How to Buy Cash Capital Increase Subscription: A Complete Guide from Evaluation to Subscription

When a publicly listed company announces a cash capital increase, you face an important decision: should you participate in the share offering? This seemingly simple choice actually involves a comprehensive assessment of the company’s financial plans, market trends, and personal investment strategies. This guide will take you from zero to understanding the full process of participating in a cash capital increase, helping you make clearer investment judgments.

How to buy shares in a cash capital increase depends on understanding three key aspects: first, evaluate whether this capital increase is worth participating in; second, choose the most suitable subscription method for yourself; third, follow the correct process to execute the transaction. Whether you’re a long-term investor or a short-term trader, this guide can help you avoid common pitfalls and seize share subscription opportunities.

Things You Must Know Before Participating: The Three Types of Cash Capital Increases

Before deciding whether to participate in a cash capital increase, you first need to understand which type of capital increase you’re facing, because different methods carry different risks, rewards, and operational procedures.

Type 1: Public Underwriting, Open to Everyone

Public underwriting is the most common and transparent method for cash capital increases. The company issues new shares publicly through a securities firm to all investors, similar to an open stock purchase event. A typical feature is a clear subscription price (usually slightly below the market price, known as a discount issuance), and any shareholder holding the stock can subscribe proportionally.

The advantage of this method is transparency and fairness. The process is straightforward, and rules are clear. The downside is that because it’s open to the public, underwriting costs are higher, and the additional stock supply may exert short-term downward pressure on the stock price. For example, if you hold 1,000 shares of a listed company and the company decides to issue new shares at a ratio of 1 new share for every 10 shares held, you would have the opportunity to subscribe for 100 shares.

Type 2: Private Placement, Limited to Specific Parties

Private placement involves the company directly negotiating with specific investors (usually institutional investors, strategic partners, or major shareholders) to subscribe, without open public offering. The company can allocate new shares at negotiated prices to targeted parties.

Private placements are highly flexible. The company can adjust prices and terms based on the identity and subscription amount of the investors. Common additional terms include lock-up periods (investors cannot sell shares for a certain period after purchase), board nomination rights, anti-dilution protections, etc. Small shareholders usually cannot participate in these offerings, but if you are a major shareholder or an institutional investor, this could be a lower-cost entry opportunity.

Type 3: Shareholder Priority Rights Offering, Protecting Existing Shareholders

This is the most shareholder-friendly method. The company grants existing shareholders the right of first refusal, allocating new shares proportionally based on current holdings. In theory, if you exercise all your rights, your ownership percentage remains unchanged.

This method embodies fairness and respects shareholder rights, but it requires you to actively exercise your subscription rights. If you do not subscribe or do not subscribe enough, your ownership stake will be diluted.

Evaluating a Cash Capital Increase: Five Key Points for Investors

When facing a cash capital increase, don’t rush to follow the crowd. Instead, evaluate from these five perspectives to make rational decisions.

Point 1: Is the Fundraising Purpose Clear and Verifiable?

The most important thing is to understand how the company plans to use the funds. The purposes generally fall into three categories: (1) Growth-oriented, such as building new factories, purchasing production equipment, or developing new products; (2) Financial optimization, such as debt repayment or capital structure improvement; (3) Strategic moves, like mergers and acquisitions or strategic investments.

Growth-oriented capital increases are usually viewed positively by the market because they indicate expansion and development potential. Financial optimization raises concerns about financial stress. Ideally, the company should specify the use, provide a timeline, and project benefits. For example, “raising NT$100 million to build a new factory, expected to be completed by end of 2026, with an estimated 30% increase in annual capacity” is more reassuring than “raising funds for operational expenses.”

Point 2: Is the Price Reasonable and What is the Discount?

A common practice is issuing new shares at a price below the current market price, known as a discount. The discount typically ranges from 5% to 15%, but in extreme cases, it can exceed 20%.

You need to assess whether this discount is reasonable. A moderate discount (5%-10%) is generally acceptable, reflecting the attractiveness of the new shares and market conditions. If the discount exceeds 15%, be cautious, as it may indicate market pressure on the stock price or lack of confidence in the offering. Also, compare the subscription price with the company’s past stock price trend and future potential.

Point 3: Who Are the Subscribers and How Transparent Is the Process?

Check who is subscribing to these new shares. If mainly allocated to major shareholders or related parties with opaque pricing, it’s a red flag. Conversely, if all shareholders have equal pre-emptive rights or if well-known institutional investors are involved, transparency is higher.

In Taiwan, regulators require full disclosure of subscription parties and their identities to prevent insider arbitrage. Review the company’s official announcements carefully.

Point 4: The Company’s Financial Health

Always review the company’s fundamentals before participating. Key indicators include: cash reserves, operating cash flow, debt ratios, and gross profit margins.

If the company has tight cash flow and high debt but claims to raise funds for expansion, that’s contradictory. Consider why the company doesn’t use existing cash for growth. This may reflect management’s lack of confidence in the company’s prospects.

Point 5: Timeline and Usage Plan

Fundraising purposes should come with specific timelines. The company should specify when funds will be used, when the project will start and finish, and the expected financial impact. Responsible companies regularly update investors on progress.

