01.3 · How companies raise and return capital¶

Why this matters: every share issue, buyback, dividend, bonus and split changes either the number of shares or the cash in the company — and sometimes moves value from one group of shareholders to another. If you can't do the dilution arithmetic in your head, you can't tell a value-creating QIP from a giveaway, or a smart buyback from an expensive one.

Learning objectives — after this lesson you can:

Distinguish primary from secondary transactions, and fresh issue from offer for sale, and say where the money goes.
Describe how Indian companies raise equity (IPO, FPO, QIP, rights issue, preferential allotment and warrants) and debt (bank loans, NCDs, commercial paper), with the key SEBI rules as of September 2026.
Work out the effect of any share issue on ownership, EPS, book value per share and intrinsic value per share, and identify when it transfers wealth between old and new shareholders.
Compute a rights issue's theoretical ex-rights price and the value of a rights entitlement.
Explain dividends (interim/final, record and ex-dates), buybacks (tender vs open market) and their current tax treatment, and show when a buyback creates value per share and when it merely raises EPS.
Explain why bonus issues and stock splits change nothing fundamental.

Prerequisites: 01.1 What a company is, 01.2 Shares, market cap & enterprise value · Time: ~100 min

1. The capital cycle: where a company's money comes from and goes¶

A company funds itself from three sources:

Internal accruals — cash generated by the business (cash flow from operations) and retained rather than paid out. For most mature companies this is by far the largest source.
Debt — borrowing from banks or bond investors; a fixed claim (01.1).
Equity — issuing new shares; a residual claim.

And it uses money to invest (capex, working capital, acquisitions) or to return capital to its providers: interest and principal to lenders; dividends and buybacks to shareholders.

flowchart LR
  subgraph IN[Raising capital]
    E1[IPO / FPO / QIP /<br/>rights / preferential] --> CO
    D1[Bank loans / NCDs /<br/>CP / ECB] --> CO
    OP[Cash from operations] --> CO
  end
  CO((Company)) --> INV[Capex, working capital,<br/>acquisitions]
  CO --> R1[Interest & principal<br/>to lenders]
  CO --> R2[Dividends & buybacks<br/>to shareholders]
  S1[Offer for sale / block deals /<br/>everyday trading] -. money moves between investors;<br/>none reaches the company .-> S2[Buyers]

The dashed line is the most important distinction in this lesson:

In a primary transaction the company issues new securities and receives the cash (a fresh issue of shares, a new loan, a bond issue).
In a secondary transaction existing securities change hands between investors and the company receives nothing (every trade on NSE, block deals, and an offer for sale by existing shareholders).

A classic misconception is that an IPO always "raises money for the company". It only does so to the extent of its fresh-issue component.

Worked example 1 — Kaveri's sources and uses of cash, FY21–FY26¶

Adding up six years of Kaveri's cash-flow statements (₹ Cr) shows how it actually funded itself:

Sources	₹ Cr	Uses	₹ Cr
Cash flow from operations (after tax)	395.7	Capex on PP&E incl. CWIP (Hosur plant)	398.0
Proceeds from sale of land (FY25)	18.0	Purchase of intangibles	18.0
Net sale of liquid mutual funds	25.0	Interest paid on borrowings	61.0
Treasury income received	33.9	Lease payments	30.1
Net term loans raised	57.0	Dividends paid	90.0
Net working-capital loans raised	66.0
Total sources	595.6	Total uses	597.1

Net change in cash \(= 595.6 - 597.1 = -1.5\) Cr, which is exactly the fall in cash from ₹34.0 Cr (31-Mar-2020) to ₹32.5 Cr (31-Mar-2026). Three observations you will build on for the rest of the course:

No equity was raised. Share capital stayed at ₹30.0 Cr (6.00 Cr shares) throughout. All growth was funded by internal accruals and debt.
The Hosur plant was debt-funded at the margin: capex of ₹248.0 Cr in FY23–FY24 coincided with ₹112.0 Cr of new term loans.
Working-capital loans funded the receivables build-up: receivables rose ₹250.7 Cr over the six years (₹96.0 Cr → ₹346.7 Cr), and ₹66.0 Cr of the funding came from net short-term bank borrowing — all of it in FY25 (+₹28.0 Cr) and FY26 (+₹38.0 Cr), after the solar business took off; FY21–FY24 net working-capital borrowing was zero. Total borrowings went from ₹65.0 Cr to ₹188.0 Cr.

2. Raising equity (1): the IPO¶

An initial public offering (IPO) is a company's first sale of shares to the public, followed by listing on NSE/BSE. An IPO can have two components:

Fresh issue — new shares issued by the company. The company receives the money (less fees). The share count rises: existing holders are diluted.
Offer for sale (OFS) — existing shareholders (promoters, private-equity funds, the government) sell part of their holding. The sellers receive the money. The share count does not change.

Most Indian IPOs combine the two; many are dominated by OFS, which is why the "objects of the issue" section of the offer document is the first thing to read (03.5). The largest example of a pure OFS: the LIC IPO (May 2022) raised roughly ₹21,000 Cr — all of it an offer for sale by the Government of India of about 3.5% of the company. LIC itself received nothing (Wikipedia — Life Insurance Corporation).

