Part 6 · Reading disclosures beyond the numbers · Lesson 31
Paid-in capital increases, convertible bonds (CB) and treasury stock disclosures
When a company issues new shares or buys back and cancels its own shares, your ownership stake and the slice each share represents change. Learn to read share-count disclosures with simple math.
QToday's question
Isn't it good news when a company raises new money? Why does the stock price fall when a paid-in capital increase is announced?
It is true that cash comes into the company's account. But if that money comes from new shareholders, the number of slices the company is divided into goes up. Conversely, if the company buys back its own shares and cancels them, the number of slices goes down. In this lesson, you will calculate three share-count disclosures in terms of ownership %, EPS and BPS.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 2, you saw that material event reports are timely disclosures filed by the day after the event. In Lesson 9, you looked at share capital (2 million shares × KRW 500 par value = KRW 1 billion) and capital surplus. In Lesson 16, you calculated that cancelling 100,000 treasury shares lifts EPS from KRW 600 to about KRW 632, and that converting 200,000 CB shares lowers it to about KRW 545. The BPS of KRW 3,000 from Lesson 24 moves again today. Today we connect those calculations to the actual types of filings.
- STEP 1 · Basic conceptsThree disclosures that change the share count
Explain how a rights offering, a , and purchases and cancellations each change the share count and equity.
- STEP 2 · Understanding the principleWho receives the new shares is what matters
You can calculate how the differences among shareholder allotment, public offering and third-party allotment, and CB conversion price adjustment (refixing), affect existing shareholders.
- STEP 3 · Real-world applicationThe order for reading a material event report
In paid-in capital increase and CB filings, you can check five things first, and in treasury stock filings, you can tell 'acquisition' from 'cancellation'.
STEP 1Three disclosures that change the share count
The size of each slice depends on how many pieces you cut the pizza into. Disclosures that change the share count are disclosures that change the number of pizza slices.
Paid-in capital increase: selling new shares to raise money
A is when a company issues new shares and sells them for cash. Company equity rises, but so does the number of shares. If the fictional Robin Bakery sells 400,000 new shares (20% of the existing 2 million) at KRW 7,200 each, KRW 2.88 billion comes in. The share count becomes 2.4 million, and the KRW 6 billion of equity from Lesson 9 becomes KRW 8.88 billion (share capital up KRW 200 million + capital surplus up KRW 2.68 billion).
If net income stays at KRW 1.2 billion, EPS = KRW 1.2 billion ÷ 2.4 million shares = KRW 500, down about 17% from KRW 600. Until the new money is used to grow profit, each share's slice gets smaller. This is . That is why share prices often weaken after a capital increase is announced.
Convertible bond: debt that later becomes shares
A starts out as interest-paying debt, but it is a bond that investors can exchange for shares at a set price (the conversion price) if they wish. If the fictional Robin Bakery issued KRW 1.8 billion of CBs at a conversion price of KRW 9,000, then 200,000 new shares are created when everything is converted. As calculated in Lesson 16, shares become 2.2 million and EPS about KRW 545. In exchange, KRW 1.8 billion of debt disappears and equity rises by KRW 1.8 billion, so BPS becomes KRW 7.8 billion ÷ 2.2 million shares ≈ KRW 3,545.
Treasury stock: buy it back, then cancel it
When a company buys its own shares on the market, it is a purchase. If the purchased shares are , the share count actually falls. If Robin Bakery buys 100,000 shares at KRW 9,000 and cancels them, shares become 1.9 million and EPS about KRW 632. Because KRW 900 million leaves the company, equity falls to KRW 5.1 billion and BPS actually drops to about KRW 2,684. It is normal for BPS to fall when a company whose share price is above BPS buys back its own stock.
Quick checkRobin Bakery issued 500,000 new shares. If net income stays the same, what will EPS be?
STEP 2Who receives the new shares is what matters
Even for the same 20% capital increase, the position of existing shareholders is completely different depending on who gets the new shares.
Three capital increase methods
| Method | Who receives the new shares | For existing shareholders |
|---|---|---|
| Shareholder allotment | Existing shareholders (in proportion to their holdings) | If you participate, you can keep your ownership %. If you do not, you are diluted. |
| Public offering | Anyone can subscribe | If you do not subscribe and buy, you are diluted. |
| A specific party chosen by the company | You are diluted with no chance to participate. Who the recipient is and whether the price is fair are the key points. |
New shares are usually issued below the market price. The KRW 7,200 in the example above is also 20% below the KRW 9,000 share price. Because of the discount, part of existing shareholders' value shifts to the new shareholders, so the bigger the discount, the heavier the dilution.
