Upcoming rights issues announcements
Corporate Actions - Rights
Find all the information you need about listed companies' corporate actions.
| Company Name | ISIN | Rights Ratio | Rights Date |
|---|
What is a Rights Issue?
Rights issues allow the company's existing shareholders to buy additional shares at a discounted price directly from the company rather than buying them in the secondary market. The number of additional shares offered depends on the number of shares already held by the existing shareholder.
Features of a Rights Issue
Companies exercise a rights issue when they need cash flow for various objectives. The process may allow the company to raise money without incurring underwriting fees. However, few rights may be underwritten if the company wants to secure the amount of capital raised.
These rights are usually distributed as dividends, and the number of additional shares the shareholders can purchase is generally proportional to their existing shareholding. The holder may entirely or partially exercise rights.
These rights are usually distributed as dividends, and the number of additional shares the shareholders can purchase is generally proportional to their existing shareholding. The holder may entirely or partially exercise rights.
Existing shareholders also have the advantage of the right to trade with other concerned market participants until the new shares can be purchased. The rights are sold in a similar way as average equity shares.
Existing shareholders can also disregard the rights; however, their existing shareholding will be diluted post-issue of additional shares if they do not purchase additional shares.
Let’s understand it with an example
Suppose an investor owns 100 shares of ABC Ltd., trading at INR 10 per share. The company set forth a rights issue in the ratio of 2 for 5, i.e., all investors holding 5 shares will be eligible to buy 2 more new shares. The company declared a discounted price, say, INR 8 per share. That means, for every 5 shares (at INR 10 each) held by a pre-existing shareholder, the company will offer 2 new shares at a discounted price of INR 8.
Investor’s Portfolio Value (before rights issue) = 100 shares x INR 10 = INR 1,000.
Number of additional shares to be received = (100 x 2/5) = 40.
Amount paid to buy rights shares = 40 shares x INR 8 = INR 320.
Total no. of shares after exercising rights issue = 100 + 40 = 140.
Increased value of the portfolio after exercising rights issue = 140 Shares x 10 = INR 1,400.
Important dates related to Rights Issue:
Announcement Date –
It is the date on which the Board announces the Rights Issue. It is also known as the Declaration Date.
Record Date -
It is the date on which a company that has offered Rights issue decides the eligible shareholders to receive the right to buy additional shares.
Ex-Date –
This is the date by which you need to purchase the shares to be eligible to receive the right. Generally, it is two days prior to the record date as settlement takes two days in most of the markets, which means shares purchased today will be credited to your demat account after T+2 days (Trading day + 2 days). As of December 2023, we have a T+1 settlement in India, so the Ex-date is one day before the record date.
Conclusion
Rights issue is one of the methods available for a listed company to raise additional capital without incurring hefty charges. It is different from an IPO, where a private company goes public, and shares are offered to the investors for the first time.
There can be certain reasons for a company behind raising additional capital – It could be funding for business expansion, setting up a new plant, working capital requirements, etc. It is suggested to study the rationale behind raising additional capital and apply if you see a value in the offer.
It is completely optional for the existing shareholders to participate in a Rights issue.
Generally, the price offered in a rights issue is lower than the current market price. This practice is done to increase interest among existing shareholders in the issue.
Due to the higher number of shares post the rights issue, the effective Earnings per share of the company declines as net profit remains the same
