Chapter 2 of 7
Why companies issue shares
Learn equity financing, dilution, fresh issues and offers for sale without assuming that every IPO funds business expansion.
In this chapter
A business needs capital #
Companies finance activity through combinations of retained earnings, borrowing and equity. Retained earnings come from past profits kept in the business. Debt creates contractual obligations. Equity exchanges a share of ownership for capital and usually does not have a fixed repayment date.
The best financing choice depends on cash generation, business risk and the terms available. Equity is not free money: existing owners share future economic benefits with additional holders. Debt is not automatically bad: its cost and repayment capacity matter.
Decision lab: Capital raised versus value created #
A fictional ₹10 crore equity issue finances a factory. The issue increases resources, but whether existing holders benefit depends on issue price, deployment and incremental economics. Cash raised is not itself earnings.
Build a pre/post share-count and cash bridge. Contrast an offer of existing shareholders’ shares with a new issuance; identify who receives cash in each. Explain what additional evidence is needed to evaluate deployment.
Hypothetical worked example
Ownership falls, but value is a separate question
A fictional business has 100 shares and earns ₹1,000. Earnings per share are ₹10. It issues 25 shares at ₹80 and receives ₹2,000 before expenses.
An owner of 10 shares falls from 10% to 8% ownership. If earnings initially stay ₹1,000, EPS becomes ₹8. If the additional capital later produces ₹500 extra earnings, EPS becomes ₹1,500 ÷ 125 = ₹12.
The illustration is arithmetic, not a forecast. It explains why share-count dilution and economic value creation are related but not identical. Expenses, the timing of new earnings and the risks of the expansion all matter.
Common mistakes
- Calling all secondary-market purchases funding for the company.
- Judging an offer from its issue price without considering the share count.
Which transaction normally sends new equity capital to the issuer?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
- SEBI investor education ↗
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- SEBI Investor: understanding bonds ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.