Dilution simulator · Robin Bakery (fictional), if I hold 20,000 shares (1%)
Pie: the dark part is existing shares, orange is newly created shares (for cancellation, grey is the shares that disappeared). This is a simple calculation assuming net income stays at KRW 1.2 billion; it does not include earnings growth from the new money or CB interest savings. All figures are fictional.
Conversion price adjustment (refixing)
CBs usually come with a clause that lowers the conversion price when the share price falls. This is called . If the conversion price drops from KRW 9,000 to KRW 6,300, the same KRW 1.8 billion buys about 286,000 shares, so the lower the share price falls, the more new shares are created. The Financial Services Commission's Regulation on Issuance and Disclosure of Securities sets the floor for adjustments due to market price declines at 70% of the initial conversion price, and from December 1, 2024, exceptions that go below 70% are allowed only with a special resolution of the shareholders' meeting for each issuance.
In Lesson 21, Dark Cloud Electronics (fictional) issued CBs three times over two years, KRW 6 billion in total. If the conversion price at issuance was set at KRW 5,000, then when everything converts to shares, KRW 6 billion ÷ KRW 5,000 = 1.2 million new shares are created. The share count more than doubles from 1 million to 2.2 million (+120%), and existing shareholders' share shrinks to 100 ÷ 220 ≈ 45%. Dividing Year 3 net income of KRW 300 million by 2.2 million shares takes EPS from KRW 300 to about KRW 136. The balance sheet looks better because KRW 6 billion of debt turns into equity, but earnings per share fall to less than half. This is the path by which shareholders of a company that survives on debt and CBs rather than profit are quietly diluted.
Common misconceptions
- "A paid-in capital increase is always bad news?"
- If the new money is invested in equipment that earns a high return, each share's slice can grow again over the long run. The interpretation differs depending on whether the use of funds is facility investment, debt repayment, or operating funds.
- "Buying treasury stock immediately reduces the share count?"
- If the company only acquires and holds them, the share count stays the same. It falls only when the shares are cancelled. That is why you must read 'acquisition decision' and 'cancellation decision' disclosures separately.
- "A CB is debt, so it has nothing to do with shareholders?"
- The moment it converts, it becomes new shares. Even CBs not yet converted are potential shares that could become stock at any time, so they are reflected in the diluted EPS from Lesson 16.
Quick checkThis CB has an initial conversion price of KRW 10,000. If the stock price is cut in half, how low can the conversion price go in principle?
STEP 3The order for reading a material event report
Paid-in capital increases and CBs are disclosed in a material event report by the day after the board resolution. It may look long, but you only need to check five places first.
Five things first
- 1Size: what % of the existing shares are the new shares?
A paid-in capital increase decision shows 'type and number of new shares' and 'total shares issued before the increase'. Dividing one by the other gives the dilution size right away. For a CB, look at 'number of shares to be issued upon conversion' and 'percentage of total shares'.
- 2Method and recipients
Check whether the 'capital increase method' is shareholder allotment, public offering, or third-party allotment. For a third-party allotment or private placement CB, look at who the recipient is and what relationship they have with the company.
- 3Price: issue price or conversion price and the discount rate
See how much cheaper than the current share price it is issued, and for a CB, what the refixing terms and the minimum adjusted price are.
- 4Purpose of the fundraising
Amounts are broken out into facility funds, operating funds, debt repayment funds, funds for acquiring other companies' securities, and so on. If debt repayment and operating funds make up a large share, go back and review the cash flows from Lessons 20 and 21 first.
- 5Schedule and history
Check the expected listing date of the new shares and the CB conversion request period, and count from the filing list how many capital increases and CBs the same company has done recently.
The item names in a paid-in capital increase decision (type and number of new shares, par value per share, total shares issued before the increase, purpose of fundraising, capital increase method) were checked in the FSS OpenDART 'Paid/Free Capital Increase Decision' development guide. CB filing items can be worded slightly differently from company to company, so generic names are used here.
Try it yourself: three CB filings from Dark Cloud Electronics
Let's apply the five steps directly to Dark Cloud Electronics (fictional). Suppose you search the filing list for 'convertible bond issuance decision' and find three filings within two years.
| Disclosure | Amount | Conversion price | Shares on conversion | Use of funds |
|---|---|---|---|---|
| Year 2, H1 | KRW 2 billion | KRW 5,000 | 400,000 shares | Operating funds |
| Year 2, H2 | KRW 2 billion | KRW 5,000 | 400,000 shares | Operating funds, debt repayment |
| Year 3 | KRW 2 billion | KRW 5,000 | 400,000 shares | Debt repayment |
| Total | KRW 6 billion | 1.2 million shares |
Dark Cloud Electronics is a fictional company in this course (1 million shares outstanding, share price KRW 2,500, Year 3 net income KRW 300 million). All three are assumed to be private placements, with the minimum refixing price set at KRW 3,500, which is 70% of the initial conversion price.
