Rights issue

RECENT NEWS
The Economic Times  10 hrs ago  Comment 
"Total proceeds from the issue of equity shares and class B shares would aggregate up to Rs 1,600 crore," Future Retail said in the document.
The Economic Times  Jul 27  Comment 
Early last month, Renuka Sugar issued open offer but it failed because the market price was much higher than the open offer rate.
The Hindu Business Line  Jul 25  Comment 
Can Fin Homes Ltd, the Canara Bank sponsored housing finance subsidiary, reported a 15 per cent growth in net profit for the June quarter over the corresponding year on higher income. Ne...
Reuters  Jul 23  Comment 
Telekom Austria, majority-owned by Carlos Slim's America Movil, called an extraordinary shareholder meeting to approve a rights issue and a new supervisory board.
The Hindu Business Line  Jul 23  Comment 
Shares of CanFin Homes will remain in focus on Thursday, as the company board is meeting to consider rights issue. Catamaran Management Services, a venture capital fund promoted by NR Nara...
The Hindu Business Line  Jul 22  Comment 
The ₹1,000-crore rights issue of Tata group’s hospitality major Indian Hotels Company Ltd will open on August 4 and a substantial amount of the funds raised will be utilised to repay debt.
WA Business News  Jul 18  Comment 
Uranium Equities has announced a one for three rights issue and placement to raise up to $1.5 million for its Alligator Rivers uranium field and general working capital.
Finance Asia  Jul 17  Comment 
Demand was strong for Richard Li's telecom trust, which will use the proceeds to pay down some of its substantial debt.
The Australian  Jul 17  Comment 
SOUTHERN Cross Media has confirmed the resignation of chief financial officer Peter Lewis, but has not commented on speculation of a rights issue.
The Economic Times  Jul 16  Comment 
The Karur, Tamil Nadu-headquartered bank has registered a post tax net profit of Rs 25.34 crore in the corresponding period last year.




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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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