If the company only vaguely states “for operational expenses” without a clear plan or schedule, be cautious.

Practical Steps in the Cash Capital Increase Subscription Process: From Announcement to Payment in Six Steps

After understanding the types and evaluation methods, let’s look at the actual subscription process.

Step 1: Monitor Company Announcements and Regulatory Approvals

Typically, the company proposes a plan to the board, discussing the size, price range, and subscription parties. Once approved, the company must report to and obtain approval from regulatory authorities (in Taiwan, the Financial Supervisory Commission and the Taiwan Stock Exchange). During this phase, closely follow official announcements and regulatory news.

After approval, the company will publish detailed subscription terms, including price, period, and quantity. This is your critical decision point.

Step 2: Obtain Subscription Quota and Rights

If it’s a shareholder priority or public offering, your broker usually automatically calculates your subscription quota. For example, if the company sets a ratio of 1 new share for every 10 shares held, and you own 1,000 shares, your quota is 100 shares.

This information is often available via your broker’s app or notifications. Some brokers notify you proactively; others require you to check. Log in promptly after the announcement.

Step 3: Assess the Subscription Price and Make Your Decision

Once you receive your quota, compare it with your prior evaluation. Key questions include: (1) What is my actual cost at the subscription price? (2) Is this price reasonable compared to the current stock price and future prospects? (3) Do I have sufficient funds? (4) Can I accept the risk?

If all answers are yes, proceed to the next step. If not, it’s rational to skip.

Step 4: Complete the Subscription Within the Deadline

Subscription periods are limited. In Taiwan, it usually starts 5 trading days after the announcement, with a window of 5-10 trading days. Check the specific dates.

Use your broker’s online system to submit your subscription. Some brokers accept phone or in-person applications. Don’t miss the deadline; once it passes, you cannot participate in this round.

Step 5: Payment and Fund Transfer

After confirming your subscription, you must pay by the specified date. Payment methods typically include: (1) automatic deduction from your brokerage account; (2) transferring funds to a designated account.

Ensure sufficient funds are available. Failure to pay invalidates your subscription and may blacklist you for future offerings. Payment amount = number of shares × subscription price. For example, 100 shares at NT$30 each requires NT$3,000.

Step 6: Listing and Trading of New Shares

Once paid, the company registers the new shares, and they are usually credited to your account within 10-15 trading days. The shares then start trading publicly. You can see the new holdings in your broker account and trade accordingly.

Note: If there is a lock-up period (common in private placements or special allotments), the shares may be restricted from sale for a certain time (e.g., 1 year). Confirm whether such restrictions apply before participating.

Comparing Public Underwriting, Private Placement, and Shareholder Rights: Which One Is Right for You?

A company may offer multiple types of capital increases simultaneously, or you may need to choose among different offerings. Comparing their pros and cons helps.

Public Underwriting: Three Main Features

Advantages:

• Equal opportunity for all shareholders
• Transparent rules
• Usually offered at a discount of 5%-10%
• Regulated and fully disclosed, reducing risks

Disadvantages:

• Higher costs (underwriting fees, legal, audit)
• Longer process
• Large new share influx may temporarily depress stock price, especially if discount is large or market reacts negatively

Private Placement: Flexibility and Speed

Advantages:

• Fast and flexible procedures
• Negotiable pricing and terms
• Can offer favorable conditions to strategic investors or major shareholders

Risks:

• Lower transparency
• Limited participation for small shareholders
• Potential for less favorable terms or insider advantages
• May involve complex clauses like anti-dilution or board rights, affecting company control

Shareholder Rights Offering: Fair and Protective

Advantages:

• Fair to existing shareholders
• No dilution if fully exercised
• Encourages long-term holding

Disadvantages:

• Requires active exercise of rights
• If you cannot or do not want to subscribe fully, your stake will be diluted
• If other shareholders do not subscribe, remaining shares may be allocated differently, possibly at unfavorable terms

Practical Advice

Choose based on your status and goals. Small investors with limited funds may prefer public underwriting or rights offerings for transparency and fairness. Institutional investors or major shareholders might opt for private placements for flexibility and negotiated terms. Always evaluate risks, terms, and your own capacity.

Will EPS Be Diluted? Analyzing the Financial Impact of Share Subscription

Many investors worry: after subscribing, will EPS decrease? Will my investment be diluted? This is a very practical concern.

Short-term Dilution Is Almost Inevitable

Without corresponding profit growth, issuing new shares will almost certainly dilute EPS. The formula is straightforward: EPS = Net Profit ÷ Total Shares Outstanding. If net profit remains unchanged but shares increase, EPS drops.

For example, if a company earns NT$100 million with 10 million shares (EPS = NT$10), and it issues 2 million new shares, total shares become 12 million, and EPS drops to NT$8.33, a 16.7% decrease.

This short-term effect will be reflected in the next earnings report.

Long-term Depends on Fund Utilization

However, the story doesn’t end there. The key is how the company uses the raised funds. If invested effectively in high-return projects, profits will grow, potentially offsetting or reversing EPS dilution.