1 Size: A single filing alone is 400,000 shares, 40% of the existing 1 million. If all three convert, 1.2 million new shares exceed the existing share count. 2 Method: All are private placements, so existing shareholders had no chance to participate. 3 Price: The current share price of KRW 2,500 is half the KRW 5,000 conversion price, so there is no reason to convert right now, but if refixing lowers the conversion price to KRW 3,500, KRW 6 billion ÷ KRW 3,500 ≈ 1.71 million shares. Then shares would be about 2.71 million, existing shareholders' share about 37%, and EPS based on Year 3 net income would go from KRW 300 to about KRW 110. 4 Purpose: It is operating funds and debt repayment, not facility investment. As seen in Lesson 21, it means a company whose operating cash flow was negative for all three years is covering its cash shortfall with CBs. 5 History: Three times in two years, with a growing share going to 'debt repayment'.
Viewed one at a time, they look like ordinary fundraising filings, but laid side by side, three of them paint the picture of 'a cash-starved company hanging on by giving up shareholders' value bit by bit'. A filing should be read not as a single title but by how many times the same type of filing was repeated, and for what purpose.
Find it yourself on DART
As in Lesson 3, search for the company and choose Material event report under filing type, and titles such as 'paid-in capital increase decision', 'convertible bond issuance decision' and 'treasury stock acquisition decision' appear. Treasury stock also appears in the exchange filings (KIND) as 'treasury stock acquisition decision' and 'share cancellation decision'. To see how many shares were actually bought after the decision and when they were cancelled, check the 'result report' and the table of total shares in Section I of the annual report.
Treasury stock cancellation is now the rule
According to the Ministry of Justice, a Commercial Act amendment that makes treasury stock acquired by a company cancelled in principle, with holding or disposal allowed as an exception only with shareholder meeting approval, passed the National Assembly plenary session on February 25, 2026. Cases where companies bought treasury shares only to hold them and used them to defend control or sell to friendly parties have long been criticized, and now companies must explain to shareholders 'why they are not cancelling'. For the specific cancellation deadline and scope of application, check each company's filings and the Ministry of Justice guidance.
How to use it in investing
| Filing title | What to calculate first |
|---|---|
| Paid-in capital increase decision (third-party allotment) | New shares ÷ existing shares = dilution rate, issue price discount rate, recipients |
| Paid-in capital increase decision (shareholder allotment) | The money needed to participate and the dilution rate if you do not |
| Convertible bond issuance decision | Number and % of shares upon conversion, and the maximum number of shares if adjusted down to the minimum price |
| Treasury stock acquisition decision | Whether there is a cancellation plan, size relative to market cap |
| Share cancellation decision | How much EPS rises in line with the percentage drop in shares |
You can check the numbers right away by entering them into the paid-in capital increase and CB dilution calculator.
It is not always the case. A capital increase by a company with clear growth opportunities, or one that greatly improves the financial structure, can help shareholders in the long run. Conversely, a treasury stock purchase without cancellation does not reduce the share count. What matters is the habit of checking 'size, recipient, price and purpose' by calculation rather than relying on the filing title.
Quick checkA company with 10 million shares issues 2.5 million new shares through a third-party allotment. What % of the original will the stake of an existing shareholder who cannot participate fall to?
✓What we learned today
- When new shares are issued, the number of slices the company is divided into rises, so my ownership % and earnings per share (EPS) are diluted. If Robin Bakery (fictional) issues 400,000 new shares (20%) and I do not participate, my ownership goes from 1.00% to about 0.83% and EPS from KRW 600 to KRW 500.
- Even for the same paid-in capital increase, who receives it matters. With a shareholder allotment you can keep your stake by participating, but with a third-party allotment, existing shareholders are diluted without a chance to participate.
- A convertible bond is debt that later turns into shares. If the stock price falls, the conversion price falls (refixing) and more shares can be created, and the floor is in principle 70% of the initial conversion price.
- For treasury stock, read buying (acquisition) and eliminating (cancellation) separately. Only cancellation actually reduces the share count and raises EPS. The revised Commercial Act that passed the National Assembly in February 2026 requires companies, in principle, to cancel the treasury stock they acquire.
- Read a material event report in the order size (% of total shares) → method and recipients → price → use of funds → schedule, and check the dilution rate right away with the calculator.
