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Equity Capital Markets – Part 6: Types of Capital & Issue Process

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Equity Capital Markets – Part 2: Types of Capital & Issue Process

Introduction:

In this part of our Equity Capital series, we explore the types of capital, methods of issuing shares, IPO processes, and concepts crucial to understanding how equity is raised and allocated in financial markets.

1. Types of Share Capital

  • Authorised Capital: Maximum capital a company is legally allowed to raise as per its charter.
  • Issued Capital: Portion of authorised capital actually offered to investors.
  • Subscribed Capital: Capital actually subscribed by the investors out of issued capital.
  • Called-Up Capital: Portion of subscribed capital called for payment.
  • Paid-Up Capital: Amount actually paid by shareholders; can be equal to or less than called-up capital.

2. Methods of Share Issue

  • Public Issue: Shares are offered to the general public through an IPO or FPO.
  • Private Placement: Shares issued to a select group of investors. Types include:
    • Preferential Allotment
    • Qualified Institutional Placement (QIP)
    • Institutional Placement Program (IPP)
  • Rights Issue: Existing shareholders offered shares at a discount on a ratio basis.
  • Bonus Issue: Free shares given to existing shareholders based on holdings.
  • Sweat Equity: Shares offered to employees or directors for their contribution.

3. IPO (Initial Public Offering) Process

  • Red Herring Prospectus: Preliminary document outlining the company’s financials and IPO plan (without price).
  • Roadshows: Marketing campaigns and investor meetings to generate interest.
  • Green Shoe Option: Allows the company to issue additional shares if demand is high (up to 15%).
  • Allotment: Shares are allocated to investors based on category (retail, institutional, etc.).
  • Oversubscription: Happens when demand exceeds available shares, requiring pro-rata allotment.

4. Diluted vs Non-Diluted Shareholding

  • Diluted Shareholding: Assumes all options, convertibles, and warrants are converted to shares.
  • Non-Diluted Shareholding: Current outstanding shares only.

5. Pricing Approaches

  • Fixed Price Offer: The price is fixed in advance in the prospectus.
  • Book Building Offer: Price is discovered based on investor bids within a given price band.

6. Stock Exchange vs OTC

  • Stock Exchange: Regulated marketplace where securities are bought and sold (e.g., NSE, BSE).
  • OTC (Over-the-Counter): Decentralized market where securities trade directly between parties, usually unlisted.

Conclusion:

This part covered the foundation of how companies raise funds through equity, the capital structure, and share issuance methods. In Part 3, we will dive into valuation techniques used to analyze equity.

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