Rights issue

RECENT NEWS
Reuters  Apr 23  Comment 
Lone Star, the top shareholder in GTC, said it had no plan to raise its bid for additional shares after a rights issue by the real estate developer failed to win backing...
WA Business News  Apr 22  Comment 
Five weeks after announcing a $7.2 million rights issue, and three weeks after getting a loan from two of its directors, Viento Group has called a trading halt on its shares while it considers funding options.
The Hindu Business Line  Apr 19  Comment 
Recovery in India, volumes at JLR will drive growth over two years
The Economic Times  Apr 16  Comment 
In the rights issue, investors have an option of buying six shares at a discounted price for every lot of 109 shares they hold.
The Hindu Business Line  Apr 16  Comment 
Shares of Tata Motors and Tata Motors DVRs will remain in focus, as the ₹7,500-crore rights issue opens on Friday. The entitlement ratio has been fixed at six shares for every 109 shares h...
The Hindu Business Line  Apr 15  Comment 
SBI associate State Bank of Travancore has raised over Rs 474 crore through a rights issue to fund business expansion. “The Committee of Directors... has approved the allotment of 1,18,50...
The Economic Times  Apr 10  Comment 
Orix will now become the second largest shareholder, marginally up to 25% from 23.16%, while Abu Dhabi Investment Authority will raise its stake to 14% from 12.56%.
The Economic Times  Apr 10  Comment 
Market experts said return of investor confidence in the equity markets is at work, which encouraged some of the large firms to go for the rights issue mode.
OilVoice  Apr 9  Comment 
Abilene Oil and Gas Limited ASXABL is pleased to announce that following the successful Rights Issue the Company has agreed to fund its share of the Lodestone Resources LLC second option to acquir
The Economic Times  Apr 8  Comment 
"The company was expected to raise close to Rs 1,402 crore but have got Rs 1450 crore," said the person who didn't want to be named.




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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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