Issuing shares sounds straightforward: a company decides how many shares it wants to issue, an investor or employee subscribes, and the new shares are added to the cap table.
In practice, share issuance is a legal, financial and administrative process involving approvals, valuation, documentation, allotment, statutory filings and accurate ownership records.
For Indian companies, the process is primarily governed by the Companies Act, 2013, along with applicable rules and, where relevant, SEBI and FEMA regulations. The exact steps depend on why the company is issuing shares and who is receiving them.
This guide explains the share issuance process from start to finish, with practical examples for startups, investors and employee equity programmes.
The share issuance process generally involves determining the purpose and type of issue, checking the company's authorised share capital, obtaining the required approvals, determining the issue price, making the offer, receiving subscription money, allotting the shares, filing the required return of allotment, updating statutory registers and cap tables, and issuing or crediting the securities to the shareholders.
Share issuance is the process through which a company creates and allots new shares to investors, employees, founders or other eligible persons in exchange for consideration or, in certain cases, without fresh cash consideration.
The important distinction is that issuing new shares creates additional securities.
This is different from a share transfer, where an existing shareholder sells or transfers already-issued shares to another person. A transfer changes who owns the shares; an issuance increases the number of shares outstanding.
Suppose Startup A has:
The company raises ₹1 crore from an investor by issuing 20,000 new shares.
After the issuance:
The founders have not transferred any of their existing shares. The company has created and allotted new shares to the investor.
That distinction is fundamental to understanding dilution and cap table management.
Companies issue shares for several reasons. The most common include:
| 1 Raising capital A startup may issue shares to angel investors, venture capital funds or strategic investors as part of a funding round. |
| 2 Employee equity Companies may issue shares pursuant to an ESOP or other employee equity arrangement after the relevant options have been exercised and the applicable conditions are satisfied, under Section 62(1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. |
| 3 Rights issue A company can offer additional shares to existing equity shareholders in proportion to their existing holdings under Section 62, with a 15 to 30 day acceptance window subject to the applicable provisions. |
| 4 Preferential issue A company may issue shares to selected investors or other identified persons, subject to the applicable requirements around approvals, pricing and valuation. |
| 5 Bonus issue A company may issue bonus shares to existing shareholders by capitalising eligible reserves, rather than raising fresh cash from them. |
Although the exact procedure varies according to the type of issue, most share issuances can be understood through the following stages.
Let's break each one down.
Before preparing documents, the company needs to establish what kind of issuance it is undertaking, because the legal procedure can change depending on the transaction.
| Scenario | Typical route |
| Existing shareholders receive shares proportionately | Rights issue |
| Selected investor receives new shares | Preferential or private placement route, as applicable |
| Employees receive shares following an ESOP exercise | ESOP-related issuance |
| Shares issued from eligible reserves | Bonus issue |
| Public investors subscribe to securities | Public issue, subject to applicable SEBI regulations |
The first question should therefore not be “How do we issue the shares?” It should be “What is the legal and commercial nature of this issuance?” That determines the compliance pathway.
Before issuing additional shares, the company needs to check whether it has sufficient authorised share capital.
Think of authorised share capital as the maximum share capital that the company's constitutional documents permit it to issue.
For example:
A company has:
The company wants to issue another 30,000 shares.
It cannot simply issue all 30,000 shares if its existing authorised capital only permits 1,00,000 shares.
It may first need to increase its authorised share capital in accordance with the applicable provisions.
Section 61 of the Companies Act, 2013 provides a mechanism for a company with share capital to alter its authorised share capital, subject to the Act and its Articles.
This is one of the easiest issues to overlook during a fast-moving funding round.
A company can have:
and still have an administrative problem if its authorised capital is insufficient for the proposed issuance.
The company must determine how much the new shares will be issued for.
This normally involves two components:
Face value + securities premium = issue price
For example:
If the company issues 50,000 shares at ₹100 each, it receives:
50,000 × ₹100 = ₹50 lakh
The accounting and legal treatment of the securities premium must also be considered under the applicable provisions.
For certain forms of issuance, particularly preferential issues and transactions involving foreign investors, valuation requirements can become particularly important.
Suppose a startup agrees to raise ₹5 crore at a post-money valuation of ₹50 crore.
If the transaction results in the investor receiving 10% of the company after the issuance, the number of shares issued must be calculated consistently with the company's existing fully diluted or agreed capitalisation structure.
This is where valuation, share price and cap table modelling intersect.
A mistake at this stage can affect:
The company must obtain the appropriate approvals before proceeding with the issuance.
This commonly starts with a Board meeting, where directors consider matters such as:
Depending on the type of issuance, a shareholder resolution may also be required.
For example, private placement is governed by Section 42 of the Companies Act. The Act establishes requirements around private placement offers, including the use of a private placement offer letter and restrictions on the number of persons to whom the offer may be made.
Similarly, rights issues, ESOPs, preferential issues and bonus issues have different approval requirements.
Board approval does not necessarily mean the shares have already been issued.
Approval is one stage of the process.
The actual legal issuance generally occurs through allotment after the relevant conditions have been satisfied.
Once the necessary approvals are in place, the company proceeds with the relevant offer or subscription process.
For a private placement, for example, the offer is made to identified persons rather than to the public. The applicable rules also require specific documentation and records relating to the offer.
For a rights issue, existing shareholders receive an offer to subscribe to additional shares in proportion to their existing holdings, subject to the applicable rules.
For an employee equity programme, the employee may exercise vested options according to the terms of the ESOP scheme.
An employee has:
The employee exercises all 2,000 options.
The company receives:
2,000 × ₹50 = ₹1,00,000
Once the relevant conditions and approvals are satisfied, the company can proceed with allotment of the shares.