How an Indian mainboard IPO works (rules as of Sep-2026)¶

DRHP → SEBI. The company files a draft red herring prospectus with SEBI; SEBI issues observations.
RHP and price band. The red herring prospectus is filed with the Registrar of Companies, with a price band whose cap may be at most 120% of the floor.
Anchor book. The day before the issue opens, the company can allot up to 60% of the QIB portion to anchor investors (large institutions). Anchor shares are locked in — 50% for 30 days, 50% for 90 days. Since 30-Nov-2025, 40% of the anchor book is reserved for domestic mutual funds, life insurers and pension funds (earlier, one-third for mutual funds) (SEBI ICDR Third Amendment 2025, summary).
Bidding (usually three working days) via ASBA/UPI, in three categories. For a profitable issuer (ICDR Regulation 6(1)): up to 50% QIBs (qualified institutional buyers — mutual funds, insurers, banks, FPIs…), at least 15% non-institutional investors (individuals and others applying above ₹2 lakh), and at least 35% retail individual investors (applications up to ₹2 lakh). A 2025 proposal to cut the retail share of very large IPOs was withdrawn (Cyril Amarchand Mangaldas client alert, 16-Sep-2025). Companies that do not meet the profitability track record list under Regulation 6(2), where at least 75% must go to QIBs.
Allotment and listing on T+3 (T = issue closing day), mandatory since 1-Dec-2023 (Business Standard, Aug-2023).
Lock-ins. Promoters must lock in a minimum contribution of 20% of post-issue capital, generally for 18 months (three years if most of the fresh issue funds capex); anchor and pre-IPO lock-in expiries are dates when supply can hit the market.
Minimum public offer. Securities Contracts (Regulation) Rules require the public to hold at least 25%; smaller IPOs must offer 25% up front, while larger ones may offer less and reach 25% over time. Tiers by post-issue market cap: under ₹1,600 Cr — 25%; ₹1,600–4,000 Cr — at least ₹400 Cr; ₹4,000–50,000 Cr — 10%; above ₹50,000 Cr — lower percentages with 5–10 year glide paths under the amendment notified on 13-Mar-2026 (AZB & Partners summary).

The SME platforms (NSE Emerge, BSE SME) have separate, lighter rules and a history of abuse (09.5).

Worked example 2 — a fresh issue plus an OFS¶

Palar Valves Ltd (fictional) has 8.0 Cr shares before its IPO: promoters 5.6 Cr (70%), a private-equity fund 2.4 Cr (30%). It prices its IPO at ₹250: a fresh issue of ₹300 Cr plus an OFS of 1.2 Cr shares by the PE fund.

	Computation	Result
New shares from fresh issue	300 ÷ 250	1.2 Cr
OFS proceeds (to the PE fund)	1.2 × 250	₹300 Cr
Total issue size	300 + 300	₹600 Cr
Post-issue shares	8.0 + 1.2	9.2 Cr
Pre-money equity value	8.0 × 250	₹2,000 Cr
Post-money market cap	9.2 × 250	₹2,300 Cr
Promoter holding post-IPO	5.6 ÷ 9.2	60.9%
PE fund post-IPO	(2.4 − 1.2) ÷ 9.2	13.0%
Public post-IPO	(1.2 + 1.2) ÷ 9.2	26.1%

The post-issue market cap of ₹2,300 Cr sits in the ₹1,600–4,000 Cr bucket, so the offer must be at least ₹400 Cr; at ₹600 Cr it complies, and the public already holds more than 25%.

EPS dilution. If Palar's PAT is ₹80 Cr, EPS falls from \(80/8.0 = ₹10.00\) to \(80/9.2 = ₹8.70\) (−13.0%) on day one, and the post-issue P/E is \(250 / 8.70 = 28.75\)x. The new cash has to earn something to close the gap: if the ₹291 Cr of net proceeds (after, say, 3% issue expenses) merely sits in liquid funds at 7% pre-tax, it adds \(291 \times 7\% \times (1 - 0.2517) = ₹15.2\) Cr of PAT, and EPS becomes \((80 + 15.2)/9.2 = ₹10.35\). Whether the IPO is good for pre-IPO holders depends on what the money earns once deployed — and on whether ₹250 was a fair price.

3. Raising equity (2): once listed — FPO, QIP, rights and preferential issues¶

A listed company that needs equity has four main routes. All require shareholder approval of some kind; all are governed by SEBI's Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018.

Route	Who can buy	Pricing	Speed	Typical user
FPO (follow-on public offer)	The public, like an IPO	Book-built or fixed	Weeks–months	Large raises needing retail reach
QIP (qualified institutions placement)	QIBs only	Floor = average of the weekly highs and lows of the closing price over the two weeks before the relevant date; up to 5% discount allowed	Days	Banks, NBFCs, growth companies — the Indian workhorse
Rights issue	Existing shareholders, pro rata (rights tradable)	Set by the company, usually at a discount	~23 working days from board approval (since the April-2025 reforms)	Distressed or promoter-backed raises; companies that want to avoid diluting non-participants
Preferential allotment (shares or warrants)	Named investors — often promoters, strategic investors	Floor (frequently traded shares) = higher of the 90- and 10-trading-day VWAP before the relevant date	1–2 months	Promoter infusions, strategic stakes

Sources: QIP pricing — ICDR Reg. 176 (summary); rights-issue timeline effective 7-Apr-2025 (Moneylife); preferential pricing, lock-ins and warrants (Vinod Kothari FAQ). SEBI's regulations page showed the ICDR as last amended on 21-Mar-2026 when this lesson was written (Sep-2026) — verify the current text before relying on any detail.

