Primary Issue or Secondary Sale: Who Receives The Money

A primary issue creates new shares and the money reaches the company. A secondary sale moves shares that already exist and the money reaches the shareholder who sold them. A buyer paying Rs 1,140 crore for 4.00 crore shares of Harivansh Packaging Limited cannot tell which one happened from their own side of the trade. Every difference sits on the other side.

Every other difference between the two routes follows from that one fact. Each route is built separately elsewhere. Setting the two in two columns at an identical price and an identical parcel of shares leaves the destination of the money as the only thing free to vary.

What is the single difference, and why is there only one?

Picture a sweet shop run by two people on a busy street corner. There are two entirely ordinary ways money can arrive in connection with that shop. A third person can pay Rs 5,00,000/- into the shop's account to become a partner. The next morning the shop has Rs 5,00,000/- it did not have, and that money can buy a second oven. Or one of the existing two partners can sell half of what he holds to a neighbour for Rs 5,00,000/-. The next morning the shop's till is exactly where it was and the partner is Rs 5,00,000/- richer. Both were called putting money into the shop by somebody in the street. Only one of them was.

The single difference between a primary issue and a secondary sale is whether the shares handed over are newly created or already existed, and that one fact settles who receives the money. New shares have no previous holder, so the money paid for them has nowhere to go except the company issuing them. Existing shares have a previous holder, and that holder is the party being paid. There is no third possibility, and there is no case where a company can receive money for shares it did not create.

Everything else in this guide is downstream of that. The share count, the cash line, net worth, earnings per share, book value per shareWhat one share stands behind in the accounts, found by spreading net worth across the count. That is a different question from what a buyer would pay for the share. and the proportion held by the promoter and promoter group all behave differently under the two routes, and every one of those behaviours traces back to the same root. A reader who memorises six differences will get one of them backwards under pressure. A reader who holds the single difference can rebuild the other five on a napkin.

Why can the buyer not tell which one happened?

Now stand on the buying side of the trade. The buyer transfers money. Shares arrive. The contract noteThe statement a buyer receives once a trade settles, listing what was bought, in what quantity, at what price and on what date. records the quantity, the price and the date. The buyer now holds a claim on the profits and the assets of Harivansh Packaging Limited in proportion to what is held. Every one of those sentences is true whether the shares were minted last week or have been in somebody's account for eleven years.

Nothing on the buyer's side of the trade carries any trace of the route. The distinction has to be read off the paperwork of the offer rather than felt from the transaction, and that is precisely why it gets missed. A difference that announces itself is a difference people notice. The route does not announce itself anywhere the buyer can see, so it survives into models, into notes and into conversations, and the first place it surfaces is a number that will not reconcile six months later.

There is a second reason the buyer is unbothered. Price is set by the worth of the claim to whoever is prepared to pay for it. A buyer is not paying for the history of the certificate; the buyer is paying for a slice of Rs 225 crore of profit after tax and whatever comes after it. So the same Rs 285/- can sit on both columns of the comparison without any strain at all, and holding it constant is what lets the comparison actually isolate the one thing that moved.

What happens to the share count under each?

Start with the row that generates the most other rows. Harivansh Packaging Limited has 18.00 crore shares before either route runs. Under a primary issue of 4.00 crore shares, 4.00 crore shares that did not exist come into existence at allotmentThe formal act of assigning newly created shares to the people who applied for them. It is the moment those shares begin to exist and start counting. and the count becomes 22.00 crore. Under a secondary sale of 4.00 crore shares, nothing is created and nothing is cancelled, and the count is 18.00 crore the following morning exactly as it was the previous evening.

Every per-share figure below comes out of this row alone, so a reader who gets the share count right cannot get earnings per share or book value per share wrong. The dependence of every per-share figure on one row is a useful thing to know about one's own reasoning. When two sets of per-share figures disagree, the disagreement is almost never in the profit and almost always in the denominator, and the denominator is settled by asking one question: were shares created, or did shares move?

