associated with public offerings.
For example, MSEI is planning to raise ₹1,000 crore by issuing 500 crore shares through private placement.
3. Rights Issue
In a rights issue, the company offers new shares to its existing shareholders in proportion to the number of shares they already own. This means that if a shareholder owns 100 shares, and the company announces a 1:5 rights issue, they have the right to buy 20 additional shares.
The shares are usually offered at a discounted price to encourage existing shareholders to invest more in the company. This method allows companies to raise additional funds while ensuring that control and ownership remain with the current investors. It is a fair and transparent method to raise capital without diluting existing ownership too much. Many companies prefer this method during expansion or restructuring phases.
4. Bonus Issue
A bonus issue is a method where the company issues additional shares to existing shareholders without charging them anything. These shares are given free of cost and are usually issued from the company’s accumulated reserves or retained earnings. The bonus shares are distributed in a specific ratio, such as one bonus share for every two shares held.
Although no fresh capital is raised through a bonus issue, it serves as a way to reward existing shareholders and increase the total number of shares in the market. This can also improve the stock’s liquidity, making it more attractive to small investors.
For instance, if a company announces a 2:1 bonus issue, shareholders will receive one extra share for every two shares they already hold.
5. ESOP and Sweat Equity
Companies often offer shares to employees and key personnel through methods like the Employee Stock Option Plan (ESOP) or sweat equity. In an ESOP, employees are given the option to purchase shares of the company at a fixed price after a certain period. This serves as a long-term incentive and helps retain talented employees.
Sweat equity refers to shares issued to employees or directors in return for their contribution in the form of skills, expertise, or intellectual property rather than cash. These methods not only build employee loyalty but also align their interests with the company’s long-term growth.
Many startups use ESOPs to attract and motivate top talent when they are unable to offer high salaries.
6. Preferential Allotment
Preferential allotment is a method in which shares are issued to a specific group of individuals or institutions at a pre-agreed price. Unlike private placement, which is limited in number, preferential allotment is often used for strategic purposes such as mergers, acquisitions, or raising capital from known investors.
This method requires approval from shareholders through a special resolution and follows regulatory procedures to ensure transparency. Companies prefer preferential allotment when they want to bring in strategic partners or promoters without going through the lengthy process of a public issue.
For instance, a company might issue shares to a private equity firm as part of a strategic alliance
This article is for informational purposes only and should not be considered financial advice. Investing in stocks, cryptocurrencies, or other assets involves risks, including the potential loss of principal. Always conduct your own research or consult a qualified financial advisor before making investment decisions. The author and publisher are not responsible for any financial losses incurred from actions based on this article. While efforts have been made to ensure accuracy, economic data and market conditions can change rapidly. The author and publisher do not guarantee the completeness or accuracy of the information and are not liable for any errors or omissions. Always verify data with primary sources before making decisions.