Rights issue

RECENT NEWS
The Straits Times  11 hrs ago  Comment 
November 26, 2014 1:17 AM PACIFIC Andes Resources Development (Pard), a global frozen fish supplier, said yesterday it plans to launch a rights issue to raise $192.3 million.
The Hindu Business Line  Nov 25  Comment 
GMR Infrastructure has received the Securities and Exchange Board of India approval to raise up to Rs 1,500 crore through rights issue. In a rights issue, shares are issued to existing in...
The Economic Times  Nov 13  Comment 
He has acquired four crore shares by subscribing to the rights issue and bought 6.5 lakh shares through the open market on October 31.
Financial Times  Nov 10  Comment 
World’s oldest bank pins hopes for survival on proposed rights issue
guardian.co.uk  Nov 10  Comment 
Bernstein analysts says cutting prices could help fix supermarket and cash call is less likely In contrast to J Sainsbury which is heading lower on, among other things, worries about a dividend cut, troubled Tesco is moving in the right...
Financial Times  Nov 10  Comment 
Outsource group issues fourth profit warning this year after expected £1.5bn writedowns
Reuters  Nov 6  Comment 
Communications and events company UBM Plc said it intended to raise about 565 million pounds ($902 million) via a rights issue to fund its acquisition of trade show organiser...
Financial Times  Nov 5  Comment 
Shoring-up exercise approved in wake of ECB stress tests, which found hole in balance sheet
newratings.com  Nov 4  Comment 
mybet Holding SE: capital increase via rights issue with additional subscription option substantially placed mybet Holding SE / Key word(s): Capital Increase 04.11.2014 17:49 Dissemination of an Ad hoc announcement according to § 15 WpHG,...




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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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