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.