The shareholder registerThe record a company keeps of who holds its shares and in what quantity, brought up to date as trades settle. tells the same story from a different angle. Under a sale, the register keeps the same total and changes names against it. Under an issue, the register gains lines and the total at the bottom is larger. Both are ordinary events and both are visible in the company's filings, but only one of them changes what the bottom of that register adds up to.

What happens to cash and net worth under each?

Harivansh Packaging Limited carries Rs 140 crore of cash and Rs 1,650 crore of net worth. Under a primary issue, the Rs 1,140 crore paid by the buyers arrives inside the company, so if the money is simply held rather than spent, cash goes to Rs 1,280 crore and net worth goes to Rs 2,790 crore. Money coming in against newly created shares is not a liability and not revenue. Capital lands on both sides of the balance sheet at once, so both rise by the full amount raised.

Under a secondary sale, cash is Rs 140 crore afterwards and net worth is Rs 1,650 crore afterwards. Not approximately, not nearly: identically. Harivansh Packaging is not a party to the transaction at all. Two other people agreed a price, money moved between their accounts, and the company found out in the same way everybody else did.

The balance sheet is the one place where the difference between the two routes is unmistakably visible, and the trade itself is the one place where it is completely invisible. The check therefore belongs in the accounts rather than in the announcement. The cash row is also where the effect on borrowing appears. Net debtWhat a business would still owe if every rupee of its cash went to lenders tomorrow. Borrowings first, then the cash pile taken off. at Harivansh Packaging stands at Rs 600 crore. Borrowings of Rs 740 crore less the Rs 140 crore cash pile leave exactly that, and measured against earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 477 crore the Rs 600 crore is a leverage ratioNet debt weighed against a single year of operating earnings. It answers roughly how many such years the borrowings stand for. of 1.26 times. Put Rs 1,140 crore of fresh money in and cash of Rs 1,280 crore exceeds borrowings of Rs 740 crore, leaving Rs 540 crore of net cash. Run the sale instead. Nothing in the ratio moved, and it stands at 1.26 times afterwards.

Why can only one of the two routes move earnings per share?

Earnings per share is Rs 225 crore of profit after tax divided by the number of shares. Before either route, that division gives Rs 12.50/-. Now watch which part of the fraction each route is able to touch.

A primary issue leaves the numerator alone. Money arriving as capital is not earnings, and the business has not yet had time to do anything with it. Profit after tax on the day of allotment is therefore the same Rs 225 crore it was the day before. The denominator, though, goes from 18.00 crore to 22.00 crore. So Rs 225 crore spread across 22.00 crore shares lands on Rs 10.23/-, and each share now stands behind a smaller slice of the same profit.

A secondary sale touches neither part. Profit after tax is Rs 225 crore and the count is 18.00 crore, so earnings per share is Rs 12.50/- afterwards. The figure is not a coincidence and not an approximation. Only one of the two routes is capable of diluting anything at all, and it is the route that brought the company money. The asymmetry between the two routes is worth carrying away.

Say the second half of that out loud. The claim is genuinely awkward. The route that helps the company is the route that costs the existing holders something per share. The route that costs the existing holders nothing per share is the route that leaves the company exactly where it was. There is no version of this where a company gets money for nothing, and a reader who is uncomfortable with that trade is having the correct reaction to it.

Does that fall in earnings per share stay where it lands?

Not necessarily, and it is worth being precise about what the Rs 10.23/- figure assumes. Profit after tax was pinned at Rs 225 crore right across the fresh issue column for one reason only: on the day the money arrives it has not been anywhere yet. The Rs 1,140 crore is sitting in an account. Money that has not bought a machine, retired a loan or funded a single extra cycle of trading cannot possibly have produced a rupee of additional profit.

Rs 10.23/- is therefore a reading taken at one moment rather than a property of the transaction. The figure a year later turns entirely on what the Rs 1,140 crore is put to work on. Grow the profit enough and a holder ends up ahead of where they started; grow it by less, or not at all, and the fall simply stays.

The condition is easy to state without building anything. The count went up by 4.00 crore on a base of 18.00 crore, a rise of 22.22 per cent, so the profit has to travel the same distance before the two cancel. Rs 225 crore rising by 22.22 per cent reaches Rs 275 crore, and Rs 275 crore spread across 22.00 crore shares gives back exactly Rs 12.50/-. Anything short of Rs 275 crore leaves the holder worse off per share than before the raise, and anything past it leaves them better off.

