Issuing of shares

Is it true that:

1. There are two types of Public companies; The first type of public companies are those which are listed on stock exchange and they can issue their shares to the general public to raise money; The second type of public companies are those which cannot issue their shares to the general public because they are not registered on stock exchange?

No, that is not true. A public company, even though it may not be listed on a stock exchange, can invite the public to subscribe for or purchase that company’s shares. The difference between the two types of public company is that the first type is listed on a stock exchange and … the second one isn’t. There are stock exchange rules that must be complied with in order to retain the stock exchange listing so that is a difference between the two types – but that only arises as a result of the essential difference – listed? Or not listed?

2. Public companies (those listed on stock exchange) are allowed by law to issue their shares for whatever price they want to general public but that price should not be lower than their nominal value. For eg a company set $1 nominal price of their shares then they should issue their shares in the market at more than $1 such as $2?

That is almost correct. Not quite correct here ‘then they should issue their shares in the market at more than $1 such as $2?’. The directors could issue the shares at an amount that is the same as the nominal value. It is not necessary to issue at a price HIGHER than the nominal value

Secondly, the ‘strike price’ (the price that the company is asking for a share) potentially is not payable all in one payment. The issue price may be received by the company in multiple stages. When British Telecom was privatised, the issue price was struck at £1.30 payable as to 50 pence on application, 40 pence one year later and the final 40 pence a further year after that.

Now then! Here’s something to think about. On the issue of a share, the amount received shall be not less than 25% of the nominal value + the whole of any premium. In BT’s case, that would be 25% of £1 (25p) + the premium (a further 30p). A total of 55 pence

So why was it OK to receive only 50 pence on application? There’s a puzzle for you! If you want the answer, you’ll need to post again 🙂

3. Private companies simply cannot issue their shares to the general public because they re allowed by law; However, they can issue their shares to private individuals without any involvement of stock exchange?

Correct

4. Rights shares issue is when we issue shares to our existing shareholders to raise further money from them to expand the business (such as buying non-current assets etc); The reason to issue rights shares are simply to raise more money?

Correct

5. The reason companies issue bonus shares is to reduce the market price of its shares and that is the only objective that can be done by bonus shares issue?

Not necessarily the only reason. It could be that the directors feel that the Statement of Financial Position is too ‘bitty’ and needs to be tidied up. Where a company has ‘non-distributable reserves’ and wishes to reduce the balance(s) on the non-distributable reserve account(s), the directors could ‘capitalise’ those non-distributable reserves by way of financing a bonus issue.

The double entry would be, for example:

Dr Share Premium Account (or Capital Redemption Reserve Account)
Cr Share Capital Account

6. Companies have a right to choose whatever share price they want for their shares to be issued in the stock market but they first have to decide the nominal price for their value which has to be lower than the market price of their shares. For eg a company wants to issue their shares at $10 but they put the nominal price to $1?

You appear unsure as to the mechanics that are involved here! The nominal value of a company’s shares is determined as a pre-incorporation exercise – ie before the company legally exists. Technically, the nominal value is selected by ‘the Promoter’ of the company and is a decision made in advance of submitting the required forms to the Registrar of Companies in order to effect the formal creation of this new ‘person’ ie, the company.

You have also made a technical error in ‘have to decide the nominal price for their value which has to be lower than the market price of their shares’. Directors may issue shares (whether through a stock exchange or not) so long as the issue price is NOT LOWER than the nominal value. Thus, a £1 share may be issued for £1 (or any amount above that)

The emphasis is not that the nominal value should be lower than the issue price. The emphasis is that the issue price shall not be lower than the nominal value. It’s a small difference but where a share is issued at its nominal value, then your statement that ‘…which has to be lower than the market price of their shares’. is not true

All OK now?

1 Correct

2 Correct

3 Correct … and you should have stopped here!

4 Nope 🙁 The market price is, as you have stated in point 3, the price on the market at which a buyer is prepared to buy and a seller is prepared to sell. In fact, two prices are quoted. The higher price is what a buyer will have to pay. The lower price is the amount that a seller would expect to receive. The difference, historically known as ‘the jobber’s turn, represents the amount that a middle-person will make as a payment for acting as … the middle-person.

Now this next bit is really important! After the event of a company issuing shares to its successful applicants who have offered to buy those available shares at the strike price, THE COMPANY HAS NO FURTHER DIRECT INVOLVEMENT IN THOSE SHARES OR THE MARKET PRICE. Market forces and gamblers’ instincts may move the share price in the market but the company is not directly involved.

Share premium is the difference between the strike price of a share on its issue compared with its nominal value. This has nothing at all do with the market price of a share. As for the second part of this question of yours, a really smarty pants person would tell you that if the issue price is lower than the nominal value, that would not be known as a share discount. It would be known as ‘illegal’ and the directors involved are potentially facing jail time – if there’s room in the prison after Donald Trump becomes a resident together with the associated Secret Service personnel that will have to go to prison with him (fingers crossed)

Your question actually asks ‘if the market price is lower than the nominal value then the difference is called share discount?’ If the market price falls below the nominal value, this is NOT known as a share discount. This is more commonly known as ‘yet another of Mike’s disastrous investments’. The company has NO DIRECT INVOLVEMENT in the market price of a share so any nomenclature that you wish to ascribe to the difference between market price and nominal value is entirely your own private preference. The company is no longer interested in whatever title you wish to give this difference.

OK?