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Rights Issue: What is it?

Created on 29 May 2019

Wraps up in 6 Min

Read by 3.6k people

Updated on 10 Sep 2022

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company (in proportion to their existing shareholding) at a specified price (generally at a discount) and time. The company gives a right to its existing shareholders to subscribe to the newly issued shares in proportion to their existing holdings. For instance, a 1:1 rights issue means existing shareholders can buy one extra share for every one share already owned by him/her.

Why do companies Issue Rights share?

The company generally issues additional shares :

  1.  To expand the business

  2. To pay its debt

  3. or for any other reason.

It is given as a privilege to the current investors to increase their holding in the company. Whenever a company issues new shares, the existing shareholders get the right to subscribe to them at a discount, before it is offered to the public.

This ensures that the promoter’s shareholding is not diluted and offers a chance to the existing shareholders to increase their exposure to the stock at a discounted price. Thus, if the company is performing well it is the right way to increase your stake in the company.

It should be noted that the Rights Issue is an option since it gives a company's stockholders the right, but not the obligation, to purchase additional shares in the company.

Shareholders have two options with a rights issue. They can

1)  Subscribe to the rights issue in full; or

2)  Unsubscribe the rights by ignoring them

What happens to the unsubscribe portion of the right issue?

Shareholders who do not subscribe to their rights entitlements have their entitlement fall into the ‘unsubscribed portion’ category. As per the terms of the letter of offer sent to the shareholders, promoters typically reserve the right to subscribe to this unsubscribed portion. In this way, promoters can increase their shareholding in the company by subscribing to the ‘unsubscribed portion’ of the issue.

What is the record date?

The record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive the specified securities as offered by Rights Issue.

What is the ex record date?

As the trade settlement cycle in India is T+2 days, hence always for the right share ex record date will be two days before the record day, i.e. every shareholder should have purchased the stock on or before the ex-record date to be eligible for the right issue.

What is the T+2 settlement?

After the shareholder has bought or sold their shares through a broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Here T stands for transaction date (the date the transaction takes place). T+2 means, 2 days post the transaction date, where the actual change of ownership happens.

Hence everyone is advised to hold the shares on or before ex record date to exercise their rights.

EPS adjustment

Rights issue requires adjustment in Earnings Per Share calculation. This is because rights issues involve an element of bonus shares as the exercise price is set below the market price. If no such adjustment is made in the EPS calculation in respect of the bonus element in a rights issue, then the earnings performance of a company may be unnecessarily penalized in the year in which rights issue takes place.

5 Paisa.com

5Paisa.com is a discount broker, which was listed in November 2017. The company is backed by the IIFL group, which is engaged in the distribution of financial services and broking. The company needs additional funding to invest in the improvisation of technology platforms, scaling up its business operations and invest in alternative businesses.

Recently the company came with the rights issue in the ratio 1:1 and the record date for this was May 29, 2019.

How to apply:- 

If your bank supports ASBA, you can apply for the right issue online just like an IPO. If not, then you would have received a courier of the Composite Application Form (CAF) from RTA (Registrar and Transfer Agent) of the company. You will have to fill the form and submit it at a Self-Certified Syndicate Banks (SCSBs) branch (a bank which offers the facility of applying through the ASBA process).

* Finology will update all its clients regarding the deadlines and procedures to exercise your right entitlement.

 

Number of outstanding equity shares

12,739,022

Issue Size (In Rs.)

1,019.12 million
 

Face value (In Rs.)

10
 

Issue Price (In Rs.)

80
 

Premium (In Rs.)

70
 


The shareholders, who will exercise their right will get the share at Rs.80. The ex-record date of the issue is 27 May 2019 and in the Indian market the settlement date is T+2, so all those shareholders who hold the share on or before 27 May 2019 are eligible for Rights issues. Further to exercise the rights, 5paisa will issue a form which the investors need to fill inorder to exercise their right. It was witnessed that the company’s 27 May 2019 closing price was Rs 369.60 but 28 May 2019 the share opened at a price of Rs 237.25. This created a panic among investors that the share price has fallen by 35.8% in the market.

But if you analyze the overall picture, you will find something different. The TTM(Trailing Twelve Months) revenue of the company was 63 crores. If you divide this figure with no. of shares i.e. 1.27 Crore, it gives a revenue per share of 49.60 (i.e., revenue belonging to one shareholder).

With the issue of rights (1:1), the number of shares held by every holder will be doubled and would be 2.54 but revenue per share will be diluted to Rs 24.8 (the wealth of the shareholder will remain the same.

Theoretical Ex Rights Price

Theoretical Ex-Rights Price is a deemed value which is attributed to a company's share immediately after a rights issue transaction occurs. Theoretical Ex-Rights Price may differ slightly from the actual market price of the stocks prevailing after a rights issue due to varying perceptions of market participants concerning the rights issue and stock market imperfections.

Formula

Theoretical Ex-Rights Price:

= (Market value of shares prior to right issue + Cash raised from rights issue) / Number of shares after the rights issue

Calculation

It proposes to issue equity shares by way of a rights issue to existing shareholders in the ratio of 1 equity share on 29 May 2019 at an exercise price of Rs.80.

The market value of its shares immediately prior to the rights issue was 369.6 per share. The company had 12739022 shares before the issuance of rights shares. Assuming that all shareholders will exercise their rights on 29 May 2019.

Theoretical Ex-Rights Price may be calculated as follows:

Step 1: Calculate market value of 5Paisa.com prior to the rights issue

Market Value before rights issue

(Rs.369.6 x 1,27,39,022shares)

4,70,83,42,531.2

Step 2: Calculate cash proceeds raised from the rights issue

Cash raised from rights issue

( Rs.80 x 1,27,39,022)

1,01,91,21,760

Step 3: Calculate number of shares after the rights issue

Number of Shares

(1,27,39,022*2)

2,54,78,044

 

Step 4: Calculate Theoretical Ex-Rights Price

 = 4,70,83,42,531.2   + 1,01,91,21,760

= 5,72,74,64,291.2 /25478044  = Rs.224.8

But the share opened at a price of  Rs 237.5 which means the stock is  still surrounded with positive sentiments. So, investors should not panic by seeing the market price. There is no change in company’s performance.

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Koushik Mohan has completed MBA from National institute of securities markets (SEBI), with 1.6years of experience working with Northern Trust and CA firm in the departments like OTC derivatives and Accounting.

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