Understand buybacks and rights issues

1.2.6 · Stock-Market › Shares, Ownership & Indices

Core Concepts

Dono fundamentally ownership percentages aur share count ko change karte hain, lekin opposite directions mein aur opposite reasons ki wajah se.

Share Buybacks

Companies buybacks KYO karti hain?

1. Undervaluation signal dena: Management ko lagta hai ki shares intrinsic value se neeche trade ho rahe hain
2. Excess cash return karna: Kai jurisdictions mein shareholders ke liye dividends se zyada tax-efficient
3. Metrics improve karna: Share count kam karo → EPS (Earnings Per Share) badhao, chahe absolute earnings flat rahe
4. Dilution rokna: Employee stock options se issue hue shares ko offset karna
5. Capital structure adjust karna: Equity financing se debt ki taraf shift karo (leverage badhao)

Yeh mechanically HOW kaam karta hai?

Buyback se pehle: $\text{Your ownership}=\frac{n}{N_0}$

Buyback ke baad: $\text{Your ownership}=\frac{n}{N_0-\Delta N}$

Ownership mein change: $\Delta \text{ownership}=\frac{n}{N_0-\Delta N}-\frac{n}{N_0}=n\left(\frac{1}{N_0-\Delta N}-\frac{1}{N_0}\right)$

$=n\cdot \frac{N_0-(N_0-\Delta N)}{N_0(N_0-\Delta N)}=\frac{n\cdot \Delta N}{N_0(N_0-\Delta N)}$

Yeh step KYO? Hum ek common denominator dhoondh rahe hain yeh dekhne ke liye ki ownership badhti hai (numerator positive) kyunki denominator tumhare numerator ke constant rehne se zyada tezi se shrink hota hai.

Step 1: Repurchase hue shares calculate karo $\text{Shares bought back}=\frac{\text{Buyback amount}}{\text{Price per share}}=\frac{₹100\text{M}}{₹100}=1,000,000\text{ shares}$

Yeh step KYO? Total cash ko price se divide karne par pata chalta hai ki company kitni quantity afford kar sakti hai.

Step 2: Naya share count $N_{\text{new}}=10,000,000-1,000,000=9,000,000\text{ shares}$

Step 3: Tumhari nayi ownership $\text{Old ownership}=\frac{1,000}{10,000,000}=0.01\%$ $\text{New ownership}=\frac{1,000}{9,000,000}=0.0111\%(+11\%\text{ relative increase})$

Tumhara percentage KYO badhta hai? Tumne nahi becha, lekin doosron ne becha (ya company ne market se kharida). Pie chhoti ho gayi, tumhara slice same size raha → bada percentage.

Step 4: EPS impact (maano earnings unchanged hain)

• Old EPS: Maano ₹200M profit → ₹200M / 10M = ₹20 per share
• New EPS: ₹200M / 9M = ₹22.22 per share (+11%)

Yeh step KYO? Same profit ko kam shares se divide karo = higher per-share earnings, jo aksar higher stock prices support karta hai.

Steel-man: Tum sahi ho ki mechanically ownership % badhti hai. LEKIN:

1. Opportunity cost: Agar company ₹100/share pay karti hai lekin intrinsic value ₹80 hai, toh woh value destroy kar rahi hai. Woh ₹100M R&D, expansion, ya acquisitions mein invest ki ja sakti thi jo >100% returns deti.
2. Debt-funded buybacks: Agar borrow kiye paise buyback finance karte hain, toh company ke paas ab kam cash HAI AUR zyada debt. Interest expense future earnings ko hurt kar sakta hai.
3. Timing risk: Peak valuations par buybacks (cyclical highs) capital waste karte hain.

Fix: Evaluate karo kyun aur kis price par buyback ho raha hai. Achhe buybacks tab hote hain jab shares undervalued hon aur company ke paas koi better investment opportunity na ho.

Rights Issues

Companies rights issues KYO karti hain?

1. Capital raise karna: Expansion, debt reduction, ya survival ke liye funds chahiye (distressed companies)
2. Loyalty reward karna: Existing shareholders ko discounted shares ka pehla mauka milta hai
3. Dilution avoid karna (participants ke liye): Agar tum apne rights exercise karo, tumhari ownership % constant rehti hai
4. Debt se sasta: Koi interest payments nahi, haalaanki yeh EPS ko dilute zaroor karta hai

Yeh HOW kaam karta hai?