Let \(V\) be the intrinsic value of the equity before the issue, \(N\) the shares before, and suppose the company issues \(n\) new shares at price \(P\), raising \(nP\) in cash (ignore fees). If the cash is worth its face value inside the company, the value per share afterwards is

\[v_{\text{post}} = \frac{V + nP}{N + n}\]

Compare with \(v_{\text{pre}} = V/N\). A little algebra shows \(v_{\text{post}} > v_{\text{pre}} \iff P > V/N\).

Issue above intrinsic value per share → accretive to existing holders (the new investors overpay).
Issue at intrinsic value → neutral, whatever happens to EPS or ownership percentages.
Issue below intrinsic value → a wealth transfer from existing to new shareholders.

Two corollaries: ownership dilution by itself is not a loss (you own a smaller slice of a bigger pie), and what the company does with the money comes on top — invested at returns above the cost of capital it adds value; hoarded or wasted it destroys some.

Worked example 3 — Nirmal Finance's FY24 QIP¶

Nirmal issued 1.0 Cr shares at ₹300 in a QIP in FY24, raising ₹300 Cr. At 31-Mar-2023 it had 10.0 Cr shares and net worth of ₹853.4 Cr.

	Computation	Result
BVPS before (FY23)	853.4 ÷ 10.0	₹85.34
Issue price as a multiple of book	300 ÷ 85.34	3.52x
BVPS immediately after the QIP	(853.4 + 300) ÷ 11.0	₹104.85
Accretion to BVPS from the QIP alone	104.85 ÷ 85.34 − 1	+22.9%
Holder of 10 lakh shares: stake before → after	0.10 ÷ 10.0 → 0.10 ÷ 11.0	1.000% → 0.909%
Check: FY24 net worth	853.4 + 300.0 + PAT 169.0 − dividends 20.0	₹1,302.4 Cr ✓

Issuing at 3.5x book lifted book value per share for everyone. For a lender, equity is also raw material: RBI capital rules cap how much an NBFC can lend per rupee of capital, so the QIP funded the loan-book growth from ₹3,790 Cr to ₹4,700 Cr (and its capital adequacy ratio rose from 25.6% to 30.5%). Whether it was good for existing holders turns on whether ₹300 exceeded intrinsic value per share — a question for 07.1. Note that RoE dipped only slightly (15.9% → 15.7%) despite the extra equity.

Worked example 4 — the same algebra on Kaveri (hypothetical)¶

Kaveri has not issued equity, but suppose it raised ₹300 Cr via a QIP. Use the house view: equity value ₹1,941.3 Cr on 6.07 Cr diluted shares, i.e. ₹319.8 a share (kaveri-valuation.md).

Issue price	New shares (300 ÷ P)	Value per share after	Change	New investors receive (shares × value)	Transfer to (−) / from (+) new investors
₹370 (≈5% below ₹390 CMP)	0.811 Cr	₹325.7	+1.8%	₹264.1 Cr	−₹35.9 Cr
₹320 (≈ intrinsic)	0.938 Cr	₹319.8	0.0%	₹299.9 Cr	≈0
₹250 (distressed)	1.200 Cr	₹308.3	−3.6%	₹370.0 Cr	+₹70.0 Cr

At ₹370 the new investors pay ₹300 Cr for shares worth ₹264.1 Cr — the existing holders gain ₹35.9 Cr. At ₹250 the new investors pay ₹300 Cr for ₹370.0 Cr of value, and the existing holders' stake falls from ₹1,941.3 Cr to ₹1,871.3 Cr. If you think a stock is overvalued, you should cheer when management issues shares; if undervalued, a deep-discount issue to outsiders is a direct loss.

Rights issues: the discount that doesn't matter (if you act)¶

In a rights issue every shareholder gets rights entitlements (REs) in proportion to their holding — say 1 new share for every 5 held, at a subscription price below market. REs are credited to demat accounts and trade on the exchange; holders can subscribe, sell (renounce) them, or ignore them. Since the 2025 reforms, promoters can also renounce in favour of named "specific investors", and unsubscribed shares can go to identified investors.

The price at which the shares should trade after the issue is the theoretical ex-rights price (TERP): the value of the old shares plus the cash paid, divided by the new share count. For \(r\) old shares per new share at subscription price \(S\) and cum-rights price \(P_0\):

\[\text{TERP} = \frac{r P_0 + S}{r + 1}, \qquad \text{value of one RE} = \text{TERP} - S\]

Worked example 5 — a 1-for-5 rights issue (hypothetical Kaveri)¶

Kaveri (price ₹390) offers 1 new share for every 5 at ₹300 → 1.2 Cr new shares, raising ₹360 Cr.

\[\text{TERP} = \frac{5 \times 390 + 300}{6} = ₹375, \qquad \text{RE value} = 375 - 300 = ₹75\]

An investor with 500 shares (worth ₹1,95,000 before) receives 100 REs:

Choice	Position after	Net wealth
Subscribe (pay 100 × ₹300 = ₹30,000)	600 shares × ₹375 = ₹2,25,000, minus ₹30,000 paid	₹1,95,000
Sell the REs (100 × ₹75 = ₹7,500)	500 shares × ₹375 + ₹7,500	₹1,95,000
Ignore them	500 shares × ₹375	₹1,87,500 (−₹7,500, −3.8%)

The deeper the discount, the more the rights issue looks like a bonus issue bundled with a fair-price issue — and the more a shareholder who does nothing loses. Deep discounts also make the issue almost certain to be fully subscribed, which is why distressed companies and promoters who plan to take up their own rights like them.

