Rights issue

RECENT NEWS
The Hindu Business Line  May 19  Comment 
State-owned Syndicate Bank today said it will raise up to Rs 4,300 crore this fiscal through various instruments including Basel-III compliant bonds, rights issue and preferential allotment.“The boar...
Mondo Visione  May 18  Comment 
Dubai Financial Market (DFM) today announced that the rights issue of “Ajman Bank” is due to be tradable on the exchange between Sunday, 22 May 2016 until 5 June 2016.  Trading of the rights issue enables existing shareholders of the company...
The Hindu Business Line  May 16  Comment 
Securities markets watchdog SEBI has given clearance to non-banking finance company Crest Ventures for raising funds through a rights issue of shares The company had filed its application with the...
The Hindu Business Line  May 16  Comment 
Shares of Anjani Portland Cement will turn ex-rights on Tuesday. The company is offering 68.96 lakh shares through the rights issue at a price of ₹108.75 apiece. Shareholders who held shares as on th...
Reuters  May 12  Comment 
Scotland's public prosecutor said on Thursday there was insufficient evidence to prosecute Royal Bank of Scotland or its directors over a 12 billion pound cash call on the...
New York Times  May 12  Comment 
Scottish prosecutors said there was “insufficient evidence” to pursue senior figures at the bank over the raising of about $17 billion just before its rescue.
Reuters  May 12  Comment 
Swedish heat pump maker Nibe said on Thursday it had agreed to buy U.S-based Climate Control Group from LSB Industries for $364 million, while planning a rights issue worth 3...
The Hindu Business Line  Apr 27  Comment 
Sun Pharma Advanced Research Company has informed the exchanges that the rights issue committee on Wednesday approved the allotment of 1.02 crore fully paid-up equity shares at ₹245 an equity share on...
Financial Times  Apr 26  Comment 
Aerospace specialist to launch £500m rights issue to reduce debt levels
Financial Times  Apr 26  Comment 
Aerospace and defence specialist warns on profits, saying it needs to raise cash to pay down debt




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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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