Rights issue

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Twitter has found itself under fire again. This time, it’s coming from Amnesty International, a non-governmental organization that focuses on human rights. Amnesty International’s new report, “#ToxicTwitter: Violence and abuse against women...
guardian.co.uk  Mar 16  Comment 
UK drinks retailer saw its shares suspended after shock profit warning over arithmetic mistake Conviviality, owner of the Bargain Booze and Wine Rack chains, is seeking to raise more than £50m in an emergency rights issue next week after a...
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Advanced Enzyme Technologies has completed the first tranche of additional investment of MYR 150,000 by way of subscription to the rights issue of 1.5 lakh equity shares having fac
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Sompo holds 26 per cent in the general insurance joint venture.
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Financial Times  Feb 27  Comment 
The rights issue was followed by a sharp price rebound, but doubters remain in the majority
The Hindu Business Line  Feb 24  Comment 
Shareholders can pick up the the rights issue that is priced attractively to the current market price
New York Times  Feb 23  Comment 
The Communist Party-controlled Global Times said it was wrong for the U.S. to criticize another country’s human rights when it couldn’t control guns at home.
The Economic Times  Feb 22  Comment 
Tata Steel is also raising Rs 12,800 crore through a rights issue to reduce debt and fund its acquisition of stressed assets.




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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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