Chapter 22 –

Equity/ Ordinary Shares

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 Learning Objectives
• Discuss the general features of equity/ordinary shares, the important aspects of
preemptive rights of shareholders and the merits and demerits of ordinary share
financing
• Review the procedure relating to equity shares and securities
convertible/exchangeable into equity shares in India in terms of common
conditions for public/rights issues, provisions as to public issues, rights issues,
preferential issues and qualified institutional placement

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 Introduction
• Equity/ordinary share capital, as a long-term source of finance, represents
ownership capital/securities and its owners—equity-holders/ordinary shareholders
—share the reward and risk associated with the ownership of corporate enterprises.

• It is also called ordinary share capital in contrast with preference share capital which
carries certain preferences/ prior rights in regard to income and redemption.

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 Fundamentals of Equity Shares
Types
Authorised share capital
• Authorised share capital is the number of ordinary shares capital that a firm can raise
without further shareholder approval.
Subscribed share capital
• Subscribed share capital is the number of shares (capital) outstanding.
Par (face) value
• Par (face) value is a value arbitrarily placed on the shares.
Book value
• The book value of ordinary shares refers to the paid-up capital plus reserves and surplus
(net worth) divided by the number of outstanding shares.
• Market value
• The price at which equity shares are traded in the stock market is their market value.© 2019
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 Features
Residual Claim to Income
• The equity shareholders have a residual claim to the income of the company.
• They are entitled to the remaining income/profits of the company after all outside
claims are met.
Residual Claim on Assets
• The ordinary shareholders’ claim in the assets of the company is also residual in that
their claim would rank after the claims of the creditors and preference shareholders in
the event of liquidation.

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Right to Control
• As owners of the company, the equity-holders have the right to control the
operations of/ participate in the management of, the company.
• Their control is, however, indirect.
Voting System
• The ordinary shareholders exercise their right to control through voting in the
meetings of the company.
• Proportionate voting is the system under which each share is allotted a number
of votes equal to the number of directors to be elected and votes can be given to
any director.

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• Majority voting is the system where by in the election of directors, each
shareholder is entitled to one vote for each share held and he can vote all
shares for each director separately.
• Pre-emptive right (rights) is a legal right of existing shareholders to be
offered by the company in the first opportunity to purchase additional
equity shares in proportion to their current holdings.
• Dilution of control/ financial interest occurs when a new share issue
results in each existing shareholder having a claim in a smaller part of the
firm’s earnings than before.
Limited Liability
• Limited Liability Although the equity holders share the ownership risk,
their liability is limited to the extent of their investment in the share capital
of the company.
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 Evaluation
• As the single most important source of long term funds, equity capital has merits
as well demerits from the viewpoint of the company as well as the shareholders.

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 Merits
• It is a permanent source of funds without any repayment liability.
• It does not involve obligatory dividend payment.
• It forms the basis of further long-term financing in the form of borrowing related
to the creditworthiness of the firm.

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 Demerits
• As a source of long-term fund,
it has high cost,
low/nil risk,
does not dilute control and
puts no restraint on managerial freedom

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 Issue Procedures
• The procedural aspects of raising of equity shares and securities
convertible/exchangeable into equity shares prescribed by the Securities and
Exchange Board of India (SEBI) in terms of the following:
common conditions for public and rights issues,
provisions as to public issues,
rights issues,
preferential issues, and
qualified institutional placement are discussed below.

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 Common Conditions for Public/Rights
Issues
• While public issue means an initial public offer (IPO) or a further public offer
(FPO), a rights issue means an offer of equity shares and convertible securities by
a listed issuer to its shareholders as on the record date.
• IPO is an offer of shares/convertible securities by an unlisted issuer to the public
for subscription including an offer for sale by existing holders in an unlisted issuer.
• FPO is an offer of shares/convertible securities by a listed issuer including an offer
for sale in a listed issuer.

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 Public Issues
• The provisions as to public issues are:
 eligibility requirements,
 pricing, promoters contribution,
 lock-in and
 minimum offer to public/reservations.

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 Book Building
• Book building is a process to elicit demand for securities and assess price for
them.
• There are two alternative methods of book built issues.
• According to the first method, the lead merchant banker would act as the lead
book runner and be primarily responsible for book building.
• The alternative method of book-building issue, available only in case of further
public offer, differs from the first in respect of determination of prices and
allocation to non-anchor-investors on proportionate basis.

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 Green shoe option
• Green shoe option is the option for stabilisation of the post-listing price of
securities in a public issue by allotting excess shares.
• Upto 15 per cent of the issue size may be borrowed by the stabilising agent from
the promoters/pre-issue shareholders holding more than 5 per cent of the
securities.

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 Rights Issues

• The main elements of the framework of rights issues are

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 Preferential Issues
• Preferential issue is an issue of specified securities by a listed issuer to any select
group/group of persons on a private placement basis.
• The main elements of such issues are:
 conditions,
 disclosures,
 allotments,
 tenure of convertible securities,
 pricing of shares payment of consideration,
 lock-in and
 transferability of lock-in securities/warrants.

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 Qualified Institutional Placement
• QIP is the allotment of shares/ CDIs/warrants and other con
to QIBs on private placement basis.
• The main elements of QIP are:
 conditions,
 placement document,
 pricing,
 allotment restrictions,
 minimum number of allottees,
 validity of the special resolution,
 tenure and
 transferability.

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