Total naye shares issued: $N_{\text{new}}=N_0\times \frac{R}{S}$

Issue ke baad total shares: $N_{\text{total}}=N_0+N_{\text{new}}=N_0\left(1+\frac{R}{S}\right)=N_0\cdot \frac{S+R}{S}$

Theoretical Ex-Rights Price (TERP): Market price par purane shares aur subscription price par naye shares ke weighted average se derive kiya jaata hai.

$\text{TERP}=\frac{N_0\cdot P_{\text{market}}+N_{\text{new}}\cdot P_{\text{sub}}}{N_0+N_{\text{new}}}$

$N_{\text{new}}=N_0\cdot \frac{R}{S}$ substitute karo:

$\text{TERP}=\frac{N_0\cdot P_{\text{market}}+N_0\cdot \frac{R}{S}\cdot P_{\text{sub}}}{N_0\left(1+\frac{R}{S}\right)}$

$=\frac{P_{\text{market}}+\frac{R}{S}\cdot P_{\text{sub}}}{1+\frac{R}{S}}=\frac{S\cdot P_{\text{market}}+R\cdot P_{\text{sub}}}{S+R}$

Yeh formula KYO? Naya fair price purane market cap aur raise hue naye cash ka weighted average hai, naye total shares se divide kiya gaya. Yeh value ka conservation hai: total value = (purani value) + (cash in), zyada shares mein spread out.

Step 1: Tum kitne naye shares khareed sakte ho? $\text{Your rights}=\frac{400}{4}=100\text{ new shares}$

Yeh step KYO? 1:4 ratio matlab har 4 shares ke liye tum 1 naya share khareed sakte ho.

Step 2: Rights exercise karne ki cost $\text{Cost}=100\times ₹120=₹12,000$

Step 3: Saare shareholders ko issue hue total naye shares $N_{\text{new}}=\frac{5,000,000}{4}=1,250,000\text{ shares}$

Step 4: Naye total shares $N_{\text{total}}=5,000,000+1,250,000=6,250,000$

Step 5: TERP calculate karo $\text{TERP}=\frac{4\times 150+1\times 120}{4+1}=\frac{600+120}{5}=\frac{720}{5}=₹144$

Yeh step KYO? Share price ₹150 se ₹144 par drop honi chahiye kyunki company ne saste shares issue kiye, jisse value per share dilute ho gayi.

Step 6: Agar tum rights exercise karo toh tumhari position

• Pehle: 400 shares × ₹150 = ₹60,000 value
• Tum pay karte ho: ₹12,000
• Baad mein: 500 shares × ₹144 (TERP) = ₹72,000 value
• Net change: ₹72,000 − ₹60,000 − ₹12,000 = ₹0 (theoretically neutral, tumne fair value pay ki)

Tumhari ownership:

• Pehle: 400/5,000,000 = 0.008%
• Baad mein: 500/6,250,000 = 0.008% (unchanged!)

Step 7: Agar tum exercise NAHI karte (tum rights ignore karte ho) toh tumhari position

• Pehle: 400 shares × ₹150 = ₹60,000
• Baad mein: 400 shares × ₹144 = ₹57,600
• Loss: ₹60,000 − ₹57,600 = ₹2,400 (4% dilution loss)

Tumhari ownership:

• Nayi: 400/6,250,000 = 0.0064% (tum 0.008% se dilute ho gaye!)

Yeh step KYO? Agar tum participate nahi karte, tumhari ownership % girti hai aur tumhare per-share value TERP par aa jaati hai, jisse loss hota hai.

Alag KYO hain?

• Buyback: Company cash-rich hai, shares undervalued hain → equity base shrink karo
• Rights issue: Company ko capital chahiye, equity debt ke comparison mein sasti hai → equity base expand karo

Steel-man: Haan, rights issues aksar mushkil times mein aate hain (debt burden, expansion failure). Lekin socho:

1. Growth rights issues: Ek company jo capital raise kar rahi hai high-return project fund karne ke liye (nayi factory, acquisition) bahut positive ho sakta hai. Market cap dilution se tezi se badhta hai.
2. Debt reduction: Mahenge debt ko equity se swap karna financial health improve kar sakta hai aur bankruptcy risk kam kar sakta hai.
3. Discount ek gift hai: Agar tum exercise karte ho, tum ₹144 waale shares ₹120 mein khareed rahe ho (hamare example mein, actual discount capture hoti hai).

