Rights Issue

                                             

1. Rights Issue : 

A rights issue allows the company to offer additional shares to existing shareholders at a discount to raise funds without taking on more debt. 

This means existing shareholders of the company can buy additional shares at a discounted price directly from the company rather than buying from secondary market.

It is one of the fastest ways of raising funds for companies.

Shareholders have the right, but not the obligation  to buy new shares at a discount than the market price.

Example : In a 1:5 Rights Issue by Company “ABC”, an investor holding 100 shares will have the opportunity to purchase 20 additional shares at a pre-determined discounted price set by the company.

 

2. Why company declare the Right issues

1) Capital for Expansion : 

When a company is planning an expansion of its operations, it may require a huge amount of capital. Instead of opting for debt , they may like to go for equity to avoid fixed payments of interest. To raise equity capital, a rights issue may be a faster way to achieve the objective.

2) Reduce Debt :

 Companies raise funds to repay the debt, Rights Issue is one of the effective and common ways in which companies repay their debt.

3) Working Capital Requirement : 

Rights Issue provides necessary funds for the short-term working capital requirement of the Company.

 

3. What was the impact in stock after declare the Right issues

After a rights issue, share prices often fall due to the new, discounted shares. For example, Bharti Airtel’s stock price fell after its rights issue to adjust for the increased number of shares.

Initially, the share price may experience a decline due to the dilution effect as new shares are issued at a discounted price

• The total share capital increases due to the issuance of additional shares based on the rights issue ratio.

• The company gets positive cash flow (from financing), which can be used to improve its operations.

• Per-share metrics such as EPS (Earnings Per Share) and book value may decrease because of the increased number of shares outstanding, impacting metrics like diluted EPS.

• The market price of the company's shares typically adjusts downwards after the rights issue as new shares enter the market.

Example : 

Let’s say an investor owns 100 shares of Company “A” and the shares are trading at ?10 each. The company announces a rights issue in the ratio of 2 for 5, each investor holding 5 shares will be eligible to buy 2 new shares. The company announces a discounted price of, for example, ?6 per share. It means that for every 5 shares (at ?10 each) held by an existing shareholder, the company will offer 2 shares at a discounted price of ?6.

1) Investor’s Portfolio Value (before rights issue) = 100 shares x ?10 = ?1,000

 2) Number of right shares to be received = (100 x 2/5) = 40

3) Price paid to buy rights shares = 40 shares x ?6 =  ?240 

4) Total number of shares after exercising rights issue = 100 + 40 = 140 5) Revised Value of the portfolio after exercising rights issue = ?1,000 + ?240 = ?1,240 

6) Expected price per share post-rights issue = ?1,240 / 140 = ?8.86

According to theory, the price of the share after the rights issue should be ?8.86, but market behaviour can vary. An upward trend in the share price benefits the investor, while if the price drops below ?8.86, the investor may incur losses.

 

4. Pros and cons of a rights issue

   
   

Pros

• Companies can raise these funds without taking on debt because rights issues are based solely on equity.

• Rights issues involve minimal costs since they do not require underwriting fees.

•  Shareholders can retain their current ownership percentage, as any additional purchases are proportionate to their existing holdings, if they participate on the Rights issue

Cons

• Existing shareholding percentage may get diluted, if existing shareholders don’t want to participate in the Rights Issue.

• After a rights issue, dilution can cause a drop in share price

• Unlike a public offering, most stock exchanges restrict the amount that can be raised through a rights offering issue.

5. Conclusion : 

A rights issue allows current shareholders to purchase more shares directly from the company at a lower price than what's available on the stock exchange, making it one of the quickest methods for companies to raise funds.

They’re a fast way for companies to source funds.

Company declare the Right issues for : 

1)Capital for Expansion 

2)Reduce Debt 

3)Working Capital Requirement 

In a 1:5 Rights Issue by Company “ABC”, an investor holding 100 shares will have the opportunity to purchase 20 additional shares at a predetermined discounted price set by the company.

 

6. FAQ : 

1. What are the benefits of participating in a rights issue?

Shareholders can purchase additional shares of the company at a discounted price compared to the market price.

 

2. What is the other option if I don't wish to participate in the Rights Issue?

Existing shareholders who do not wish to participate in the Rights Issue can sell their Rights.To sell them, use your brokerage account to place a sell order specifying the quantity and price. 

 

3. How is the price of the rights determined?

Price at which new shares are offered is typically set at a discount to the current market price to make shareholders participate.

 

4. How long does a rights issue typically last?

The rights issue period, from announcement to closure, varies but typically lasts a few weeks to allow shareholders sufficient time to decide and act on their rights.

 

5. Where can shareholders get more information about a rights issue?

Shareholders can find detailed information about a rights issue in the company's announcement, prospectus, or through their stockbroker, online platforms  like ORCA, Moneycontrol, Groww etc.

 

6. Is there any Tax implication on Participating or selling Rights Issue ?

There is no tax on subscribing to the rights issue, but selling the rights entitlements (if renounceable) or selling the shares acquired through the rights issue is taxed as per capital gains tax.

 

7. Steps to Participate in Rights Issue?

    1) Log in to Your ORCA Account: Access your online trading account.

    2) Locate the Rights Issue Section: Navigate to the corporate actions or IPO/rights issue section.

    3) Apply for Rights: Select the rights issue you want to apply for, choose the number of shares, and submit your application.

    4) Make Payment: Authorize the payment using your linked bank account or UPI (Unified Payments Interface).

    5) Allotment: Once the issue closes and shares are allotted, they will appear in your Demat account for trading.