What is Capital Subscription?
Capital Subscription is known to be a very important step in the process of the formation of a company. This step is a must for any public company before it can commence its business operations. But what does actually ‘Capital Subscription’ mean? It means that once the public companies have undergone the incorporation process and hold a Certificate of Incorporation, it becomes eligible to get its capital subscribed from the general public. Since every company require finances to operate its business, so through Capital Subscription public companies are allowed to raise the required money through the public by issuing them different securities that are shares and debentures. But for private companies, this step is completely irrelevant as they are not allowed to undergo this step, that is, they can’t raise a single penny from the public itself. For any public company to issue shares or debentures, they first have to invite the public so that consequently they can buy the securities. It can be done with the help of issuing a full fledge prospectus, which acts as an invitation on the behalf of any public company. The public then can subscribe to the capital of that particular company. Also, this process involves many different protocols and documentation.
To raise funds from the public, public companies have to undergo a series of steps.
Steps required for raising Funds from Public
The various steps required for raising Funds from Public are as follows:
1. Approval from SEBI:
SEBI stands for Securities and Exchange Board of India. It is known to be the watchdog of the securities market because it is responsible for setting up the rules and regulations regarding what is required to disclose to the public. SEBI performs both regulatory and protective functions. A public company while inviting the general public to issue capital must disclose all the required information to its investors. All the material facts regarding the company should be well communicated and nothing should be hidden from potential customers. So, SEBI ensures that the interest of no stakeholder is compromised. So, once the public companies receive approval and validation from the board they can move on to the next step.
2. Filing the Prospectus:
A prospectus is nothing but a written document which contains each and every detail of the public company. A prospectus is ‘any document described or issued as a prospectus including any notice, circular, advertisement, or other document inviting funds or deposits from the public. A prospectus is like the face of any company that is when any potential investor does not know anything about the company to invest in, they always read the prospectus because it is like an information brochure for any company. It is an invitation to the public to apply for shares or debentures or to make deposits in the company. So, no misleading statements or errors can be expected while issuing a prospectus. Also, all the material facts are required to be communicated well. A copy of the prospectus or in lieu of the prospectus is required to be submitted to the Registrar of Companies.
3. Appointing Brokers, Bankers and Underwriters:
Capital Subscription is not as easy as it seems to be. To make this tedious task easy, a company requires a team of brokers, bankers and underwriters. The job of the broker is to advertise that this particular company is inviting public to raise funds. Brokers distribute the application forms to interested investors and motivate them to become part of the allotment. Simultaneously bankers are responsible to collect the money paid by the investors with their application form to purchase shares and debentures. But it is not always necessary that the public will always be interested to buy the securities. So, in such cases companies appoint underwriters. Underwriters are basically responsible to undertake the issue if the capital is not subscribed by the general public. For underwriting the issue, underwriters are rewarded with a certain amount of commission. The appointment of underwriters is dependent on the progress of the capital subscription of the company so, it is not always necessary to appoint the underwriters.
4. Minimum Subscription:
As per the Companies Act, companies must have a minimum subscription, that is, a certain amount of shares must be applied for allotment under the application forms of the public. It is the cause that companies who do not have sufficient finances to fund their business operations have to bear losses and also investors can lose their money, which is again against the interest of the investors. So, the process cannot move ahead or the public companies cannot commence their operations until and unless they don’t have the minimum subscription. According to Companies Act, companies should have a minimum subscription of at least get 90% of the size of the issue. Any per cent less than the issue size disqualifies the company to allot the securities. So, in such cases, the company is responsible to return the deposits already made by the applicants.
5. Application to Stock Exchange:
An application is made to at least one stock exchange for permission to deal in the company’s shares and debentures. This approval has to be made before the expiration of a minimum of 10 weeks from the date when the subscription list gets closed. Without this approval, public companies can’t issue or allot any security to the public. So, the allotment without permission is void and the public company is responsible to return all the application money within the time span of 8 days.
6. Allotment of Shares:
After completing the above-mentioned steps, a company can allot shares to the public. But until the shares are not being allotted to the public, the company is required to keep all the application money in a separate bank account. It is done to protect the money from being used by the companies for other purposes. When there is the case when the total number of applications for total shares is more than the shares available with the company to perform allotment, extra money needs to be returned or adjusted with any of the allotment money, which is already standing due from them. And the complete amount is returned to those who are being allotted zero shares. Also, for this ‘Return of allotment’ has to be submitted to the Registrar of Companies with the signature of a director or a secretary and that too in the time span of 30 days.
But a public company is not at all bound to call applications from the public for capital subscription. Rather finances can be raised from family, friends, neighbours, relatives or any private sources like private companies. In such cases, companies do not have to issue prospectus. For that case, a ‘Statement in Lieu of Prospectus’ is issued and submitted to the Registrar not less than 3 days before allotting the shares.