Private Placement: Raising Money From Chosen Investors

A private placement is a fresh issue of shares or debentures to a small set of chosen investors rather than to the public. The money reaches Harivansh Packaging Limited itself, so it is a primary issue. The issue price fixes how many new shares exist, and every existing holder's proportion falls whether or not they were invited.

Start with the thing a share actually is. A share is not a fixed quantity of value. A share is a proportion instead, a stated fraction of everything a company is and everything it earns. So the moment a company creates shares that did not exist before, every fraction already outstanding gets smaller, by arithmetic alone, without anybody selling anything and without any announcement being made to the people it happens to.

Think of a joint household running a shop between four cousins, a quarter each. A fifth cousin puts money into the shop and is admitted as a partner. Nobody took anything from the original four. They still hold everything they held. But a quarter each is now a fifth each, because the thing being divided has five claims on it instead of four. The whole argument is what the fifth cousin paid to come in, and whether that payment was enough to leave the other four no worse off. A private placement is that argument, conducted with a share register and a bank account.

Harivansh Packaging Limited makes rigid and flexible packaging, it is listed, it has 18.00 crore shares outstanding, its profit after tax is Rs 225 crore, so earnings per share is Rs 12.50/-, and its net worth is Rs 1,650 crore. The promoter and promoter group hold 58.0 per cent. Its chief financial officer is Devyani Kulkarni, and Ashwin Rege leads its transaction team.

What are the only two features that define a private placement?

Two, and no more. The investors are chosen, and the shares are new. Everything else said about a placement, the speed of it, the discount, the effect on control, the effect on earnings, is a consequence of one or both of those two features rather than a separate property to be memorised.

Take the first. In an offer made to the public, the company states terms and anybody who qualifies may apply. In a placement, the company approaches a named set of investors, and somebody has decided which names those are. The chosen door is a structural difference, not a difference of scale. A placement made to two hundred investors is still a placement, and an offer open to five members of the public is still an offer to the public, because the question is whether the door is chosen or open.

Take the second. The shares handed to those investors are created for the purpose. They did not exist the day before. Creating them is what pushes the money into the company's account rather than into a seller's, and it is what makes the total share count rise. If instead an existing holder had sold two crore shares to those same investors, the investors would end up in exactly the same place and the company would end up with nothing at all. Same investors, same rupees, completely different event.

What is a Primary Issue, and why does that word decide where the money lands?

A primary issue creates shares that did not exist and delivers the subscriptionThe act of agreeing to take up newly created shares and paying the issue price for them. money to the company. The definition ends there, and it is worth holding on to. A headline about a large sum of money has something to do with the company's bank balance only when the issue is primary.

Follow the cash, and the classification settles itself. If the subscription money lands in the account of Harivansh Packaging Limited, the issue is primary. If it lands in the account of somebody who already held shares, it is not primary, whatever the announcement is titled and however large the number in the headline. There is no third place for the money to go and no fourth question to ask.

The distinction matters more than it looks. A reader who sees a Rs 1,140 crore figure attached to a company naturally assumes the company now has Rs 1,140 crore more to work with. In a primary issue that assumption is correct: Harivansh Packaging genuinely has the cash, its net worth genuinely rises by the full amount, and it genuinely has something new to spend. In the other case the company's balance sheet is untouched to the last rupee, and only the register of holders has changed. The two events can be described in almost identical words and they are not remotely the same thing.

The primary nature is also what makes every later effect possible. Dilution, the fall in earnings per share, the rise in book value per share and the return the money has to earn all exist because new shares were created and cash arrived. Take away the primary nature and every one of those effects disappears, because nothing was created and nothing arrived. The allotmentThe formal act of issuing named shares to a named subscriber once the money is in. Until allotment, a subscriber has paid but is not yet a holder. is where the new shares come into existence on the register.

Who may subscribe, and who chooses them?

