Share issue: what is it and why issue shares?

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Share issue is essentially the process by which companies pass on new shares to shareholders, who may themselves be new or existing shareholders. Companies can issue shares to both individuals or corporate bodies. Alongside the issue of shares, you may see the term ‘share allotment’ used. While there can be subtle differences between  issuing shares and alotting them, for most companies and in most circumstances they amount to exactly the same process. So we’ll use both terms to mean the same thing here.

We must, however, distinguish between a share allotment and a share transfer. With a share allotment, the shares are created and issued by the company to the people who become the company’s shareholders. Shares will generally be issued by the company at the start of its life and some companies will issue more shares later on. A share transfer, in contrast, involves existing shares being passed from an existing shareholder to someone else. That will always take place after the company has been formed and, although the company may be involved, it is not creating or allotting those shares. We’ve looked at how to transfer shares elsewhere, so we’ll focus on the allotment of shares here.

The main reason a company will issue new shares is to raise money to finance the business. Some examples will help to show the different scenarios where an allotment of shares may be considered. Here’s our top 10:

  1. When the company is first incorporated, a number of shares will usually be issued. This share issue, along with any money that the company may borrow, enables the company to trade. The initial shareholders are often referred to as ‘subscribers’, because they are said to subscribe to the new company’s Memorandum of Association.
  2. Shares may be issued in order to repay some or all of the company’s borrowing.
  3. New funds may simply be required to grow the business organically.
  4. Issuing shares might also fund a particular new development or project, which will often require significant initial capital with the rewards (hopefully) seen in later years.
  5. A share issue could be used to fund the purchase of another company. This may mean raising cash from a share issue and using that cash to buy the other business. Alternatively, new shares could be issued to the current shareholders of the target company – they’d effectively be exchanging their shares in the company being purchased for shares in the company that is buying it.
  6. To repair a damaged balance sheet. Many companies, large and small, found themselves needing to allot shares to continue trading in the recent financial crisis.
  7. The company can make a bonus or capitalisation issue of shares to existing shareholders. Instead of the shareholders needing to pay for the shares themselves, in this type of share issue the company uses its own profits to fund the allotment instead. This usually has the effect of reducing the value of the shares in issue, which may in turn make them more marketable to investors.
  8. If shareholders prefer not to receive a cash dividend, the company may offer them a ‘scrip’ dividend instead – allotting shares of the same value as the cash dividend. This is often popular among companies because issuing shares as a dividend does not impact cashflow in the way a cash dividend does.
  9. If a director or employees exercises a share option that they’ve been granted by the company, they may acquire the shares via an allotment to them.
  10. As part of a new director or senior employee joining the business or an existing employee becoming a director, they may acquire shares in the company. Often used by professional companies, this can both demonstrate and cement the employee’s commitment to the business – they’ll have a clear and direct interest in the company’s success. The shares would either be passed to the employee by a new allotment of shares or via a transfer from existing shareholders.

The shares allotted will usually be in an existing share class, although sometimes there will be reasons to create a new share class. We’ll look at the main different types of share and the reasons why a company may wish to use them in another article. Having looked here at the reasons why a company may wish to make a share issue, in other articles we’ll go on to look at how to issue shares and the things a company needs to think about when doing so.


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Article Comments

  1. Tisha Samuwi says:

    very complete information

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