What is Fresh Issue of Shares

A fresh issue of shares means the issue of newly created shares by a company to elicit funds from the primary market. What is a fresh issue, why it occurs, its impact, real-life illustrations, procedures, advantages, disadvantages, and investor insights – all have been explained in this blog. Additionally, we will explore the concept of What is Fresh Issue of Shares.

What is a Fresh Issue of Shares?

A fresh issue of shares or a new issue refers to the issue of further shares by a firm in the primary market offering to generate fresh funds. Unlike an Initial Public Offering (IPO), wherein fresh issues of stock occur when it takes place for a firm’s initial stock, a fresh issue can happen at any point following public listing. Understanding What is Fresh Issue of Shares is crucial for investors.

The new issue increases the share capital of the company and dilutes existing shareholding but introduces fresh capital to fund growth, expansion, reduction of debts, or working capital requirements. The importance of What is Fresh Issue of Shares cannot be overstated.

Why Do Companies Issue Fresh Shares?

Companies incorporate a new issue of shares because of assorted strategic reasons, including a focus on What is Fresh Issue of Shares:

• To fund growth projects, acquisitions, or expansion opportunities.
• Becoming more financially stable and paying off debt.
• To support research and development or to produce new product lines.
• To generate funds to meet working capital or operating requirements.
• In search of strategic investors or institutional funding.

All these reasons reflect the company’s aim to strengthen its balance sheet via a fresh injection of funds.

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Impact of Fresh Issue on Shareholders

When there’s a fresh issue of shares:

• Dilution: Proportionate percentage of existing shareholders’.
• Share Price Effect: Price generally moves on dilution and future use of funds.
• Future Development: Through optimal utilisation of funds, future income and return to shareholders can be maximised.
• Voting Rights: Voting strength depends upon the issue of further shares.

So, although dilution is an issue, prudent use of funds can be a reward to long-term shareholders.

Fresh Issue vs Offer for Sale (OFS)

Knowing the difference:

• Fresh Issue of Shares:
  • New shares issued.
  • Raises fresh capital for the company.
  • Typically issued under primary market rules.
• Offer for Sale (OFS):
  • Existing shareholders sell their holdings.
  • No new capital enters the company.
  • Share ownership just changes hands.

In short, a fresh issue has a direct benefit to the firm, whereas an OFS is merely a transfer from holders.

How is a Fresh Issue Priced?

Methods of pricing a fresh issue of shares usually comprise:

• Book Building:
  • Price band presented.
  • Investors bid within the band.
  • Final price (cut-off) determined by demand.
• Fixed Price Issue:
  • Price declared upfront.
  • Simpler for retail investors.
• Preferential Allotment or Rights Issue:
  • Given to chosen investors or shareholders currently holding stock at a definite discount.

The pricing strategy adopted has an impact on how capital is mobilised and who engages in Initial Public Offering participation.

Who Benefits from a Fresh Issue of Shares?

Members who benefits include:

• The Company: Gains instant capital without borrowing.
• Long-Term Shareholders: They can benefit if capital is effectively used to grow or enhance profitability.
• New Investors: Obtain access to fresh issues of stock, at times discounted, through rights or preferential allotment.
• Strategic Investors: Gain access to the company to forge partnerships or long-term cooperation.

Used wisely, a fresh issue can foster growth and shareholder value.

Real-Life Examples of Fresh Issue of Shares

Example 1: Zomato IPO

Despite the existence of an IPO and a new issue in Zomato’s IPO, a significant portion of what was mobilised from the primary issue itself went into augmenting operations, technology, and new market expansion.

Example 2: Nykaa’s Public Issue

Nykaa’s initial funding included a fresh issue of shares where capital raised went to marketing, technology, and offline store expansion. The amount received was used by the company to finance growth plans.

Example 3: (Reliance Rights Issue)

Reliance Industries, by doing a huge rights issue, a kind of new issue, offered existing shareholders a fresh issue of securities at a discounted price, utilised to retire debts and future projects.

These examples illustrate how companies in India raise capital via fresh issues at different stages of their growth journey.

Process of Issuing Fresh Shares

This is the step-by-step process of a fresh issue of shares:

1. Board Approval: The board of the company authorises the proposal of a fresh issue.
2. Regulatory Filings: File necessary documents with SEBI and exchanges.
3. Pricing and Structure: Determine the pricing approach, book building, fixed price, rights or preferential.
4. Prospectus / DRHP: Draft and release a prospectus or Draft Red Herring Prospectus.
5. Subscription and Allotment: Applications by investors and allotments are made as per demand.
6. Listing: New shares are listed on the stock exchange, and trading begins.

This organised process facilitates transparency and compliance within a primary market offering or Initial Public Offering.

Advantages of Fresh Issue

The main advantages are:

• Fresh Capital: Raises funds without increasing debt.
• Growth Support: Funding expansion, new projects, or acquisitions.
• Improved Financial Profile: Fortifies balance sheet and lowers leverage.
• Valuation Visibility: A new issue or IPO can garner market focus and better valuation.
• Strategic Collaborations: Invite institutional or strategic investors.

In general, knowing what is a fresh issue and a successfully conducted fresh issue facilitates corporate strategy and value creation.

Disadvantages of Fresh Issue

Potential drawbacks to consider:

• Dilution: Current shareholders have a lesser percentage of ownership in the firm.
• Price Pressure: Increased supply can temporarily depress share price.
• Execution Risk: Misuse of funds or poor market response may harm returns.
• Regulatory Complexity: Comprises multiple approvals and disclosures.

Investors should weigh dilution and company credentials carefully before participating and should know exactly what is a fresh issue.

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Conclusion: Should You Invest via a Fresh Issue?

Since, you know now what is a fresh issue; A fresh issue of shares can be a good investment prospect when:

• The firm has no defined growth plan or payback policy to service its debts.
• The product is priced openly and fairly.
• You don’t mind short-term dilution and holding long-term.

To investors, going into a well-developed Initial Public Offering can be attractive, as long as it’s made through a rights issue or preferential allotment at attractive prices.

But if you have doubts regarding dilution or what would be done to the money by the firm, waiting or investing when it lists may be better, especially if you’re considering an investment banking course to understand such decisions better.

FAQs on What is Fresh Issue of Shares

Is a fresh issue of shares good or bad for investors?

A new issue can be good if funds from capital raised are utilised in growth or to pay off debts properly. However, shareholders who already have stock can have dilution of their holding; therefore, analysis of utilisation of funds by the company is essential.

Does fresh issue increase share price?

Not necessarily. While successful recovery of proceeds can build value in the long run, short-term effects can be subject to price pressure due to dilution. Post-issue pricing also relies to some degree on market sentiment.

Is fresh issue available to the public?

Yes, newly created issues are typically introduced in the primary market offering, accessible to retail as well as institutional investors depending upon the structure, like IPOs, rights issues, or preferential allotments.

How is fresh issue different from bonus shares?

A new problem consists of issuing new shares to raise capital, whereas bonus issues are free shares distributed to shareholders from existing reserves; no fresh capital goes to the firm.

Anant Bengani, brings expertise as a Chartered Accountant and a leading figure in finance and accounting education. He’s dedicated to empowering learners with the finest financial knowledge and skills.