Here is the feature that separates a placement from every other route to money. Somebody chooses who gets to become a holder. In the structure Harivansh Packaging Limited uses, the company identifies the investors it wants, negotiates with them, and then puts the selection to its shareholders for approval before any share is allotted.

Sit with why that approval has to exist. The people being asked to approve are the people who will be diluted. The holders are not being asked whether they would like to participate. In a placement they will not be participating. They are being asked to agree that a stranger may be admitted to the register at a stated price, and that their own proportion may fall as a result. Admitting a stranger is a genuine transfer of something they hold, made by a decision rather than by a market, and it would be extraordinary if it happened without their consent.

Notice also what the selection buys. Because the investors are few and identified, the company can talk to them properly, and they can do real work before committing. The result is that a placement either happens or does not happen, quickly and with little suspense. Certainty is the thing being purchased, and the price of it is that the chosen investors get terms nobody else had a chance to match.

How does the issue price fix the number of new shares?

Now the arithmetic, and it is one division. The amount to be raised, divided by the price at which each new share is issued, is the number of new shares created. Harivansh Packaging Limited raises Rs 1,140 crore at Rs 285/- a share. Rs 1,140 crore divided by Rs 285/- is 4.00 crore new shares. The share count goes from 18.00 crore to 22.00 crore, and the new investors hold 4.00 crore out of 22.00 crore, which is 18.18 per cent of the enlarged company.

Where does Rs 285/- come from? The illustrative reference price for the shares is Rs 300/-. Rs 285/- is Rs 15/- below it, so the discount to the reference priceThe gap between the price a new share is issued at and the market price used as the benchmark. It is a comparison of two prices and nothing more. is Rs 15/- on Rs 300/-, which is 5.0 per cent. A reference price is read off a market, so it moves from one day to the next. The Rs 285/- is fixed in the term sheet and does not move at all.

The price is not a detail of the raise. The price is the raise, and it alone decides how much of the company the same rupees buy. Run the identical Rs 1,140 crore at Rs 190/- instead. Rs 1,140 crore divided by Rs 190/- is 6.00 crore new shares, the count becomes 24.00 crore, and the new investors hold 6.00 out of 24.00, which is 25.0 per cent. Same money into the company, same balance sheet afterwards, and a quarter of the company handed over instead of a little under a fifth. Nothing changed except one number in the term sheet.

The proportion handed over is why the people who work on a raise argue about the price for weeks and settle the size in an afternoon. The size is a funding question, answered by the cost of whatever the money will pay for. The price is a proportion question, and the proportion does not come back.

What happens to a holder who was never invited?

Nothing is taken from them, and their proportion falls anyway. The claim reads as a contradiction until the two things a holding is are separated: a number of shares, and a fraction of a company. The number does not move. The fraction does.

Work it on the register of Harivansh Packaging Limited. The promoter and promoter group hold 58.0 per cent of 18.00 crore shares, which is 10.44 crore shares. They are not subscribing to this placement. Afterwards they still hold exactly 10.44 crore shares, not one share fewer. But 10.44 crore out of 22.00 crore is 47.45 per cent. The promoter and promoter groupThe people and entities that set a company up or control it, together with the connected holdings recorded alongside them. went from holding more than half of the company to holding less than half, without selling a single share.

The fall below half is worth stating plainly for what it is: a fact about the arithmetic of a larger share count, and nothing more. The consequences of a holding crossing below half, in terms of control, consent or anything in law, are a matter for the Ministry of Corporate Affairs at mca.gov.in and for SEBI at sebi.gov.in.

The free floatThe part of a listed company's shares held by anyone outside the promoter and promoter group, so the part that can change hands in the market. moves the other way. It was 7.56 crore shares, 42.0 per cent. The new investors sit outside the promoter group, so the float becomes 7.56 plus 4.00, which is 11.56 crore shares, and 11.56 out of 22.00 is 52.55 per cent. The two shares add up: 47.45 plus 52.55 is 100.00.

