Rights issue

RECENT NEWS
Financial Times  Jun 15  Comment 
Etihad is carrier’s only major shareholder yet to commit to taking part in rights issue
The Australian  Jun 15  Comment 
Virgin’s monster rights issue sounds ambitious, but its ranks of shareholders should make the raising a formality.
Mondo Visione  Jun 13  Comment 
The Capital Market Authority (CMA) would like to clarify that the listed companies (“The Companies”) applying for a capital increase through rights issue offering are: 1. Wataniya Insurance Company (Wataniya) A decision regarding the...
Financial Times  Jun 6  Comment 
Stock hit as analysts and investors weigh up impact of cash call
Channel News Asia  Jun 3  Comment 
The commodity trader says it is raising US$500 million in a fully underwritten rights issue and its chairman and biggest shareholder Richard Elman will step down within 12 months.
Financial Times  Jun 1  Comment 
Fundraising will cut defence company’s debt
The Hindu Business Line  Jun 1  Comment 
Specialty chemicals maker Polson has informed the BSE that the company’s rights issue has not been fully subscribed to by public shareholders. The board of directors of the company on Wednesday decide...
Mondo Visione  May 29  Comment 
Dubai Financial Market (DFM) today announced that the rights issue of “Dubai Islamic Bank” is due to be tradable on the exchange between Monday, 30 May 2016 until 13 June 2016.  Trading of the rights issue enables existing shareholders of the...
Financial Times  May 26  Comment 
Shares in Spanish lender fall more than 2% as it unveils move to raise fresh capital
The Hindu Business Line  May 24  Comment 
The ₹75-crore rights issue of Anjani Portland Cement will open for subscription on Wednesday. Shareholders of the company will receive three equity shares for every eight held at ₹108.75. The record ...




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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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