14.14         ndian    onom
     themselves) with a track record of at least five years other buyers in the secondary market. Also, in
     of consistent profitability are allowed to issue       India, a company receives no tax benefits for the
     shares at a premium.                                   dividends distributed. In other words, dividends
           When a company issues shares at a premium, it    are paid by the companies out of the earnings left
     is able to raise the required amount of capital from   after taxes and they get taxed once again at the
     the public by issuing a fewer number of shares.        hands of the investors.
     For example, while a new company promoted by
     first time entrepreneurs intending to raise say, Rs.      foreign financial inveStorS
     1 crore, has to offer 10 lakh ordinary shares at Rs.
                                                            Through the Portfolio Invesment Scheme (PIS),
     10 each (at par), an existing company may raise
                                                            the foreign financial investors (FIIs) were allowed
     the same amount by offering only 2 lakh shares
                                                            to invest in the Indian stock market—the FIIs
     at Rs. 50 each (close to the market value of its
                                                            having good track record register with SEBI as
     shares). The latter is said to have issued its share
                                                            brokers. FIIs make investments in markets on the
     at a ‘subscription price’ of Rs. 50 (Rs. 10 in the
                                                            basis of their perceptions of expected returns from
     case of the former company), at a premium of Rs.
                                                            such markets. Their perceptions among other
     40 (being the excess of subscription price over par
                                                            things are influenced by :
     value). In such a situation in India, the company’s
     books of accounts will show Rs. 10 towards share             (i) the         prevailing       macro-economic
     capital account and Rs. 40 towards share premium                  environment;
     account. It means that the higher the premium,             (ii) the growth potential of the economy; and
     the fewer will be the number of shares a company          (iii) the corporate performance in competing
     will have to service. For this very reason, following             countries.
     the policy of free pricing of issues in 1993, many          Increased FII inflows into the country during
     companies came out with issues at prices so high       the year 2012 helped the Indian markets become
     that in many cases they were higher than their         one of the best performing in the world in 2012,
     market prices, leading to under-subscription of        recovering sharply from their dismal performance
     such issues. The companies are, however, learning      in 2011. At the end of December 2012, 1,759
     fast about the pitfalls of high pricing of shares and  FIIs were registered with SEBI with their net
     it is only a matter of time before the issue prices    FII flows to India at US$ 31.01 billion.10 These
     become more realistic.                                 flows were largely driven by equity inflows (80
           In India, no company is allowed to issue shares  per cent of total flows) which remained buoyant,
     at a discount, i.e., at a price below par. Again, in   indicating FII confidence in the performance
     India, once a company has issued the shares, it        of the Indian economy in general and Indian
     cannot easily reduce its capital base, (i.e., buy back markets in particular. The economic and political
     or redeem) its own shares.                             developments in the Euro zone area and the United
           This means that ordinary share capital is a      States had their impact on markets around the
     more or less permanent source of capital, which        world including India. The resolution of the fiscal
     normally a company is never under an obligation
     to return to the investors, because a shareholder
     who wishes to disinvest (i.e., get back the invested
                                                              10.    As per the Ministry of Finance, Economic Survey
     capital) can always do so by selling the shares to              2012–13, p. 121.