A fall in earnings per share on the day of a raise is an arithmetic certainty, a fall a year later is a business outcome, and treating the first as evidence for the second is one of the more expensive confusions in this whole subject. Note also that Rs 275 crore is the break-even for this raise at this size on this base, and not a rule about raises. Change the parcel, the price or the opening count and the figure changes with them. Where the cost of the money gets weighed against what it earns is covered separately.

Which route costs the promoter more ground?

Most people get this one backwards, and the reason they get it backwards is instructive.

Of the 18.00 crore shares of Harivansh Packaging Limited, 10.44 crore sit against the name of the promoter and promoter group. That holding is the 58.0 per cent everybody quotes. The remainder, 7.56 crore shares or 42.0 per cent, is the free floatShares sitting outside the promoter holding, in the hands of anyone at all. It is the slice of a company that ordinarily trades..

Under a primary issue of 4.00 crore new shares, the promoter and promoter group still hold 10.44 crore shares. Nobody took anything from them. The count, however, is now 22.00 crore, so 10.44 crore of 22.00 crore is 47.45 per cent, with the free float at 52.55 per cent. The promoter and promoter group have lost 10.55 points of proportion without selling a single share. Losing ground without selling is what makes a fresh issue feel unfair to a holder who did nothing.

Under a secondary sale of 4.00 crore shares by that same holder, the count stays at 18.00 crore and their holding falls to 6.44 crore shares. The 6.44 crore is 35.78 per cent against a free float of 64.22 per cent, a fall of 22.22 points. The route that gives the company nothing at all does considerably more to the register than the route that raises Rs 1,140 crore, and the reason is arithmetic rather than intent. A sale moves the numerator down while leaving the denominator alone; an issue leaves the numerator alone and moves the denominator up. Two moving parts pulling the same way will always beat one, and here the sale costs more than double the ground the issue does.

There is a quiet symmetry underneath the two columns that is worth pausing on. Holders outside the promoter and promoter group start with 7.56 crore shares. After a fresh issue that becomes 11.56 crore of 22.00 crore. After a sale it becomes 11.56 crore of 18.00 crore. Outside holders end up with 4.00 crore shares however those shares got there, so the number of shares in outside hands is 11.56 crore in both cases and under the mixed offer as well. Only the denominator differs. The whole comparison lives in the share count.

The mixed offer, where most real offers actually sit

Everything so far has been run on two pure cases, and pure cases are a teaching device. A reader will actually meet an offer containing both at once, and a mixed offer is not an edge case or a complication: it is the ordinary shape of a raise.

Take the same Rs 1,140 crore at the same Rs 285/- a share, and split the 4.00 crore shares down the middle. 2.00 crore of them are newly created and 2.00 crore of them are existing shares being sold by the promoter and promoter group. The buyers pay Rs 1,140 crore in total and do not sort their money into two piles; the sorting happens on the other side.

The 2.00 crore newly created shares at Rs 285/- come to Rs 570 crore, and that Rs 570 crore reaches Harivansh Packaging Limited. Rs 570 crore reaches the selling shareholder for the same reason in reverse. The headline offer size is the sum of two figures that do entirely different things, and adding them together is the one operation that destroys the information a reader came for.

Now run every row of the comparison on the mixed case. Running the rows again is where a reader finds out whether they actually hold the mechanism or merely recognise it. The count goes to 20.00 crore, being 18.00 crore plus the 2.00 crore that were created. Earnings per share divides that same Rs 225 crore by 20.00 crore shares and settles on exactly Rs 11.25/-. Net worth is Rs 1,650 crore plus the Rs 570 crore that came in, or Rs 2,220 crore. Book value per share spreads Rs 2,220 crore across 20.00 crore shares and comes to exactly Rs 111.00/-. Cash goes from Rs 140 crore to Rs 710 crore. The promoter and promoter group sold 2.00 crore out of their 10.44 crore, leaving 8.44 crore of 20.00 crore, or 42.20 per cent. Outside hands carry the other 11.56 crore, or 57.80 per cent.