Suppose the company invests in expansion, and after production starts, net profit increases by NT$50 million annually. Now, net profit is NT$150 million, and with 12 million shares, EPS becomes NT$12.5, higher than before. This is the “profit recovery after dilution.”

Conversely, if funds are used just to cover losses or pay down debt without profit growth, EPS will remain diluted in the long run, negatively impacting shareholders.

Valuation and Return Are the Final Tests

To judge whether participating is worthwhile, look beyond short-term EPS. Estimate the long-term growth and profitability. Use the post-dilution EPS and apply a reasonable P/E ratio to project the potential stock price. If the projected price exceeds your purchase price, participation may be justified. If dilution significantly compresses the valuation, it might not be worthwhile.

Advanced methods like discounted cash flow (DCF) models can help assess whether the current subscription price is attractive based on future cash flow expectations.

Long-term Monitoring After Participation: Key Points

Participation isn’t the end of the story. You need to keep tracking the company’s progress to ensure funds are used as promised and achieve expected results.

Regularly Check Fund Usage Progress

Public companies are obliged to report on how they use the raised funds periodically. Review quarterly and annual reports for updates. Compare actual progress with initial plans.

If the company fails to use funds as committed, or diverts them elsewhere, it’s a warning sign. Reassess your holdings accordingly.

Monitor Financial Indicators

Beyond EPS, track revenue, gross profit margin, operating cash flow, and debt levels. The goal of raising funds should be to boost revenue and profits. If these indicators stagnate or worsen, the fundraising may not have achieved its purpose.

Pay special attention to cash flow. Sometimes profits increase but cash flow deteriorates, indicating poor earnings quality.

Watch for Further Dilutive Actions

Some companies may initiate additional capital raises shortly after, or implement share conversions or rights issues, causing further dilution. Keep an eye on such developments.

Assess Management’s Credibility

Finally, observe management’s decision-making and integrity. If promises are repeatedly delayed, funds are misused, or inconsistent statements are made, trust erodes. Consider reducing or exiting your position if necessary.

Common FAQs About Cash Capital Increase and Share Subscription: Top 10 Investor Questions

Q1: Will a cash capital increase necessarily cause the stock price to fall?

Not necessarily. In the short term, increased supply may pressure the price downward. But long-term effects depend on the use of funds and actual company performance. If the capital is used effectively to enhance competitiveness and profitability, the stock price may rise. The market prices the offering based on specific circumstances rather than automatically reacting negatively.

Q2: I don’t have enough funds to fully subscribe. What happens?

Many investors face this issue. You can choose to subscribe partially, accepting some dilution, or not participate at all, fully accepting dilution. Some investors subscribe partially and observe market reactions before deciding to add more. Decide based on your risk tolerance and financial capacity.

Q3: What happens if I choose not to subscribe?

Your ownership percentage will be diluted. For example, if the company issues new shares representing 20% of existing shares, and you do not subscribe, your stake drops from 100% to about 83% (100/120). Over time, your influence and per-share rights decrease.

Q4: When should I avoid participating?

Avoid if: (1) the purpose is unclear or suspicious; (2) the subscription price is significantly higher than the company’s prospects; (3) the company’s financial health is poor, and the raise seems like a last-minute rescue; (4) participation would significantly lower your overall investment return.

Q5: What does a lock-up period mean?

A lock-up period is a timeframe (usually 1-3 years) during which the new shares cannot be sold. Common in private placements or special allotments. It helps stabilize the stock price but limits liquidity. Confirm whether such restrictions exist before subscribing.

Q6: How do I determine if the subscription price is fair?

Compare it with the company’s average stock price over the past 6-12 months. Usually, the subscription price is at a 5%-15% discount. But also consider the company’s future growth potential. If you believe the company will grow significantly, a slightly higher price might still be acceptable.

Q7: What does institutional investor participation indicate?

Typically a positive sign. Large institutional investors (funds, insurance companies, sovereign funds) have professional research teams. Their participation suggests confidence in the company’s future. But it’s not foolproof; they can also make mistakes.

Q8: Can I subscribe only partially?

Yes. Most brokerage systems allow you to subscribe for part of your quota. For example, if your quota is 100 shares, you can choose to subscribe for only 50. This reduces capital outlay and risk.

Q9: How soon can I sell the new shares after subscription?

If there’s no lock-up, the shares can be traded immediately after listing. Some investors sell quickly to realize gains; others hold long-term. Be aware that quick trading incurs transaction costs and taxes.

Q10: How should I balance participation in share offerings with other investments?

Participation should fit your overall asset allocation. If you are heavily concentrated in one stock, participating in a new issue may increase risk. Consider reducing existing holdings or diversifying before participating. Always align with your investment goals and risk management principles.

Final Reminder

Participating in cash capital increases may seem complex, but by following this guide step-by-step, you can significantly improve your decision quality. The core logic is simple: evaluate the company’s prospects → assess the subscription price → participate cautiously → monitor long-term.

Every participation is a learning opportunity. Even if you choose not to participate, analyzing why the company is raising funds, how the market reacts, and the eventual outcome will help you become a more mature and rational investor. Wishing you success in your decision-making regarding cash capital increases!