Behind every decision to increase or decrease shares is, in the end, the question of 'who controls this company'. In the next lesson, you will learn how to read ownership disclosures of the largest shareholder and holders of 5% or more.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery (fictional, 2 million shares, net income KRW 1.2 billion) issued 400,000 new shares. If net income stays the same, what is EPS?
KRW 1.2 billion ÷ 2.4 million shares = KRW 500. The share count rose 20%, so each share's slice shrank.
Q2. Which capital increase method dilutes existing shareholders without a chance to participate?
A third-party allotment gives new shares only to a specific party chosen by the company. That is why you must check who the recipients are and whether the issue price is fair.
Q3. In principle, what is the floor for a convertible bond's conversion price adjustment (refixing) due to market price declines?
In principle it is 70% of the initial conversion price. Since December 2024, going below that requires a special resolution of the shareholders' meeting for each issuance.
Q4. A company only 'acquired' treasury stock and did not cancel it. Which statement is correct?
Acquisition alone leaves the number of shares outstanding unchanged. It actually falls only when the shares are cancelled. The revised Commercial Act that passed the National Assembly in February 2026 requires companies, in principle, to cancel acquired treasury stock.
Q5. In a paid-in capital increase filing, most of the 'purpose of fundraising' is debt repayment funds. What should you check first?
If a company sells new shares to repay debt, it can be a sign that its core business is not generating enough cash. Check the cash flows and borrowings you learned about in Lessons 20 and 21 first.
NextTerms · Next lesson · Related tools
A company issues new shares and sells them for cash. Equity rises, but the share count also rises, so existing shareholders' ownership and earnings per share can be diluted. Methods include shareholder allotment, public offering and third-party allotment.
DilutionDilutionWhen new shares are created, existing shareholders' ownership % and per-share figures (EPS, BPS, etc.) become smaller. Ownership after dilution = my shares ÷ (existing shares + new shares).
Third-party allotmentThird-party allotmentA paid-in capital increase method that allocates new shares only to a specific party chosen by the company. Existing shareholders are diluted without a chance to participate, so you must check whether the recipients and the issue price are fair.
Refixing (conversion price adjustment)Conversion price refixingA condition under which a convertible bond's conversion price is lowered when the stock price falls. In principle, the floor for adjustments due to market price declines is 70% of the initial conversion price, and since December 2024, going below that requires a special resolution of the shareholders' meeting for each issuance.
Convertible bond (CB)Convertible BondA corporate bond with the right to convert into the company's shares at a set price. The company can borrow at a low interest rate, but when it converts into shares, existing shareholders' stakes are diluted. Repeated issuance can be a sign of cash shortage.
Treasury stockTreasury stockThe company's own shares that it has bought and holds. It is recorded as a deduction from equity.
Share cancellationShare cancellationThe company eliminates the shares it bought back, reducing the number of shares outstanding. Even with the same net income, the share count falls and EPS rises.
Diluted EPSDiluted EPSEPS calculated on the assumption that all potential ordinary shares, such as convertible bonds, warrants and stock options, which could later become ordinary shares, have become shares. It is equal to or lower than basic EPS.
Weighted average number of ordinary sharesWeighted average number of ordinary sharesThe average number of ordinary shares outstanding during the year, weighted by the length of time. It is calculated excluding treasury stock and is the denominator of EPS.
EPSEarnings Per ShareNet income ÷ number of shares outstanding. The profit one share earned in a year.
BPS (Book value Per Share)Book value Per ShareThe company's net assets (assets − liabilities) divided by the number of shares outstanding. Dividing the share price by BPS gives PBR.
Share capitalShare capitalThe par value of a share × the number of shares outstanding. If total equity falls below share capital, it is capital impairment.
Capital surplusCapital surplusSurplus arising from transactions with shareholders, such as the extra money received by issuing shares above par value (share premium).
Material event reportMaterial event reportA report filed when something that greatly affects the company's management or assets happens, such as a paid-in capital increase, convertible bond issuance, treasury stock acquisition, a significant asset transfer, or a merger. It is filed by the day after the event occurs (within 3 days for mergers and the like).
Capital reductionCapital reductionReducing share capital. A free capital reduction (without returning money) cuts share capital to wipe out accumulated deficits, and shareholders' share counts fall.
KINDKorea Investor's Network for DisclosureThe listing disclosure system operated by Korea Exchange. Timely exchange disclosures such as supply contracts and preliminary earnings are posted there, and they can also be seen on DART under the exchange disclosure type.
Put what you learned to use right away
Capital Increase & CB Dilution Calculator→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.