Preferential allotments and warrants¶

A preferential allotment issues shares (or convertible securities) to specific, named investors, approved by a special resolution. Key ICDR rules (verify current text):

Pricing floor for frequently traded shares: the higher of the 90-trading-day and 10-trading-day VWAPs before the relevant date (30 days before the shareholder meeting).
Lock-in: shares allotted to promoters are locked in for 18 months; to others, 6 months.
Warrants: the right to subscribe to shares later at the fixed price; at least 25% of the price upfront, tenure at most 18 months, and the upfront money is forfeited if not exercised.

Warrants to promoters are a recurring governance question in India. The economics are an option trade.

Worked example 6 — warrants to the promoter (fictional Sarayu Industries)¶

Sarayu Industries (10 Cr shares at ₹200; promoter holds 50%) issues 0.6 Cr warrants to its promoter at the floor price of ₹200. The promoter pays 25% upfront — ₹50 a warrant, ₹30 Cr in total — and has 18 months to pay the remaining ₹150 (₹90 Cr in total) and receive a share.

If the share is at ₹320 in 18 months, the promoter pays ₹90 Cr for shares worth \(0.6 \times 320 = ₹192\) Cr: net profit after the upfront payment \(= 0.6 \times (320 - 150 - 50) = ₹72\) Cr.
If the share is at ₹120, the promoter walks away and forfeits ₹30 Cr.
On exercise the promoter's stake rises from 50.0% to \(5.6 / 10.6 = 52.8\%\) — kept within the 5%-a-year creeping-acquisition allowance of SEBI's takeover regulations, so no open offer is triggered.

Trader's lens — a preferential warrant is a call option sold cheap

The warrant is a call on Sarayu struck at ₹150 (the unpaid balance), expiring in 18 months, for which the promoter pays a ₹50 premium. Price it with Black–Scholes — \(S = ₹200\), \(K = ₹150\), \(T = 1.5\) years, volatility 40%, risk-free rate 6.5%, no dividends — and it is worth about ₹73.7. The promoter pays ₹50 for ₹73.7 of optionality: a transfer of ≈₹23.7 per warrant, ≈₹14.2 Cr in total, from the other shareholders (before the extra dilution effect a proper warrant model would include). At 30% volatility the gift is still ≈₹18.5 a warrant. The ICDR floor price protects against issuing below market; it does nothing about the option's time value. Whenever you see warrants in a notice of a general meeting, price the option.

Offer for sale through the stock exchange¶

After listing, promoters and large holders (at least 10%) can sell a block through the exchanges' OFS mechanism: the seller announces a floor price the evening before; non-retail investors bid on day T, retail investors (bids up to ₹2 lakh, at least 10% of the offer reserved for them) on T+1; at least 25% is reserved for mutual funds and insurers; minimum size ₹25 Cr with exceptions (SEBI circular, Jan-2023). The Government of India uses it for disinvestment in PSUs; promoters use it to meet minimum public shareholding. The company receives nothing; the effects are a larger free float and, often, a short-term price overhang. Bulk and block deals are covered in 01.4.

4. Raising debt¶

Debt is cheaper than equity for the company (lenders take less risk, and interest is tax-deductible), does not dilute ownership, and imposes discipline — at the price of fixed obligations that can kill a company in a downturn (04.5).

Instrument	What it is	Who uses it	What to watch
Term loan	Bank loan for a fixed period (typically 3–10 years), usually secured on the assets it funds, repaid in instalments	Capex	Repayment schedule ("current maturities"), covenants, security
Working-capital facilities (cash credit, overdraft, working-capital demand loans, bill discounting)	Revolving short-term bank lines secured on inventories and receivables; limits set by "drawing power"	Funding inventory and receivables	Utilisation creeping towards the limit; rising short-term debt alongside rising receivables
Non-convertible debentures (NCDs)	Bonds, secured or unsecured, rated; public issue or (usually) private placement; listed under SEBI's NCS Regulations, 2021	Large companies; NBFCs (Nirmal: 24% of borrowings)	Coupon vs government bonds (credit spread), rating, covenants, maturity wall
Commercial paper (CP)	Unsecured short-term promissory notes (up to one year) under RBI directions; must be rated	Top-rated corporates, NBFCs	Refinancing (rollover) risk — the IL&FS/DHFL story (13 · I4)
ECBs, FCCBs	Foreign-currency loans and convertible bonds	Exporters, large groups	Currency mismatch; convertibles are equity in waiting (01.2)
Securitisation / direct assignment, sub-debt	Selling pools of loans; subordinated bonds counted as Tier-2 capital	NBFCs (Nirmal: securitisation 11%, sub-debt 3%)	Off-balance-sheet risk, cost

