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How to Issue Shares

Aug 17, 2007
The Companies Act and its own constitution bind a company when it comes to matters related to managing its affairs. A company's board of directors possesses the power of issuing shares. However, these powers are restricted to the proviso of the Companies Act and the company's constitution. The board normally determines the amount of money the company requires to be raised through the issue of shares. The time and the person to whom the shares are to be issued are other related factors.

It is pertinent to know that your company is registered under the Companies Act before you issue shares. Thereafter, your company issues the number of shares mentioned in the registration application to the persons, who have been specified in the registration application. To acquire those shares, the shareholders pay money to the company at the rate per share agreed upon.

Notifying the Registrar of Companies
It is mandatory, as per law, to notify the Registrar of Companies of the act of issuing shares to the shareholders. The law requires a company to notify the concerned office, in the prescribed form, within ten working days of the issue of shares. The failure to comply with this legal requirement can attract penalty for each director of the erring company. The law is very firm on this.

Obtaining Shareholders' Approval
Another important point that may crop up on issuing shares is the presence of certain restrictive clauses in the company's constitution. The company could find itself in a bind on account of the restrictive clauses that prevent it from issuing shares. In that case, the board of directors can approach the shareholders and seek their approval to make the necessary amendments so that shares can be issued. A 75% shareholder majority is required to pass a special resolution to this effect.

Pre-emptive Rights of Current Shareholders
Current shareholders of a company have pre-emptive rights. These rights give them priority over non-existing shareholders of exercising the option of purchasing newly issued shares. The shares can only be offered to non-existing shareholders when the current shareholders turn down the purchase offer. There might be instances where shares are offered to non-existing shareholders on favorable terms. In such cases, the shares must first be offered to the existing shareholders on those favorable terms, though they had earlier declined the original offer.

Payment for Shares
The law does not require the existing shareholders to pay anything in return for the new shares, if the constitution of the company is silent on the matter. However the shareholders will have to pay if the constitution says so. The payment of consideration (value of shares) can be in the shape of cash, future services, promissory notes, or other means as defined in the constitution. The board of directors determines the consideration before the shares are offered.

Additional Help
The software available in the market provides the necessary documents related to the issue of shares and other related activities. This software is reasonably priced and provides all required information and help required.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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