Introduction
Briefly introduce what “Issue of Shares” means in corporate finance. Mention how companies issue different types of shares to meet financial needs and reward stakeholders.
Read More: Understanding the Difference Between Equity and Preference Shares
1. Issue of Sweat Equity Shares
Definition: Explain what Sweat Equity Shares are, highlighting their use as a reward for employees and directors for their contribution to the company’s growth.
Key Features:
- Rewarding Intellectual Property or Know-How
- No Immediate Cash Flow to the Company
- Usually issued at a discount or for consideration other than cash.
Advantages
- Boosts Employee Morale
- Aligns Interests of Employees with the Company’s Goals
- No cash outflow for the company
Legal Framework
- Mention the regulations, if applicable, for issuing Sweat Equity Shares in your country (e.g., Companies Act).
Read More: Meaning, Definition, Types, and Key Characteristics of Shares
2. Issue of Bonus Shares
Definition: Describe Bonus Shares as free shares given to existing shareholders from the company’s accumulated profits.
Key Features
- Issued in proportion to existing holdings (e.g., 1:2, meaning 1 bonus share for every 2 shares).
- No additional cash inflow for the company.
Advantages
- Enhances shareholder loyalty
- Increases liquidity in the market
- Signals strong financial health of the company
Disadvantages
- Dilution of earnings per share
- No immediate benefit to the company
3. Issue of Right Shares
Definition: Explain Right Shares as shares offered to existing shareholders at a discounted price before they are offered to the public.
Key Features
- Shareholders have a “right” to buy shares before outsiders.
- Helps raise capital quickly.
- Often issued at a lower price than the market value.
Advantages
- Quick capital infusion
- Allows shareholders to retain their ownership proportion
- Usually cheaper than raising debt
Disadvantages
- Shareholders may not have enough funds to buy additional shares
- Dilution of share value if the rights issue is not fully subscribed
Read More: Define Global Depository Receipt (GDR): Features and Advantages
Conclusion
Summarize the importance of each type of share issue and how companies use them strategically for growth, employee retention, and capital raising. Highlight which type might suit different business scenarios.
FAQ’s
What are Sweat Equity Shares, and how are they beneficial?
Sweat Equity Shares are shares issued to employees or directors in exchange for their work, know-how, or intellectual property. They help align the interests of employees with the company’s goals and boost employee morale without immediate cash outflow.
What is the difference between Bonus Shares and Right Shares?
Bonus Shares are issued free of cost to existing shareholders from the company’s profits, while Right Shares are offered to existing shareholders at a discounted price to raise additional capital. Bonus Shares increase the shareholding without requiring payment, whereas Right Shares require shareholders to invest more.
Why do companies issue Right Shares?
Companies issue Right Shares to raise capital quickly while giving existing shareholders the first option to purchase new shares at a discount. This helps the company raise funds without diluting current ownership significantly.