Rights issue

Rights issue

When doing a Secondary Market Offering of shares to raise money, a company can opt for doing a rights issue to raise capital. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by each shareholder. Rights are often transferable, allowing the holder to sell them on the open market.

Rights can be renounceable (can be sold separately from the share to other investors during the life of the right) or non-renounceable (shareholders must either take up the rights or let them lapse. Once the rights have lapsed, they no longer exist).

To issue rights the financial manager has to consider:
*Subscription price per new share
*Number of new shares to be sold
*The value of rights
*The effect of rights on the value of the current share
*The effect of rights to existing and new shareholders

A right to a share is generally issued on a ratio basis (e.g. one-for-three rights issue). Because the company is getting the shareholders' money in exchange for issuing rights, a rights issue is a source of funds for the company issuing it.

Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds sought by the company will be raised. The agreement between the underwriter and the company is set out in a formal underwriting agreement. Typical terms of an underwriting require the underwriter to subscribe for any shares offered but not taken up by shareholders. The underwriting agreement will normally enable the underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk to the sub-underwriter by requiring the sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties. The Panel’s guidance covers both non-underwritten and underwritten rights issues.

Basic example

An investor: Mr. A had 100 shares of company X at a face value of $10 per share and a total investment of $10,000, assuming he purchased the shares at $100 per share.

Assuming a 1:1 rights issue at an offer price of $50, Mr. A will have the option to subscribe to additional 100 shares of the company at the offer price. Now, if he exercises his option, he would have to pay an additional $5,000 in order to acquire the shares, thus effectively bringing his average cost of acquisition for the 200 shares to $75 per share. Although the price on the stock markets should reflect a new price of $75 (see below), the investor is actually not making any profit nor any loss.

The company: Company X had 100 m outstanding shares of face value $10 each. The share price currently being quoted on the stock exchanges is $100 thus the market capitalization of the stock would be $10 billion (outstanding shares x share price).

Further, post the rights issue the company's outstanding shares would increase to 200 million with no change in the face value. The market capitalization of the stock would increase to $15 billion (previous market capitalization + cash received from owners of rights converting their rights to shares), implying a share price of $75 ($15 billion / 200 million shares). If the company were to do nothing with the raised money, its Earnings per share (EPS) would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to acquire another company), the EPS may be impacted depending upon the outcome of the reinvestment.

ee also

*Stock dilution


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См. также в других словарях:

  • rights issue — an issuing of extra shares. A company may raise additional capital from its members as opposed to from the public at large by issuing extra shares; this is called a rights issue. See pre emption; pre emption clause. Collins dictionary of law. W.… …   Law dictionary

  • rights issue — rights issues N COUNT A rights issue is when a company offers shares at a reduced price to people who already have shares in the company …   English dictionary

  • rights issue — rights .issue n BrE technical an offer of company ↑shares at a cheaper price than usual, to people who own some already …   Dictionary of contemporary English

  • rights issue — rights ,issue noun count BUSINESS an offer of SHARES at a special low price by a company to people who already own shares in it …   Usage of the words and phrases in modern English

  • rights issue — An issue of shares for cash by a company to its existing shareholders on a basis pro rata to their existing shareholdings. The issue will normally be at a substantial discount to the current share price (usually between 20% and 40% discount). The …   Financial and business terms

  • rights issue — noun an offering of common stock to existing shareholders who hold subscription rights or pre emptive rights that entitle them to buy newly issued shares at a discount from the price at which they will be offered to the public later the… …   Useful english dictionary

  • rights issue — A method by which listed companies on a stock exchange raise new capital, in exchange for new shares. The name arises from the principle of pre emption rights, according to which existing shareholders must be offered the new shares in proportion… …   Accounting dictionary

  • rights issue — A method by which listed companies on a stock exchange raise new capital, in exchange for new shares. The name arises from the principle of pre emption rights, according to which existing shareholders must be offered the new shares in proportion… …   Big dictionary of business and management

  • rights issue — UK / US noun [countable] Word forms rights issue : singular rights issue plural rights issues business an offer of shares at a special low price by a company to people who already own shares in it …   English dictionary

  • rights issue — subscription rights / rights offer Privilege granted to existing shareholders of a company to subscribe to shares of a new issue against payment. Rights are often tradable in the secondary market …   Euroclear glossary


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