Right Issue is an invitation by a company to its existing Shareholders to buy additional shares at a “discounted price” instead of going to the public .
Contributed By Ranjeet Kumar
These shares are issued in proportion to the shareholder’s existing holdings.We will try to understand this with the help of an example – A company, let’s say ABC Ltd, offers shares for Rs 785/Share (discounted Price), market value of which is Rs 1000/Share, to its existing shareholders. And right issues in 2:5 implies that an existing holder can buy 2 extra shares for every 5 shares held.
In case a shareholder holds 9 shares of ABC ltd. Can he buy 4 shares?.
NO, he can buy 2 shares only.
Why do companies announce Right Issues ?
Companies have various methods for raising funds, Right Issue is one of them.
Yes, Companies offer Right Issues when they are in need of funds for several reasons, such as –
- to pay off Debt, or
- for a new plan/new project. etc
What are options available to the existing shareholders :-
- Subscribe right issue or Buy additional right shares
- Renounce (sell) right Entitlement.
- Ignore it
If you want to learn more about Right Entitlement have a look at our Article on Right Entitlement (RE)
Well ! if you are confused which option to choose from the above. Let us clear it for you.
Let us tell you what happens If you choose to ignore neither subscribe nor renounce your right as an existing shareholder of the company.
In case of a rights issue, the value of existing investors’ shares reduces along with their proportional ownership of the company, because additional shares are issued and the issuing company’s equity base rises to the extent of the issue. This is called Dilution.
Suppose, LDFC Ltd. announces Rights Issue at the ratio of 1:1, Offer Price is Rs 50/Sh. Share is Trading at Rs 100/Sh.
ShareHolder Ajay holds 10 Shares in Ldfc Ltd.
on ex-right date stock trades at adjusted price which is Rs 75/Sh.
In case Ajay neither subscribes nor renounce, his holding remains Rs 100/sh Whereas the market Value of Share is Rs 75/sh.This means he suffers virtual loss of Rs 25/sh.
What should an investor be careful about in case of a rights issue?
An investor should be able to look over and above the discount offered. One is paying money to get additional shares and one should subscribe to it if he/she has complete confidence in the company’s performance.
Also, if the market sentiment believes that the company is raising funds for a positive purpose then the price of the stock may just rise resulting in an increase in the market capitalisation. If a shareholder does not wish to exercise his/her right to buy additional shares then he/she can sell the right as the rights are usually tradable..
Here are the details of recent Rights issue –
|Company Name||CMP||Right issue price (Discount)||Right issue Ratio||Announcement Date|
|PVR||1,037||784 (around 32%)||7:94||8 June, 2020|
|ABFRL||115||110 (around 6.5%)||9:77||27 May, 2020|
|STFC||690||570 (around 15%)||3:26||15 June, 2020|
|Reliance||1916||1257 (around 14%)||1:15||30 April, 2020|
|Arvind Fashion||128||100 (around 45%)||62:91||21 June 2020|
|M&M Finance||208||50 (around 76%)||1:1||18 July, 2020|