There is a check worth running on any of these columns before leaning on it. The promoter shares and the outside shares have to add back to the count, and the two proportions have to add back to 100. In the middle column that is 8.44 crore plus 11.56 crore making 20.00 crore, and 42.20 per cent plus 57.80 per cent making 100. If either sum misses, the split was applied to the wrong side of the register.

Read the bottom row of that table from left to right and it moves in the direction almost nobody predicts. The more of the offer that is newly created, the better the promoter and promoter group come out of it. Creating shares dilutes them a little; selling shares costs them a lot. The instinct that issuing shares is the harmful route comes from thinking about the count and forgetting the holding, and this table is the correction.

Which line in an announcement gives what the company received?

A fresh issue and a sale are two different events, so every offer of any size is described somewhere in a document that separates the two portions. The line that matters is the one carrying the fresh issue amount. The fresh issue amount, and no other figure in the document, is money the company received.

The offer size is a summary line and the fresh issue amount is a fact, and a reader who takes the summary in place of the fact has swapped a number that means something for a number that means two things at once. The price per share does not rescue the reader either. A price multiplied by the wrong count gives a wrong answer with no outward sign of being wrong. Nor does the total considerationThe money one side of a transaction hands the other for what it receives. By itself it says nothing about where that money then sits.. The total consideration is the same summary line wearing a different name.

The discipline is small and it is worth making mechanical. Before any raise figure goes into anything, the fresh issue line is found and that figure written down, and only then is the headline looked at to see how much of it is being thrown away. Done in that order it takes about four seconds and removes an entire class of error permanently.

Who reads this row, and what do they do with it?

A lender testing a covenant reads it first. A covenant written on net debt or on leverage responds only to money that reached the company, so a lender looking at a Rs 1,140 crore offer wants the fresh portion before anything else. If the whole of it was existing shares changing hands, the borrower's position under that covenant is exactly where it was on the day before the offer, however loudly the offer was announced.

An analyst maintaining a model does the same thing for a different reason. The fresh figure is the only one that has a home in the model: it goes to cash, and from cash it works through net debt, through the leverage ratio and through the finance cost line. The sold portion has no home in the model at all, and trying to give it one is exactly how the error in the block above happens.

An existing holder reads the row for the answer to a different question. The question is what proportion they finish with. A fresh issue reduces their proportion and leaves their share count alone; a sale by somebody else leaves both alone and simply moves shares between other people. Every professional reading of this comparison reduces to the same first question: how much of the headline was newly created. Everything each of them cares about hangs off that one answer.

And a household reading a newspaper story about a company raising money deserves the same clarity. When the story says a company raised Rs 1,140 crore, the useful follow-up is whether the company now has Rs 1,140 crore it did not have, or whether somebody who held shares in it does. The two answers are two different items of news wearing the same headline, and only one of them says anything about what the business can now do.

Why is this the most load-bearing row in the whole subject of raising money?

Because almost everything downstream is built on it. A use of proceeds statement is a statement about proceeds, and proceeds means the fresh portion; if that figure is wrong, every line of the intended spending is wrong by the same proportion. A net debt calculation is borrowings less cash, and cash only moved for the fresh portion. A funding figure quoted in any later comparison inherits the same defect. A dilution calculation needs the count, and the count only moved for the fresh portion.

The row is dangerous rather than merely important because it is a single binary fact hidden inside a number that looks complete. Reality eventually disagrees with a wrong assumption about growth, so the assumption announces itself. A wrong assumption about which side of the trade received the money never disagrees with anything. The money did go somewhere, and every other figure in the model behaves consistently around the mistake.

One sentence carries the rest: the money follows the newly created shares and nothing else, so the fresh issue figure is the proceeds and the offer size is a headline. The sentence rebuilds every row of the comparison, resolves every mixed offer, and is short enough to survive being remembered under pressure. Surviving under pressure is the only test that matters for something needed at speed.

Harivansh Packaging Limited, Devyani Kulkarni and Ashwin Rege are invented.
Educational material. Not advice on any investment, tax, budget or market position.