This is an important distinction in equity administration:
Granting an ESOP is not the same as issuing shares.
An option may exist on an employee's dashboard or equity register without the employee yet being a shareholder. The shares generally enter the employee's ownership when the options are exercised and the shares are allotted in accordance with the scheme and applicable law.
Allotment is the point at which the company formally allocates the newly issued securities to the subscribers.
The Board typically passes an allotment resolution specifying details such as:
The timing requirements depend on the route used.
For example, under Section 42's private placement framework, securities must generally be allotted within 60 days from receipt of application money. If the company cannot allot within that period, the Act provides for repayment within the prescribed timeframe and interest consequences for delay.
An investor transfers ₹2 crore as subscription money on 1 September.
If the transaction is a private placement governed by Section 42, the company needs to track the applicable 60-day allotment deadline carefully.
This is where an apparently simple funding transaction becomes an operational compliance exercise.
After shares have been allotted, the company must report the allotment to the Registrar of Companies through the prescribed filing.
For many issuances, this involves Form PAS-3 — Return of Allotment.
The MCA's PAS-3 instruction material specifies that a return of allotment under Section 42 is to be filed with the Registrar within 30 days of allotment, together with the prescribed information and supporting documentation.
The broader Companies Act also provides that whenever a company having share capital makes an allotment of securities, it must file a return of allotment with the Registrar in the prescribed manner.
This is one of the most important post-allotment compliance steps.
PAS-3 creates an official record of the allotment, including information relating to the allottees and securities issued.
For example, after a funding round, the company should be able to reconcile:
Investment agreement → Board resolution → subscription money → allotment → PAS-3 → statutory register → cap table
If these records do not agree, the company can face problems during:
The process does not end with the MCA filing.
The company should update its internal records to reflect the new ownership position.
This can include:
For a company managing equity manually, this is where errors often creep in.
The company issues 25,000 new shares to an investor.
|
BEFORE
|
AFTER
|
Notice what happened:
The founders did not lose shares.
Their percentage ownership decreased because the total number of shares increased.
That is dilution.
This distinction is frequently misunderstood.
|
Share issuance
The company creates and allots new shares. Example: the company has 1,00,000 shares and issues 20,000 new shares to an investor. Total shares become 1,20,000. |
Share transfer
An existing shareholder transfers existing shares to another person. Example: a founder transfers 20,000 of their existing shares to an investor. Total shares remain 1,00,000. |
| Question | Share issuance | Share transfer |
| New shares created? | Yes | No |
| Total shares increase? | Yes | No |
| Company receives subscription money? | Generally yes | Generally no |
| Existing shareholders can be diluted? | Yes | Not necessarily |
| Company is a party to creating new securities? | Yes | Transfer registration is involved |
Every new share issuance changes the company's capitalisation table.
Consider a startup with:
The post-transaction ownership needs to account for the agreed basis of the cap table — whether the calculation is based on issued and outstanding shares, a fully diluted basis, or another transaction-specific definition.
This is why cap table modelling should happen before the issuance, not after it.
A good process is:
Model → Approve → Issue → Allot → File → Reconcile
rather than:
Issue → discover dilution → fix spreadsheet
The exact documentation depends on the type of issuance, but a share issuance may involve:
For private placements, for example, the applicable framework includes prescribed offer documentation and records such as PAS-4 and PAS-5.
The biggest problems are often not caused by the transaction itself. They happen because the legal, financial and ownership records are not kept in sync.
The company should verify its authorised capital before proceeding.
A rights issue, private placement, preferential issue, ESOP-related issuance and bonus issue are not interchangeable.
For applicable transactions, the issue price and valuation need to satisfy the relevant legal and regulatory requirements.
An employee receiving an option does not necessarily mean that the employee is already a shareholder.
Post-allotment filings such as PAS-3 need to be tracked carefully.
A statutory filing alone does not make an internal cap table accurate.
If Finance says an investor owns 12%, the cap table says 11.8%, and the statutory records say something else, the problem usually becomes visible during due diligence.
Consider a startup preparing for a Series A round.
Before the round:
The company agrees to issue new shares to a Series A investor.
Before signing the transaction, the company should model:
After completion, the company should reconcile:
Transaction documents → payment → allotment → PAS-3 → statutory records → cap table → employee equity records
That reconciliation is what turns a completed transaction into a properly administered share issuance.
For companies issuing shares occasionally, spreadsheets and folders can appear sufficient.
The problem becomes more obvious as the company grows.
A company may simultaneously have:
At that point, equity data can become fragmented across spreadsheets, email threads, legal documents and finance systems.
An equity management platform can provide a centralised system for:
The objective is not simply to replace a spreadsheet.
It is to create one reliable source of truth for the company's equity.
Vestd India brings share and equity administration into a single platform, helping companies manage the information surrounding their equity programmes as they grow.
Instead of maintaining separate records for the cap table, employee equity, transactions and documentation, companies can use a unified system to manage their equity lifecycle.
This can help teams keep track of:
For founders, Finance and HR teams, the value is particularly clear when the company moves beyond a simple cap table and starts managing multiple shareholders, investors and employee equity events simultaneously.
Share issuance is not a single transaction. It is a chain of connected corporate, financial and ownership events.
The process can be summarised as:
Plan the issue → check capital → determine price → obtain approvals → make the offer → receive funds → allot shares → file returns → update statutory records → reconcile the cap table.
The most important principle is simple:
Every new share should be traceable from the original approval and subscription through to the final ownership record.
Vestd India helps you model, approve, allot and reconcile every new share issuance, so your cap table always matches your statutory records.
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