Kaveri's borrowing is typical of an Indian mid-cap manufacturer: term loans for the Hosur plant (+₹50 Cr in FY23, +₹62 Cr in FY24, since being repaid at ₹20 Cr a year) and working-capital loans that grew as receivables piled up (+₹28 Cr in FY25, +₹38 Cr in FY26). Its implied borrowing cost in FY26 was finance costs on borrowings of ₹15.6 Cr ÷ average borrowings of ₹179.0 Cr ((170.0 + 188.0) ÷ 2) = 8.7%, close to the 8.9% pre-tax cost of debt in the house valuation. Nirmal, as a lender, borrows far more relative to its equity — 58% bank term loans, 24% NCDs, 11% securitisation, 4% CP and 3% sub-debt — which is why its analysis focuses on funding cost and asset–liability matching.

CP eligibility, tenor and rating rules are set by RBI's Master Direction — Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year, 2024 (issued 3-Jan-2024); verify the current version on the RBI Master Directions page before relying on specific thresholds.

5. Returning capital (1): dividends¶

A dividend is a cash distribution to shareholders out of profits (current or accumulated) under the Companies Act (s.123).

Interim dividend — declared by the board during the year.
Final dividend — recommended by the board after the year ends and declared by shareholders at the AGM. Shareholders can reduce it but not increase it.
Once declared, a dividend is a debt of the company and must be paid within 30 days (s.127).
Top listed companies must publish a dividend distribution policy (SEBI LODR) — useful for predicting payouts.

The dates¶

Date	Meaning
Announcement / declaration date	Board announces (interim) or AGM declares (final)
Record date	The company pays whoever is on the register of members at the end of this day
Ex-date	First trading day on which a buyer does not get the dividend. With India's T+1 settlement (fully in place since January 2023), exchanges generally set the ex-date on the record date itself — so you must buy by the trading day before the ex-date
Payment date	Cash hits bank accounts (within 30 days of declaration)

On the ex-date the price should drop by about the dividend: the company is poorer by the cash paid out. Pre-tax, shareholders are no richer: they swap ₹4 of share value for ₹4 of cash. Dividends do not create value; the profits that fund them do. (This is Miller and Modigliani's 1961 dividend-irrelevance result — true in a frictionless world, and a good default until taxes, signalling or governance get involved.)

Tax on dividends (as of Sep-2026)¶

India abolished the company-level dividend distribution tax from FY21; dividends are now taxed in the shareholder's hands at their slab rate. Companies deduct TDS at 10% for resident individuals whose dividends from the company exceed ₹10,000 in a year (threshold raised from ₹5,000 by the Finance Act 2025). From 1-Apr-2026 the provision sits in section 393 of the new Income-tax Act, 2025, which replaced the 1961 Act; the rate and threshold were unchanged (Tax2win guide; TDSMAN, May-2026). For a top-bracket individual, dividends are taxed at 30% plus 4% cess (31.2%, before any surcharge) — far more than the 12.5% on long-term capital gains. That gap drives Indian companies' choice between dividends and buybacks.

Worked example 7 — Kaveri's dividend¶

Kaveri paid ₹4.00 per share (₹24.0 Cr) during FY26, against FY26 PAT of ₹90.5 Cr:

Metric	Computation	Value
Payout ratio	24.0 ÷ 90.5	26.5% (guidance: "~25%")
Dividend yield at ₹390	4.00 ÷ 390	1.03%
Theoretical ex-dividend price	390 − 4	₹386
Post-tax dividend for a 31.2% taxpayer	4.00 × (1 − 0.312)	₹2.75
"Dividend %" as Indian companies announce it	4.00 ÷ ₹5 face value	80%
TDS applies once dividends exceed ₹10,000 — at ₹4 a share, a holding above	10,000 ÷ 4	2,500 shares

Over FY21–FY26 Kaveri paid out ₹90.0 Cr of cumulative PAT of ₹417.0 Cr (21.6%) — a low payout that let it fund growth internally, as Worked example 1 showed.

6. Returning capital (2): buybacks¶

A buyback is the company purchasing its own shares and extinguishing them. It returns cash to the selling shareholders and raises the remaining holders' percentage ownership. Two routes exist in India:

Tender offer. The company offers to buy a fixed number of shares at a fixed price (usually a premium) from all holders on a record date, proportionately. At least 15% of the buyback is reserved for small shareholders (holding shares worth up to ₹2 lakh on the record date). Promoters may participate. Because more shares are usually tendered than the company will buy, each holder's acceptance ratio is uncertain.
Open market through the stock exchange. The company buys on the exchange at market prices over a period. SEBI discontinued this route from 1-Apr-2025 (it let a few sellers capture most of the buyback and interacted badly with the then tax rules), then restored it from 1-Aug-2026 under amendments notified on 1-Jul-2026: size capped below 15% of paid-up capital and free reserves, completion within 66 working days, at least 40% of the amount used in the first half of the period, and promoters' shares frozen during the window (SEBI Buy-back Amendment Regulations 2026; Moneylife, Jul-2026).

Company-law limits (Companies Act s.68): a buyback may not exceed 25% of paid-up capital plus free reserves (up to 10% needs only a board resolution; above that, a special resolution), post-buyback debt may not exceed twice paid-up capital plus free reserves, there must be a gap between buybacks, and a buyback may not push public shareholding below the 25% minimum.

