Rights issue

RECENT NEWS
newratings.com  Dec 2  Comment 
LONDON (dpa-AFX) - Technology company Laird PLC (LRD.L, LARD.L) on Friday said its trading is in line with its previous update. The company expects full-year underlying profit before tax to be around 50 million pounds. In the year 2015, the...
New York Times  Nov 30  Comment 
“Beyond being a rights issue, it is also an economic, developmental and social one,” Alwaleed bin Talal wrote in a four-page letter posted on his personal website.
Financial Times  Nov 25  Comment 
Clutch of lawyers and bankers face cross-examination about bank’s 2008 rights issue
The Hindu Business Line  Nov 24  Comment 
Indian firms had raised Rs 618 crore through rights issue in the first six months of the current fiscal, a plunge of 92 per cent from the year-ago level.The funds have been raised for business expansi...
The Hindu Business Line  Nov 20  Comment 
Karnataka Bank rights issue for its existing equity shareholders to close today. The rights issue opened on November 7. The bank is issuing shares in the ratio of 1:2 at Rs 70 per share up to 9.42 cr...
The Hindu Business Line  Nov 19  Comment 
Karnataka Bank Ltd has extended its rights issue by seven more days. The rights issue, which was scheduled to close on November 21, will now close on November 28. The issue opened on November 7. Th...
Financial Times  Nov 18  Comment 
Claims made in £4bn lawsuit against bank by investors in the group’s 2008 rights issue
The Hindu Business Line  Nov 16  Comment 
Shares of Orient Paper & Industries will remain in focus as they turn ex-date for rights issue on Friday. For investors who wish to participate in the rights issue, Thursday is the cut-off date. ...
The Hindu Business Line  Nov 12  Comment 
With pick-up in earnings and improving credit growth, prospects appear bright
The Hindu Business Line  Nov 7  Comment 
The board of Orient Paper & Industries will meet on Tuesday to decide on the rights issue price. The company plans to raise ₹50 crore through the rights issue. Analysts will keep an eye on ...




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Rights Issue

Rights Issue is a secondary capital raising strategy by the company. It gives it's stockholders an option say 1:1 (i.e. one rights issued per stock held) for the outstanding common stocks.

Ex. Say an investor has 100 shares of a company at Rs. 10 per share with a total investment of Rs. 1000. The company's brokers informs him about the option as 1:1rights issued at Rs. 8 per share. The investor exercises the option and now get's 100 shares @ Rs. 8 each. Thus his total investment is now 8*100 + 1000 = Rs. 1800 with 100+100 = 200 shares. Average price of share = 1800/200 = Rs. 9.

If all the investors avail the option than the market price of the share would come down to Rs. 9 per share and the market cap of company for a total initial outstanding common shares of 1 million (now 2 million) would be Rs. 18 million from previous market cap of Rs. 10 million.

The EPS of the company halves if the capital raised is not used as the number of shares has doubled. If the capital raised is reinvested properly and the EBIT increases than the EPS also changes accordingly.

Investor use

As used by the investor, these are an offering of shares issued at a special price by a company to its existing shareholders in proportion to their holding of old shares. [1]

Investors in common stock occasionally receive rights offerings to purchase additional common stock below the existing market price. The stock rights were probably issued to satisfy the investor’s preemptive right to maintain an existing level of ownership in the company. Rights are issued below the existing market price to encourage the exercise of the rights. The rights are separate having their own markets. [2]

From "morally correct," "just, good, fair, proper, fitting, straight," to put right" "just, righteous, wise "honest, morally upright "just claim" "in a proper manner" [1]

References

  1. ‪Wall Street words: an A to Z guide to investment terms for today's investor‬ By David Logan Scott pg318
  2. Wiley CPA Exam Review 2010: Financial Accounting and Reporting by Patrick R. Delaney and O. Ray Whittington ISBN-10: 0470453516 pg585
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