1. What you will learn
By the end of this lesson you will be able to describe what actually happens when a company sells shares to the public, tell a fresh issue apart from an offer for sale and say who receives the money in each case, calculate the share count and the proportionate stake after an issue, and explain why the offer price of one company cannot be compared with the offer price of another. You will also know which institutions govern a public issue in India and where to read the current rules for yourself. This is education about mechanics. It is not advice about any issue or any company.
2. The idea explained
A company funds itself from outside in two broad ways. It can borrow, which creates a contractual duty to pay interest and repay principal whether trade is good or bad, or it can sell ownership, which creates no duty to repay but permanently divides future profits among more hands. Equity is the residual claim. Shareholders are paid after employees, suppliers, lenders and the tax authorities, and in exchange they keep whatever is left, however large or small that proves to be.
When a company approaches the public market for the first time it files an offer document describing the business, the risks, the promoters, the litigation, the related-party dealings and the intended use of the money. The offer is usually a mixture of two quite different things. A fresh issue creates shares that did not exist before, and the money paid for them goes into the company's own account to be spent on the stated purposes. An offer for sale is existing shareholders selling shares they already hold. Those shares already exist, and the money reaches the sellers, not the company. Confuse the two and you will badly misjudge how much capital the business actually received.
Dilution follows from the fresh issue alone. If a thousand shares existed and a hundred new ones are created, eleven hundred now exist, so a holder of a hundred old shares has gone from a tenth of the company to a little over nine per cent. Whether she is worse off depends on what the company does with the money. Dilution of percentage is arithmetic. Dilution of value is an economic question that arithmetic alone cannot settle.
3. The market, the regulator and the rulebook
India's securities market has a statutory regulator, the Securities and Exchange Board of India, created by an Act of Parliament, with power to make regulations, to register intermediaries such as merchant bankers, brokers and registrars, and to act against fraudulent and unfair practices. A public issue is made under the Board's regulations on the issue of capital and disclosure requirements. Rather than memorise a numbered provision, learn the shape of the requirement. A draft document is filed and placed in the public domain, observations are issued, a final document is filed with the Registrar of Companies, and the issue opens and closes within a defined window.
Around the regulator sit the operating institutions. The stock exchanges run the electronic platform on which the issue is bid for and on which the shares later trade. The clearing corporations step between buyer and seller once a trade is done and manage the resulting obligations. The depositories hold shares in dematerialised form, and a depository participant is the intermediary through which an investor opens and operates a demat account. A registrar to the issue processes applications and allotment.
Read the rules yourself. The Board publishes its regulations and circulars on its own website, and the exchanges publish issue calendars, subscription data and listing notices on theirs. When a rule matters to your answer, name the document you read and the date you read it, because procedures and thresholds are revised often.
Worked example
4. Worked example
Take a hypothetical company, Nirvaan Ceramics Limited. Every figure here is invented for teaching and describes no real company.
Before the issue Nirvaan has sixty lakh shares outstanding. It offers thirty lakh shares at one hundred rupees each: twenty lakh as a fresh issue and ten lakh as an offer for sale by a founder.
The public pays thirty lakh multiplied by one hundred, which is thirty crore rupees. Of that, the fresh issue raises twenty lakh multiplied by one hundred, which is twenty crore rupees, and that is the gross amount reaching the company before issue expenses. The remaining ten crore rupees goes to the selling founder.
Now the share count. Sixty lakh existing shares plus twenty lakh newly created shares is eighty lakh shares after the issue. The ten lakh shares the founder sold change hands but do not change that total.
Consider an existing investor holding six lakh shares who does not subscribe. Before the issue she held six lakh of sixty lakh, which is ten per cent. Afterwards she holds six lakh of eighty lakh, which is seven and a half per cent. Her proportionate stake has fallen by a quarter, purely because the denominator grew.
At one hundred rupees a share, eighty lakh shares imply a post-issue equity value of eighty crore rupees. Comparing that figure with the company's earnings and net assets is far more useful than comparing a hundred-rupee offer price with some other company's four-hundred-rupee offer price, because a price per share means nothing without the share count behind it.
5. Common mistakes and how to fix them
The first mistake is treating the whole issue size as money raised by the company. Read the split between fresh issue and offer for sale on the cover of the offer document, and use only the fresh issue when you ask what the business gained.
The second is comparing offer prices across companies. Convert price into total equity value, price multiplied by the post-issue share count, before any comparison.
The third is reading oversubscription as quality. Write down, before the figure is published, what you would conclude at two times and at forty times, and notice that you cannot justify either.
The fourth is believing that applying to public issues is a reliably profitable activity. It is not. Most active traders lose money, tip groups promising listing gains are a well-documented route to loss, and no investment is safe or guaranteed. Past performance does not indicate future results, and a SEBI-registered investment adviser is the person to consult about an individual's own money.
Key takeaways
6. Board summary
A fresh issue creates new shares and the money reaches the company; an offer for sale moves existing shares and the money reaches the seller. Post-issue share count equals the old count plus the fresh issue only. A holder who does not subscribe keeps the same shares but a smaller share of a larger denominator. Price per share means nothing for comparison until it is multiplied by the post-issue share count. Oversubscription measures applications, not value, and promises nothing about what follows.
Check your understanding
7. Practice and self-check
One. A company offers forty lakh shares, of which twenty-five lakh are fresh, at eighty rupees each. How much reaches the company before expenses? Twenty-five lakh multiplied by eighty, which is twenty crore rupees.
Two. In the same issue, how much reaches the selling shareholders? Fifteen lakh multiplied by eighty, which is twelve crore rupees.
Three. The company had one crore shares before that issue. What is the post-issue count? One crore plus twenty-five lakh, which is one crore twenty-five lakh.
Four. A holder of five lakh shares does not subscribe. What is her stake before and after? Five per cent before, and five lakh divided by one crore twenty-five lakh, which is four per cent, after.
Five. Which part of the issue caused that fall? The fresh issue alone; the offer for sale did not change the denominator.
Six. Company A offers at fifty rupees and Company B at five hundred. Which is cheaper? The question cannot be answered from price alone; you need the post-issue share count and the underlying earnings or assets.
Seven. An issue is subscribed thirty times. What does that establish about future profits? Nothing.
Eight. Where would you verify the current procedure for filing a draft offer document? On the Securities and Exchange Board of India's own website, recording the document and the date you read it.