A real tender offer. Wipro's 2026 buyback bought up to 60 Cr shares (5.72% of its equity) at ₹250, a total of ₹15,000 Cr, from holders on the record date of 5-Jun-2026. Entitlements: small shareholders 11 shares for every 56 held (19.6%); everyone else 10 for every 197 (5.1%). The promoter group, holding 72.53%, stated its intention to participate. The price was ≈23% above the previous NSE close of ₹203.11 (Wipro letter of offer; BusinessToday, 16-Apr-2026). The small-shareholder reservation is why the small-holder entitlement is almost four times the general one.

Buyback taxation: three regimes in three years¶

Period	Who pays	How
Up to 30-Sep-2024	The company	Buyback tax (s.115QA of the 1961 Act) at 20% plus surcharge and cess (effective 23.296%) on the amount paid over the original issue price; shareholders exempt
1-Oct-2024 to 31-Mar-2026	Shareholders	Entire buyback proceeds taxed as a deemed dividend at slab rates; the cost of the shares allowed as a capital loss to set off elsewhere
From 1-Apr-2026 (Finance Act 2026; s.69 of the Income-tax Act, 2025)	Shareholders	Taxed as capital gains on (price − cost): for listed shares 12.5% long-term (with the ₹1.25 lakh annual exemption) or 20% short-term, plus surcharge and cess. Promoters (and holders of more than 10%, for unlisted companies) pay an additional tax taking the effective rate to 22% for domestic-company promoters and 30% for other promoters

Sources: KPMG, Feb-2026; Vinod Kothari, Feb-2026; the tax section of the Wipro letter of offer (June 2026). Check your own position with a tax adviser; this is a summary, not advice.

For a minority shareholder the 2026 change is large. Take 100 shares bought two years ago at ₹300 and tendered at ₹450:

Deemed-dividend regime (Oct-2024 to Mar-2026): the full ₹45,000 taxed at 31.2% = ₹14,040, with a ₹30,000 capital loss to use elsewhere.
Capital-gains regime (from Apr-2026): only the ₹15,000 gain is taxed, at 12.5% + 4% cess = ₹1,950 (ignoring the annual exemption); ₹3,120 if held for 12 months or less (20% + cess).

Worked example 8 — when does a buyback create value? (hypothetical Kaveri)¶

Suppose Kaveri spends ₹90 Cr on a tender buyback. Using the house equity value (₹1,941.3 Cr, 6.07 Cr diluted shares, ₹319.8 a share), the remaining holders' value per share is \((1{,}941.3 - 90)/(6.07 - 90/P)\):

Buyback price	Shares bought	Value per remaining share	Change vs ₹319.8
₹450	0.200 Cr	₹315.4	−1.4%
₹320	0.281 Cr	₹319.8	0.0%
₹250	0.360 Cr	₹324.2	+1.4%

The same rule as for share issues, reversed: buying back below intrinsic value transfers wealth from the sellers to the holders who stay; buying back above it does the opposite.

Now look at EPS. Kaveri has net debt, so assume the ₹90 Cr is borrowed at its 8.9% pre-tax cost of debt: extra interest of \(90 \times 8.9\% \times (1 - 0.2517) = ₹5.99\) Cr after tax. At ₹450, basic EPS goes from \(90.5 / 6.00 = ₹15.08\) to \((90.5 - 5.99)/(6.00 - 0.20) = ₹14.57\) (−3.4%). A buyback raises EPS only if the earnings yield at the buyback price exceeds the after-tax cost of the money used: here \(15.08 / P > 6.66\%\), i.e. \(P < ₹226\). At ₹250 the buyback adds value per share (+1.4%) yet still reduces EPS slightly (to ₹14.98). EPS accretion and value creation are different tests; managements love to quote the first.

Trader's lens — a tender offer is a lottery ticket on the acceptance ratio

Buying shares to tender in a buyback is an event trade with payoff \(a(B - P_0) + (1-a)(P_1 - P_0)\), where \(B\) is the buyback price, \(P_0\) your entry price, \(P_1\) where the unaccepted shares trade afterwards, and \(a\) the acceptance ratio. With illustrative numbers — \(P_0 = ₹230\), \(B = ₹250\), \(P_1 = ₹210\) — the trade breaks even only at \(a = 50\%\); at a 19.6% entitlement it loses ₹12.2 a share. The market prices the expected acceptance, just as it prices the probability in a merger-arbitrage spread; the edge, if any, lies in estimating how many holders will not tender (which pushes actual acceptance above the entitlement). Special situations are covered in 12.3.

7. Bonus issues and stock splits¶

A bonus issue gives existing shareholders free additional shares in proportion to their holding (say 1:1 — one new share for each held) by transferring an amount from reserves (free reserves, securities premium or capital redemption reserve — not revaluation reserves) into share capital. A stock split divides each share into several of lower face value (₹5 → ₹1). Neither involves cash; neither changes the company's assets, profits or total equity.