Now take an ordinary holder with 1,000 shares who was never approached and did nothing. Afterwards they hold 1,000 shares. Their slice went from 1,000 out of 18.00 crore to 1,000 out of 22.00 crore, which is 81.82 per cent of the proportion they had. Dilution is invisible to anybody counting only their own shares, and the invisibility is exactly why the approval sits with holders rather than with the board alone.

What happens to earnings per share, and why is that a different question?

Profit after tax does not change on the day of the issue. A placement is a financing event and the factories did not do anything differently, so Harivansh Packaging Limited earned Rs 225 crore before the placement and it earns Rs 225 crore the day after. The number of shares the profit is divided among is what changed.

So earnings per share moves from Rs 225 crore over 18.00 crore shares, which is Rs 12.50/-, to Rs 225 crore over 22.00 crore shares, which is Rs 10.2273/-, shown as Rs 10.23/-. The fall is 18.18 per cent.

Stop on that number, because it is the same 18.18 per cent as the ownership dilution, and the match is not a coincidence. Both are the same division. The new holders took 4.00 out of 22.00 of the company, so they also took 4.00 out of 22.00 of the profit, and existing holders were left with 18.00 out of 22.00 of both. While the money is still sitting in the account earning nothing, the earnings dilution and the ownership dilution are arithmetically the identical figure. The two figures stop being identical the moment the money starts to earn, and the return that money makes is what separates them.

Which is why the reading has to be labelled honestly. Rs 10.23/- is not the result of the raise. The figure is an intermediate step, taken with Rs 1,140 crore of cash sitting idle, and it will move again as soon as that cash does anything at all. Quoting it as the outcome is like weighing a cake before it goes in the oven.

Why can one per share measure fall while another rises?

Because the two measures divide different things, and the placement did different things to each numerator. Profit did not move at all. Net worth moved by the entire amount raised. So the same larger share count pushes one measure down and the other up on the same afternoon.

Run it. Before the placement, net worth is Rs 1,650 crore over 18.00 crore shares, so book value per shareNet worth divided by the number of shares, so the accounting value standing behind one share rather than what the market pays for it. is Rs 91.6667/-, shown as Rs 91.67/-. The cash arrives, so net worth becomes Rs 1,650 crore plus Rs 1,140 crore, which is Rs 2,790 crore, over 22.00 crore shares. That is Rs 126.8182/-, shown as Rs 126.82/-. A rise of 38.3 per cent on the identical day earnings per share fell 18.18 per cent.

The rule is one comparison: issue above the existing book value per share and book value per share rises, issue below it and book value per share falls. Rs 285/- is more than three times Rs 91.67/-, so each new share brought in far more accounting value than the average share already carried, and the average was pulled up hard.

Test the rule against a price that breaks it. Raise the same Rs 1,140 crore at Rs 60/- a share. That creates 19.00 crore new shares, the count becomes 37.00 crore, and Rs 2,790 crore over 37.00 crore shares is Rs 75.41/-, below the Rs 91.67/- it started at. Same cash in, same net worth, and book value per share went down instead of up, purely because Rs 60/- is below Rs 91.67/-.

Do not read the rise as good news and the fall as bad news. They are two measurements answering two questions. Book value per share asks what accounting value stands behind a share. Earnings per share asks what a share earned this year. A placement can raise the first and lower the second at once, and a reader who quotes only whichever moved in the direction they liked has chosen the answer before doing the arithmetic.

How hard must the money work before nobody is worse off?

Ask the question in the form a holder would ask it. Earnings per share fell to Rs 10.23/- because Rs 1,140 crore is sitting idle. Which return must that Rs 1,140 crore produce before earnings per share is back at Rs 12.50/- and the raise has cost the existing holders nothing on this measure?

Work backwards from the target rather than forwards from the money. To show Rs 12.50/- across the enlarged 22.00 crore shares, Harivansh Packaging Limited needs profit after tax of 22.00 crore times Rs 12.50/-, which is Rs 275 crore. It already has Rs 225 crore. So the gap is Rs 50 crore, after tax, and that is what the Rs 1,140 crore has to produce. Rs 50 crore on Rs 1,140 crore is 4.39 per cent.

