If you’ve bought shares on the ZSE, you have bought on the secondary market. That is where shareholders can sell shares to other shareholders. When a company sells or gives new shares to shareholders this is called the issuance of shares. There are few ways that companies (listed, public or private) can issue shares to shareholders. To give you an understanding of these types of share issues we will discuss them briefly with some practical examples where they are available. The focus will be from the perspective of a publicly traded company but some of the methods apply to other types of companies as well.
The ZSE has in the recent past been starved of fresh share issues. The public offering or initial public offering is referred to as the primary market. A company issues shares and receives the money for the shares in their company account. The point of this is to raise capital. Public offerings are handled by intermediaries in the form of underwriters who are charged with matching the public offering to buyers. We can draw an example from the introduction of Cassava in 2018. The last Initial Public Offering on the ZSE was ZECO in 2009.
The bonus issue occurs when a company awards existing shareholders free shares. The shares are normally given in proportion to the number of shares a shareholder holds. You may be awarded one additional share for every 2 shares you hold. Simple and straightforward. There is a matter of dilution to consider here. The equity value of the company remains the same but will now be divided amongst a greater number of shares, therefore the value of each share will be diluted. Imagine a company with 10 shares valued at $1 awards bonus issues of 5 shares. The capital remains at $10 but the number of shares is now 15 so each share is worth 66.67 cents. Note that a bonus issue doesn’t change the proportion of holding by a shareholder. You may also find a bonus issue being called stock splits. They are used to allow shareholders to split their shareholding if they desire to sell part of it.
The rights issue is a very popular mechanism. It awards rights, hence the name, to existing shareholders to purchase additional shares in the company, usually at a heavily discounted price. Rights are optional and can be taken up or turned down. The money in this case goes to the company. It is a method of raising additional finance for companies. Just like a bonus issue, there are a few additional issues to be aware of with the rights issue. Firstly rights have a dilutive effect. They increase the number of shares without a commensurate increase in equity. Assume a company has 10 shares valued at $1 each and there is a rights issue for an additional 5 shares at 10 cents each. Assuming all rights are taken up the company will now have 15 shares and equity of $10.50, meaning each share will now be worth 70 cents each. Secondly rights have a value beyond their price, in our example a right is worth 70 cents less its cost of 10 cents 600 so there is 60 cents to be made from taking up rights. Since rights are transferrable this value can be accessed. The most recent rights issue on the ZSE was carried out by Edgars in 2020.
Another method of issuing shares that regular readers will be familiar with from our article on types of dividends is the Scrip issue or dividend issue. In this case, a company awards shareholders additional shares in the company as dividends. This is different from a bonus issue where the shares are issued for free as they have a cost to the company. Scrip issues also have a dilutive effect on the value of shares as we have more shares for the same amount of equity. There have been many scrip issues on the ZSE recently with companies including NMB in 2018, the Proplastics in 2019, Edgars in 2019, now delisted Powerspeed Electrical in 2019 and SeedCo Limited in 2019 as well.
The private placement is a special transaction that is seen more commonly with institutional investors. It can be executed in a fresh share issue or in an additional capital call at least in theory. In a private placement, shares are offered to a specific investor or group of investors as opposed to the general public. They are more common in the initial stages of company formation, you can look at the example of Econet which had a private placement arrangement with Old Mutual in its earlier years. Private placements bring additional capital to the company and whether or not they have a dilutive effect depends on the price the placement is made at.
Finally, the stock dividend is one regular reader should already be familiar with. If you’re not familiar with it have a read on the previous article on the types of dividends. The stock dividend occurs when a company awards shareholders shares in another company as dividends. Similar to a scrip issue but the company awards shares in another company, not itself. So it is an issue of shares in the second company. As a practical example, you can look at the unbundling of Proplastics from Masimba Holdings in 2015.
Understanding the various types of share issues is important. Knowing how they impact existing shareholders can give you heads-up on the way forward if you hear of or come across them in a company you hold or are interested in.