Worked example 9 — Kaveri bonus vs split (hypothetical)¶

	Actual FY26	After a 1:1 bonus	After a 5-for-1 split (₹5 → ₹1)
Shares, Cr	6.00	12.00	30.00
Face value, ₹	5	5	1
Equity share capital, ₹ Cr	30.0	60.0	30.0
Other equity, ₹ Cr	676.1	646.1	676.1
Total equity, ₹ Cr	706.1	706.1	706.1
Share price (theoretical), ₹	390	195	78
Market cap, ₹ Cr	2,340	2,340	2,340
EPS, ₹	15.08	7.54	3.02
BVPS, ₹	117.68	58.84	23.54
P/E	25.9x	25.9x	25.9x

The bonus moves ₹30 Cr from "other equity" to "share capital" — a relabelling within equity. The split doesn't even do that. Everything per share scales; every multiple is unchanged.

Why do companies bother? Lower nominal prices can improve liquidity and retail participation, a bonus can signal management's confidence (it permanently capitalises reserves), and F&O lot sizes are adjusted. Share prices often react to the announcement — as information about management's outlook, not because anything changed. Two practical cautions: historical per-share data must be adjusted for bonuses and splits (Screener and exchanges adjust; some data sources and older reports do not), and for tax purposes bonus shares have a zero cost of acquisition while a split apportions the original cost.

Action	Cash into (+) / out of (−) the company	Shares	Book value per share	Intrinsic value per share	Wealth transfer?
IPO fresh issue / FPO / QIP	+	↑	↑ if issued above BVPS	↑ if \(P > V/N\), ↓ if below	Between old and new holders, via the price
IPO offer for sale / exchange OFS	none	=	=	=	Between buyers and sellers only
Rights issue	+	↑	depends on price	= for those who subscribe or sell REs	From holders who ignore REs
Preferential shares / warrants	+	↑	depends on price	↓ if priced below value or if warrant time value is given away	To allottees (often promoters)
Debt raised	+ (with a matching claim)	=	=	depends on use; adds risk	Possibly from creditors (Type III agency)
Dividend	−	=	↓	↓ by the dividend (price drops on ex-date)	None pre-tax
Buyback	−	↓	↓ if bought above BVPS	↑ if bought below \(V/N\), ↓ if above	Between sellers and remaining holders
Bonus / split	none	↑	↓ proportionally	↓ proportionally (value per holding unchanged)	None

India notes

Read the objects of the issue. An IPO that is mostly OFS is an exit, not a growth financing — fine, but know which it is.
QIPs are the dominant follow-on route because they are fast and price close to market; frequent QIPs by a company claiming to be "cash-rich" are a forensic flag (09.5).
Warrants to promoters show up in AGM/EGM notices and postal ballots — price the option (Worked example 6).
Tax drives payout choices. The FY21 move to shareholder-level dividend tax, the October-2024 deemed-dividend rule for buybacks, and the April-2026 return to capital-gains treatment each shifted companies between dividends and buybacks. Check the regime in force at the date you are analysing.
Promoters and buybacks. Promoter participation in tender offers, the higher promoter tax rate from FY27, and the freeze on promoter shares in open-market buybacks are all worth checking in the letter of offer.

Common mistakes

Assuming an IPO or OFS funds the company. Only the fresh issue does.
Equating dilution with value destruction. Issuing shares above intrinsic value helps existing holders; what matters is the price relative to value, and what the money earns.
Treating a buyback as good because EPS rises. EPS can rise while value per share falls (buying above value with cheap debt), and vice versa (Worked example 8).
Ignoring rights entitlements. Doing nothing in a deep-discount rights issue is a real loss.
Calling bonus shares or splits "free money", or comparing per-share figures across a bonus/split without adjusting.
Confusing record date and ex-date, or assuming the old T+2 timing.
Using out-of-date tax rules for dividends and buybacks — three buyback regimes applied between 2024 and 2026.
Reading the promoter's warrant subscription as "confidence" without asking what the option was worth.

Key terms¶

Term	Meaning
Primary / secondary transaction	New securities issued, cash to the company / existing securities traded between investors
IPO	Initial public offering: first sale of shares to the public and listing
Fresh issue	New shares issued by the company; proceeds to the company
Offer for sale (OFS)	Existing holders sell shares; proceeds to the sellers
DRHP / RHP	Draft / red herring prospectus — the IPO offer document before / with the price band
Anchor investor	Large institution allotted shares the day before an IPO opens, subject to lock-in
QIB	Qualified institutional buyer (mutual funds, insurers, banks, FPIs, etc.)
FPO	Follow-on public offer by a listed company
QIP	Qualified institutions placement: fast share issue to QIBs only
Rights issue / rights entitlement (RE)	Pro-rata offer of new shares to existing holders / the tradable right to subscribe
Renunciation	Selling or transferring a rights entitlement
TERP	Theoretical ex-rights price: \((rP_0 + S)/(r + 1)\)
Preferential allotment	Issue of shares or convertibles to named investors, approved by special resolution
Warrant	Right to subscribe to a share at a fixed price; in India ≥25% paid upfront, ≤18 months
Term loan / working-capital loan	Long-term secured bank loan for capex / revolving short-term bank facility for inventories and receivables
NCD	Non-convertible debenture: a bond
Commercial paper (CP)	Unsecured, rated short-term (≤1 year) money-market borrowing
Interim / final dividend	Declared by the board during the year / recommended by the board and declared at the AGM
Record date / ex-date	Date the register is fixed for entitlement / first trading day without the entitlement
Payout ratio / dividend yield	Dividends ÷ PAT / dividend per share ÷ price
Buyback (tender / open market)	Company repurchases and extinguishes its shares, proportionately at a fixed price / on the exchange over time
Acceptance ratio	Fraction of shares tendered that the company actually buys
Bonus issue	Free shares issued by capitalising reserves
Stock split	Subdivision of shares into more shares of lower face value
Accretive / dilutive	Raises / lowers a per-share measure (EPS, BVPS or value per share — say which)

