Additional share issue - what it is: its essence, stages and goals
Additional issue of shares is a strictly regulated procedure that is carried out after the initial placement of shares and most often serves to attract additional financing for the activities of the joint-stock company. In this case, we are talking about additional shares, the issue and placement of which takes place as a supplement to previously issued (issued) shares.
This method of attracting additional funds is relevant in certain cases, among which the main one is when the actual value of the share exceeds the balance value.
The objectives of the additional issue are necessarily strictly checked, the most common and justified is the replenishment of non-current assets of the issuing company, which is associated with the implementation of new, economically effective projects.
The additional issue should be carried out in accordance with the requirements of Article No. 19 of the Federal Law "On the Securities Market": all the main nuances are indicated and spelled out here.
Share issue: essence, stages, goals
The issue of shares is the main method of creating / replenishing the company's authorized capital, as well as the main source of financing. Shares are usually issued in the process of forming a joint stock company (at the first stage) and they become an important (often the only) way to form authorized capital. Then additional emissions can be carried out to increase capital and further finance the development of the company.
The issue of shares is the moment of their issue, but not of any production (one may not suggest the other). The production of shares is their physical production in the format of a materialized security, the very fact of printing on a special form with watermarks.
Additional issue of shares is the same process, but carried out repeatedly. As a rule, an issue occurs once when a certain number of shares is issued on prescribed conditions, and then the securities can be traded on stock exchanges, distributed differently between shareholders.
The main stages of the issue of shares:
- Decision-making on the issue at the shareholders meeting or by the board of directors (if this method is used, the consent of all board members is important).
- Approval - at a meeting of shareholders, with the creation of an issue prospectus. This stage is mandatory when: an open subscription is carried out (the shares will be freely sold to everyone), a closed subscription with more than 500 subscribers, if the issue amount exceeds 50 thousand minimum wages.
- State registration - prior to the issue of the shares themselves, the decision is registered, the prospectus in the Federal Securities Commission of Russia.
- Placement of shares - transfer of ownership to a circle of primary shareholders.
- Registration of emission results by the state - after this, it is possible to make changes to the company's charter, declare the emission closed and occurred. Only after that carry out balance sheet postings, final financial calculations, calculations of the charter of the joint-stock company, etc.
The main goal of the issue of shares is to form or increase the size of the authorized capital. Initially, shares are issued when the company is created, and additional issues can be aimed at obtaining additional financing for joint-stock companies for development with a lack of own funds and the inability to increase profits without additional infusions.The objectives of the additional issue of shares:
- The business is in dire need of money - when profits fall, debts increase and successful development of the company is impossible without additional financing. Unlike a loan, the funds received under such conditions do not require a return, do not imply interest payments for their use.
- Shareholders want to get rich - this happens when large shareholders hold their interests and want to receive even more dividends. But for this with an additional issue, you need to buy your shares back from small owners.
Issue: preferred shares, additional and other forms
Issues may differ by type of shares - securities may be ordinary, convertible, preferred, etc. All of them are issued only through emission, with their own terms and conditions.
So, the legislation of the Russian Federation provides for a restriction on the issue of preferred shares - their total total volume and nominal price cannot exceed 25% of the authorized capital (after it has increased due to the issue). If this threshold is exceeded, this is a serious violation and is usually punishable under criminal law.
Emission may be primary / additional. Primary - this is when the authorized capital is first formed and a certain number of shares is issued. Additional - carried out if necessary, to attract additional finance from external sources.
Most often, this tool is used by insurance companies, banks, and other financial organizations that work exclusively within the framework of the current legislation and feel the application of legislative norms to increase capital, even when there is no real economic need.
The law imposes many restrictions on the issue of shares, requires strict adherence to established norms and rules.
Investment risks, violation of shareholder rights, decrease in investment value
During the initial and additional issue of shares, not only the goals specified in the legislation may be pursued. Usually, all the manipulations, and especially those related to the additional issue, are connected with stock prices, so they should be considered more carefully.
What are the stock prices:
- Emission - the nominal value that is established when a share is placed on the market, it is through it that the first shareholder acquires a security. The amount is indicated on the shares and in the prospectus, is the initial value in the primary market. It is calculated taking into account the book value of the assets of the company (after all, a share is a share of assets).
- Market - the price at which shares are sold / bought in the secondary market. This value is not an exact constant; it changes constantly in accordance with a mass of factors; it is determined for all transactions following the sale at the initial issue.
The market value of a security is not equal to its profitability, but is part of the factors that determine it. The market price determines the price of the remaining shares that are already in the portfolio of shareholders (the value of the investment itself).
Each subsequent additional issue of shares can have a significant impact on the price of all securities of the issuer, lowering / increasing the value of investments.
Often, majority shareholders decide to increase their authorized capital or consolidate available funds, create the appearance of the need for additional issue, thereby reducing the share of existing holders of small blocks without voting rights, provoking their sale at low prices. In this regard, the legislation is constantly being improved, risks are eliminated, and the security of securities is improved.
Methods for calculating the return on investment
When a company decides to conduct an additional issue of shares or a buyback, two provisions change: the number of shares and the number of shareholders. That is, each shareholder will already own a smaller (larger) share of the authorized capital, and all decisions on the development of the company will be made by a larger (smaller) number of people.
So, if initially the company issued 100% of the shares in the amount of 1000 pieces, and then it issued another 1000 pieces, then at first the owner of 50 shares had 5%, and then 2.5%. The issuer's profit and property are proportionally reduced. When it comes to large shares (25% and 50%, for example), then there is already a difference in terms of decision-making regarding the work of the company.
All current holders of shares have the right to preemptive purchase of additionally issued shares in order to leave the share in the percentage display unchanged. If the shareholder ignores the offer or rejects it, the issuer sells the shares to all investors in the free market.
The most important factor in conducting an additional issue is the placement price. According to Art. 77 of the Law of the Russian Federation "On Joint-Stock Companies" in a situation where the price of placement of securities is determined by the board of directors, it should be considered at market value. An independent appraiser can be involved to determine it. For regularly published prices in print, they must be taken into account.
That is, in the process of an additional issue, the issuer's board of directors receives a carte blanche regarding the price of shares. But the determined market value cannot be lower than the aggregate: the par value of the shares, the book value of the security and its price in the secondary market.
To assess the impact of additional emissions on income, you need to calculate the following indicators: payback period P / E and EPS earnings per share. To find P / E, you need to divide capitalization by profit (so you can find out how long the stock will pay off). EPS - all company profits should be divided by the number of all shares and find out how much is due to the holder. The remaining indicators are considered for additional conditions on securities.