Fix: Analyze karo kyun capital ki zaroorat hai. Company ka announcement, management commentary, aur use of proceeds padho. Ek booming market mein expansion ke liye rights issue alag hai, default avoid karne ke liye wale se.

Key Formulas Summary

Active Recall Practice

Buyback: Cookie jar company apne lunch money se 2 cookies kuch doston se wapas khareedti hai aur unhe phenk deti hai (weird hai, hai na?). Ab sirf 8 cookies total hain. Tumhare paas abhi bhi tumhari 1 cookie hai, lekin ab tum jar ka 1/8 own karte ho 1/10 ki jagah. Tumhara jar ka slice bina kuch kiye bada ho gaya!

Rights issue: Cookie jar khali hai, toh company 5 aur cookies bake karti hai lekin kehti hai, "Hey, tum 10 doston ko pehle yeh naye cookies khareedne ka mauka milta hai, discount par, kisi aur ko offer karne se pehle." Agar tum apna share khareedte ho (0.5 cookies, kyunki 5 naye cookies / 10 dost), tum abhi bhi jar ka 1.5/15 = 1/10 own karte ho. Lekin agar tum nahi khareedte, doosre bacche tumhara share khareed lete hain, aur tum ab sirf 1/15 own karte ho — tum "dilute" ho gaye.

Key: Buybacks tumhara piece bada karte hain (company cash kharach karti hai). Rights issues tumhara piece same rakhte hain sirf tab jab tum pay karke participate karo (company paise raise karti hai).

RIGHTS = Raise cash In, Give Holders The chance, Subscription price (discount)

Common Mistakes & Traps

Khaami:

1. Tum aur capital ek aisi company mein lock kar rahe ho jo shayad struggle kar rahi ho (warna shares kyun issue kar rahi hai?).
2. TERP ke comparison mein "discount" already priced in hai. Issue ke baad shares TERP par aa jaate hain. Tum ₹150 ke shares ₹120 mein nahi le rahe; tum ₹144 ke shares ₹120 mein le rahe ho (₹24 real gain per share, lekin tumhe ₹120 upfront pay karne padte hain).
3. Opportunity cost: Woh ₹12,000 kahin aur invest ki ja sakti hai.

Fix: Apna naya average cost calculate karo, company ke fundamentals aur use of proceeds check karo. Agar company bina kisi plan ke cash burn kar rahi hai, toh "discounted" price bhi overpaying ho sakti hai.

Reality:

1. Market efficiency: Agar market ko pata hai ki buyback aa raha hai, toh yeh aksar already priced in hota hai.
2. Shrinking business: Agar company ke paas koi growth opportunities nahi hain, toh buybacks ka matlab sirf yeh ho sakta hai ki unhe cash ke better uses nahi mil rahe. "Hum ek melting ice cube hain, lekin per share chhoti ice cube" — yeh bullish nahi hai.
3. Financial engineering: Peak valuations par debt-funded buybacks backfire kar sakte hain jab interest rates badhein ya business slow ho jaaye.

Fix: Buyback ke time valuation, debt levels, aur management ka wise capital allocation ka history evaluate karo.

Connections

• Price-earnings ratio (P/E): Buybacks EPS inflate karte hain, jo mechanically P/E ratio lower karta hai
• Dividend policy: Buybacks cash return karne ke liye dividends ka ek alternative hain
• Market capitalization: Rights issues market cap badhate hain (agar markets approve karein), buybacks ise roughly unchanged rakhte hain
• Dilution and anti-dilution: Rights issues non-participants ko dilute karte hain; buybacks dilution reverse karte hain
• Book value per share: Dono actions book value per share alter karte hain
• Capital structure: Buybacks debt ki taraf shift karte hain, rights issues equity ki taraf shift karte hain
• Corporate governance: Buyback timing aur rights issue terms management quality reveal karte hain
• Stock splits: Similar share-count changes, lekin splits cosmetic hain (koi cash flow nahi)

#flashcards/stock-market

Concept Map