Check your understanding¶

An IPO of ₹1,200 Cr consists of a ₹400 Cr fresh issue and an ₹800 Cr OFS by a PE fund, at ₹400 a share. Before the IPO the company had 15 Cr shares. How many shares are outstanding after the IPO, what is the post-issue market cap, and how much cash does the company receive (before fees)?

Answer
New shares \(= 400 / 400 = 1.0\) Cr → 16.0 Cr outstanding. Post-issue market cap \(= 16.0 \times 400 = ₹6{,}400\) Cr. The company receives ₹400 Cr; the PE fund receives ₹800 Cr (2.0 Cr of its shares).
A company with intrinsic value ₹5,000 Cr and 10 Cr shares issues 2 Cr shares at ₹400 in a QIP. What is the value per share after the issue? Who gains, and how much in total?

Answer
Before: ₹500 a share. After: \((5{,}000 + 800)/12 = ₹483.3\). New investors pay ₹800 Cr for \(2 \times 483.3 = ₹966.7\) Cr of value — they gain ₹166.7 Cr; existing holders lose the same amount (\(10 \times (500 - 483.3)\)). Issuing below intrinsic value transfers wealth to the new investors.
A stock trades at ₹180 and announces a 2-for-7 rights issue (2 new shares for every 7 held) at ₹117. Compute the TERP and the value of one rights entitlement.

Answer
Per 7 old shares you get 2 REs. TERP \(= (7 \times 180 + 2 \times 117)/9 = (1{,}260 + 234)/9 = ₹166\). RE value \(= 166 - 117 = ₹49\).
Kaveri declares a final dividend of "60%". How much is paid per share, and what is the total cash outflow?

Answer
60% of the ₹5 face value = ₹3.00 per share; \(6.00 \text{ Cr} \times ₹3 = ₹18.0\) Cr.
A company earning EPS of ₹20 buys back shares at ₹400 using cash that earns 7% pre-tax (tax rate 25%). Is the buyback EPS-accretive? Does that tell you whether it creates value?

Answer
Earnings yield at the buyback price \(= 20/400 = 5.0\%\); after-tax yield on the cash given up \(= 7\% \times 0.75 = 5.25\%\). Since 5.0% < 5.25%, the buyback reduces EPS (slightly). That says nothing about value: the buyback creates value for remaining holders only if ₹400 is below intrinsic value per share.
Why did SEBI's April-2026 buyback tax change make it easier to restore open-market buybacks?

Answer
Under the earlier regimes, the tax burden fell on the company (pre-Oct-2024) or on the entire proceeds as a deemed dividend (Oct-2024 to Mar-2026), so selling into a buyback was taxed very differently from selling to another investor on the exchange — and an anonymous open-market buyback could not treat sellers equally. From 1-Apr-2026 sellers pay capital-gains tax on their actual gain, the same as an ordinary sale, removing that distortion; SEBI restored the route from 1-Aug-2026 with a 15% cap and promoter shares frozen.
A company announces a 1:4 bonus (one new share for every four held). Before it, the share was ₹1,000, EPS ₹40 and BVPS ₹250. What are the theoretical price, EPS, BVPS and P/E afterwards?

Answer
Shares rise by a factor of 1.25. Price \(= 1{,}000/1.25 = ₹800\); EPS \(= 40/1.25 = ₹32\); BVPS \(= 250/1.25 = ₹200\); P/E \(= 800/32 = 25\)x — unchanged.
A promoter is issued warrants at ₹500, pays 25% upfront, and can exercise within 18 months. Describe the payoff as an option, and name two inputs that increase the value transferred to the promoter.

Answer
A call struck at ₹375 (the unpaid 75%) with a ₹125 premium already paid, expiring in 18 months; the premium is forfeited if the share ends below ₹375. The transfer (option value − ₹125) rises with higher volatility and longer time to expiry (also with a higher share price relative to the issue price at allotment and higher interest rates).

Go deeper¶

SEBI, ICDR Regulations, 2018 and the Buy-back Amendment Regulations, 2026 — the primary rules; skim the chapter headings so you know where to look.
Wipro's 2026 buyback letter of offer — a real tender offer end to end: entitlements, promoter participation, and the new tax section.
Merton H. Miller & Franco Modigliani, "Dividend Policy, Growth, and the Valuation of Shares", Journal of Business 34(4), 1961 — why payouts don't create value in a frictionless world, and hence where to look for frictions.
Richard Brealey, Stewart Myers & Franklin Allen, Principles of Corporate Finance — the chapters on payout policy and on how corporations issue securities.
Chittorgarh.com — Indian IPO, rights, OFS and buyback data (subscription levels, entitlement ratios); verify against the offer documents.

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