Audit of Share Capital of a New Company (or) Fresh Issue of Shares

Audit of Share Capital of a New Company (or) Fresh Issue of Shares

The first function of the Company after incorporation was to raise funds. The funds can be raised either by issue of securities or by loan or borrowings. Section 23 of Companies Act, 2013 makes a distinction between public and private company as far as raising funds is concerned.

Section 23 of Companies act, 2013 provides that:

Public company my raise a fund or issue securities, by:

1.  Issue of prospectus to public either by Initial Public Offering (IPO) or Follow on Public Offer (FPO), or

2.  Private placement, or

3.  Right issue

4.  Bonus issue.

Private companies may raise fund or issue securities, by:

1.  Right issue

2.  Bonus issue

3.        Private placement.

Meaning of Fresh Issue of Shares

Fresh issue of shares refers to the shares issued through Initial Public Offering (IPO).

It means when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for first time to public. Unlisted company is one whose security is not listed on any of the recognized stock exchange.

The underwriter serves as the intermediary between the company seeking to issue shares in an initial public offering (IPO) and investors. The underwriter helps the company to prepare for the IPO, considering issues such as the amount of money sought to be raised, the type of securities to be issued, and the agreement between the underwriter and the company. Syndicate Underwriting is one in which, two or more agencies or underwriters jointly underwrite an issue of securities. Such an arrangement is entered into when the total issue is beyond the resources of one underwriter or when he does not want to block up large amount of funds in one issue. Sub-Underwriting is one in which an underwriter gets a part of the issue further underwritten by another agency. This is done to diffuse the risk involved in underwriting. The name of every under-writer is mentioned in the prospectus along with the amount of securities underwritten by him. Firm Underwriting is one in which the underwriters apply for a block of securities. Under it, the underwriters agree to take up and pay for this block of securities as ordinary subscribers in addition to their commitment as underwriters.

This Initial Public Offering can be made through the fixed price method, book-building method or a combination of both. Under fixed price method, the investors know the price at which the securities are offered and allotted in advance. Book Building is a process used by companies to raise raising capital through Public Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and demand discovery.

Private Placement is issuing share capital to a select group of people, including or not the existing shareholders, like friends, family members, Angel investors, Venture Capitalists etc.

Rights issue is the pro- rata issuance of equity to existing equity shareholders in the company. This results in the advantages such as control in the hands of existing shareholders, prevention of dilution of control and less costly.

Auditors Duties

The issue of share capital should be audited by the auditor. He should study the conditions relating to the issue of share capital in the Memorandum, Articles of Association, as well as Prospectus and see that these have been duly complied with. A company cannot issue share capital exceeding the amount prescribed in its memorandum though, if its Articles permit, it may increase its authorized capital by altering its Memorandum in a general meeting. Every issue of capital should be properly authorized.