The 4.39 per cent is exactly Rs 12.50/- divided by Rs 285/-, and that is the earnings yieldEarnings per share divided by the price paid for a share, expressed as a percentage. It is the reciprocal of a price to earnings multiple. at the price the shares were sold at, and the equality is structural rather than lucky. The reason is short. New investors paid Rs 285/- for a claim that was earning Rs 12.50/-. If their money earns the same rate the existing shares were being sold at, then each new share brings in precisely what it dilutes, and the average is untouched. If it earns less, every existing holder is worse off. If it earns more, every existing holder is better off, including those who were never invited.

Which gives a break-even returnThe return that leaves a measure exactly where it started, so anything above it improves the measure and anything below it worsens it. that can be computed from the term sheet alone, before anybody has decided where the money will go. Priced instead at Rs 190/-, the same raise lifts the break-even to Rs 12.50/- over Rs 190/-, which is 6.58 per cent, and the long check confirms it: 24.00 crore shares at Rs 12.50/- needs Rs 300 crore, the gap is Rs 75 crore, and Rs 75 crore on Rs 1,140 crore is 6.58 per cent. A lower price sets a harder test, because more of the company was handed over for the same money.

The break-even cannot show whether the money will clear it. The answer depends on the assets the money buys and on what those assets earn, and no published figure settles either in advance. The break-even is the bar. Whether it gets cleared, and whether raising the money this way was the right call, are matters for the company and its holders.

What is a placement quick at, and what does it cost?

State both sides flatly and prefer neither. A placement is fast and it is certain. A small number of investors either agree or they do not, so Harivansh Packaging Limited knows whether it has Rs 1,140 crore without holding the outcome open to whoever happens to be willing on the day. For a company that needs the money to be there on a date, that certainty is the product.

The cost sits in the same feature. A part of the company was handed to somebody new, at a price the existing holders had no chance to match. The holder with 1,000 shares did not decline to participate. They were not asked. Their 81.82 per cent of their old proportion is the fee that bought the speed, and it was charged to them rather than to the company.

Both statements are true at once, and neither settles anything. Whether the speed was worth the proportion depends on what the money was needed for and what it does. The arithmetic describes what each route does to the numbers; what the arithmetic cannot settle has to be named as such and left there.

How does a lender or an analyst read a placement?

Three readers, three different first questions, and it is worth seeing that none of them is the headline.

A lender to Harivansh Packaging Limited reads a placement as an improvement in the cushion sitting under their loan. Net worth rose Rs 1,140 crore and borrowings did not move, so the proportion of the business funded by people who rank behind the lender just went up. Because Rs 1,140 crore raised to repay borrowings and Rs 1,140 crore raised to build a plant leave the loan in very different places, a lender will still ask where the cash is going. But the first read is that the buffer got thicker.

An analyst reads it as a change in the denominator, and immediately marks their earnings per share figure as stale. The useful move is to hold Rs 12.50/- as the bar, compute the 4.39 per cent the money must earn, and then wait for the company to name the use so the two can be compared. An analyst who simply reports that earnings per share fell 18.18 per cent has reported the arithmetic of an idle bank balance and called it a finding.

An investor already on the register reads it as a question about the price, and only the price. They cannot stop the dilution and they were not offered the shares. The one check available is the issue price against what the shares were earning, the same 4.39 per cent calculation, and against the Rs 91.67/- of net worth standing behind each share. The amount is a funding fact while the price is the term that decides how much of the company moved, so every one of these three readers reaches for the issue price before the amount raised.

The household version is the same reflex. When a relative offers to put money into a family shop, the size of the cheque settles how much cash the shop will have. The cheque settles nothing about how much of the shop the family still owns. Ownership turns on what fraction the relative was promised, and that is a separate negotiation with a separate answer.