Issuing Shares: Public Offers, Placings, Underwriting and Buy-Backs

A company that has outgrown its retained profit and its bank facilities can go to its owners, or to the public, for new equity. How it does so depends on what the company is, how much it needs, and whether its shares are already traded.

A private company has very few options; a public company can choose between a public offer, a placing and a rights issue; a company that no longer needs all its capital can do the opposite and buy shares back.

This topic explains the difference between private and public companies in raising equity, the methods of issuing new shares for cash (public offer or initial public offering, offer for subscription and for sale, offer by tender, placing and stock exchange introduction), how the issue price is set, why and how issues are underwritten, the Nigerian regulatory framework, and share repurchases, with worked calculations. The next topic covers rights issues in detail.

The factors affecting the issue price of new shares were tested in May Diet, 2026, Question 5(b) (5 marks), alongside the advantages and disadvantages of a full stock exchange listing. Read long-term sources of finance: equity, debt, hybrids and leases first.

Private and public companies

A private company cannot offer its shares for sale to the general investing public, and its shares cannot be traded on a stock market. It can sell shares privately, but investors are reluctant: the shares are difficult to value and difficult to sell. Existing owners rarely have enough personal capital to buy much more.

So small and medium-sized companies, which are mostly private, depend on retained profit, and because their profits are small this limits their growth. Under the Companies and Allied Matters Act 2020, section 22(5)(a), a private company cannot invite the public to subscribe for its shares; to do so it must first be re-registered as a public company.

A public company may offer its shares to the public, and may have them traded on a stock market. The market gives the shares a recognisable value (the market price) and lets shareholders sell when they wish, which makes the shares more attractive and the cost of equity lower.

Before shares can be traded, the company must satisfy the regulator (the Securities and Exchange Commission, under the Investments and Securities Act 2025 and its rules) that the company and its shares meet the requirements and that suitable information will be available to investors, and must be accepted by the exchange.

The Nigerian Exchange (NGX) has a Premium board, a Main board, a Growth board and a Technology board; the Main and Premium boards currently require a minimum public float of 20% of each class of equity, or alternatively free-float shares worth at least ₦20bn (Main) or ₦40bn (Premium), and the Growth board is less demanding. These requirements are under review, so check the current rules.

Methods of issuing new shares for cash

• Public offer: an offer of new shares to the general public. The costs are high, so it is used for large issues. A company whose shares are already traded generally cannot make a public offer without shareholders’ permission, because the existing shareholders would be diluted (and the law gives shareholders a pre-emptive right to be offered new shares first), so it uses a rights issue or a placing instead. A public offer is often used to bring a company to the market for the first time, an initial public offering or flotation. The terms prospectus issue and offer for sale are also used.
• Offer for subscription and offer for sale: in an offer for subscription the company issues new shares and receives the cash, increasing its share capital. In an offer for sale existing shareholders (the vendors) sell shares to the public; the company receives nothing. An initial public offering may combine both: if the company issues 5,000,000 new shares at ₦600 (₦3,000m) and existing shareholders sell 2,000,000 shares at ₦600 (₦1,200m), only the ₦3,000m is new capital for the company.
• Offer for sale by tender: investors bid for shares at prices of their own choosing; the issue price is the lowest price that sells all the shares. It is now very uncommon.
• Placing: a sale of a relatively small number of new shares to selected institutions. It is cheaper and quicker than a public offer and suits a listed company that needs a modest sum; the prior approval of existing shareholders should be obtained.
• Stock exchange introduction: existing shares are admitted to trading for the first time with no new shares issued and no cash raised. It is rare, and may be used by an established company whose shares are already widely held. Once listed, the company can issue new shares later by a placing or rights issue.

How many shares to issue

A company wants to raise ₦1,200m net in a flotation. Issue costs are 4% of the gross amount, and the issue price is ₦600. The net amount is 96% of the gross, so the gross amount is 1,200 ÷ 0.96 = ₦1,250m (costs ₦50m), and the number of shares is 1,250m ÷ 600 = 2,083,334 shares.

Setting the issue price

The issue price is a trade-off: too high and the issue may fail; too low and the company gets less cash for the shares it gives up. The factors are:

• The expected market price after the issue, estimated from the company’s earnings, dividends and growth and from the price/earnings (P/E) ratios of comparable listed companies. For example advisers may expect a market price of ₦600 to ₦700 and recommend an issue price of ₦600.
• A discount to attract subscribers. New investors need a reason to buy, so a discount is usual. A larger discount makes a failed issue less likely, but means more shares for the same cash (more dilution).
• Market conditions, including the level of share prices, interest rates and investor confidence at the time.
• The size of the issue and the method: a rights issue is usually at a deeper discount than a public offer.
• Whether the issue is underwritten, and the advice of the issuing house or underwriters.
• The rules of the exchange and the regulator, including pricing by book-building (collecting investors’ bids to set the price).

