Rights issue

RECENT NEWS
Reuters  Aug 25  Comment 
LONDON, Aug 25 (IFR) - Credit Agricole, HSBC and Santander have agreed to a standby underwrite for Spanish energy group Abengoa's proposed 650m capital increase, according to sources with knowledge...
The Hindu Business Line  Aug 25  Comment 
IL&FS Transportation Networks will remain in focus on Wednesday, as the company board meets to consider a rights issue. Analysts and traders will be keen to know the size of the issue,...
Forbes  Aug 21  Comment 
Shares in SEEC Media, whose stable of magazines includes the popular Chinese-language business weekly Caijing, plunged by 34% in Hong Kong yesterday after the company announced a plan to raise up to HK$638.5 million, $82.4 million, in a stock sale...
The Economic Times  Aug 18  Comment 
Issuance of 'observations' on offer documents by Sebi is considered as a clearance to the issuer to go ahead with the share issues.
Reuters  Aug 14  Comment 
Spanish energy group Abengoa , which has been struggling to reassure investors over its finances, denied a report on Friday saying that banks had advised it to increase the size of a planned rights issue to.
Wall Street Journal  Aug 5  Comment 
Standard Chartered’s effort to shrink the balance sheet and reduce risks paid off last quarter. But a rights issue to top up capital shouldn’t be counted out.
The Australian  Aug 4  Comment 
Investors are betting Santos will ­finally bow to market pressure and launch a $3bn rights issue within the next few weeks.
The Economic Times  Jul 26  Comment 
Fund raising through rights issue has crossed Rs 11,000 crore mark this year, indicating growing traction among domestic firms.
The Hindu Business Line  Jul 22  Comment 
Shares of Vascon Engineers will remain in focus, as the comapny's ₹100-crore rights issue ends on Thursday. The company had offered 14 rights equity shares for every 19 shares held as on the recor...
Finance Asia  Jul 21  Comment 
Successful completion of deal by Singapore-listed company may herald a more active M&A strategy as it diversifies away from auto business.




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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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