Underwriting

Large issues are usually underwritten: a group of institutions agrees to buy, at the issue price, any shares that the public does not take, up to a stated maximum, in return for an underwriting commission, a percentage of the value they underwrite. The benefit is certainty: no unsold shares and the expected cash. The cost is the commission.

A company that does not want to underwrite a rights issue may price the shares at a very low price, a deep-discounted issue, so that investors take them up anyway.

In Nigeria, public offers used to be subject to a rule requiring issuing houses to underwrite 80% of the offer, which the regulator later relaxed to allow book-building or discretionary underwriting; the current rules should be checked. A question will say which applies.

Example: an issue of 100m shares at ₦40 raises ₦4,000m. If 80% is underwritten (₦3,200m) at a commission of 2%, the cost is 0.02 × 3,200 = ₦64m, which the company pays whether or not the underwriters have to buy any shares.

Share repurchases

A company may instead buy back some of its own shares and cancel them, reducing equity and cash. In Nigeria the Companies and Allied Matters Act 2020 and the Securities and Exchange Commission rules allow buy-backs by public companies subject to conditions, including disclosure of the source of the funds. There are two main reasons:

1. Surplus cash. The company has more cash than it needs and earns a low return on it; buying back shares raises the earnings per share of the remaining shares, and may raise the price.
2. Cheaper debt. Debt is available and cheaper than equity, so the company replaces equity with debt, raising its gearing.

Example. A company earns ₦20,000m a year with 500m shares, so earnings per share (EPS) are ₦40; at a price/earnings ratio of 12 the price is ₦480 and the earnings yield is 1 ÷ 12 = 8.33%. It buys back 25m shares for ₦12,000m. (a) Funded from cash earning 10% before tax (7% after tax): profit falls by 12,000 × 7% = ₦840m to ₦19,160m, and the shares fall to 475m, so EPS rises to ₦40.34 (+0.8%).

(b) Funded by borrowing at 18% (12.6% after tax): profit falls by ₦1,512m to ₦18,488m, so EPS falls to ₦38.92 (−2.7%). The rule: a buy-back raises EPS only if the after-tax cost of the funds is below the earnings yield (8.33%), which cash at 7% is and debt at 12.6% is not. The effect on the share price depends on how the market views the greater risk of the higher gearing.

The ideas in more depth

Why a discount is needed

Investors know less about the company than its managers do, and a new issue adds supply. A discount compensates them for the risk of being wrong and persuades them to switch from other investments.

It is not a loss to existing shareholders if they take part in the issue, because the cash raised is added to the company; it only matters when new shares go to outsiders at a low price.

Why a buy-back is not free value

A buy-back cuts the number of shares, but also the cash that earned income, so earnings per share rise only slightly when cash is used. If it is paid for with debt, the extra interest and the higher financial risk may outweigh the gain. The value of a share depends on the future cash flows and the risk, not on the earnings per share alone.

Sources and references

• The Companies and Allied Matters Act 2020 (sections on private companies, pre-emption and share buy-backs); the Investments and Securities Act 2025 and the Securities and Exchange Commission Rules and Regulations (including the rule on share buy-backs by public companies); the Nigerian Exchange listing rules. Public offering and underwriting rules have been amended, so apply the rules given in a question.

These points are stated as at 5 November 2026.

Worked examples

1. Gross amount.
   1,200 ÷ 0.96 = ₦1,250m.
2. Shares.
   1,250m ÷ 600 = 2,083,334.

1. Amount underwritten.
   0.8 × 4,000 = ₦3,200m.
2. Commission.
   2% × 3,200 = ₦64m.

1. Profit.
   20,000 − 840 = ₦19,160m.
2. EPS.
   19,160 ÷ 475 = ₦40.34.

How to answer in the exam

• Match the method to the company: private or public, listed or not, the amount needed.
• For issue price, give several factors and apply them to the data in the question.
• Calculate carefully: net and gross proceeds, number of shares, costs and dilution.
• For buy-backs, compare the after-tax cost of the funds with the earnings yield and mention gearing.

Common mistakes in the exam

• Treating issue costs as a percentage of the net amount instead of the gross.
• Counting the proceeds of an offer for sale as new capital.
• Saying that a private company can make a public offer.
• Forgetting the cost of underwriting even if no shares are left over.
• Assuming a buy-back always raises earnings per share.
• Giving one issue price factor, without applying it.

Quick revision

• Private: no public offer. Public: public offer, placing, rights issue.
• Subscription raises cash; sale does not; introduction lists only.
• Price: expected market price, discount, conditions, advice.
• Buy-back raises earnings per share if after-tax cost of funds is below the earnings yield.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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