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Should you buy shares in a rights issue?
Sulagna Chakravarty |
June 22, 2005
friend of mine owns the shares of Bata India.
When the company came out with a rights issue, she did not have a clue as to whether to opt for it or not.
In fact, she wondered why they offered her the shares when she could buy it from the market whenever she wanted to.
Here's to demystifying what a rights issue is all about and how it affects you.
The company needs money!
A company needs money to grow and expand -- to purchase new machinery, employ more people, buy more land, open new offices or even repay its loans.
To do that, an option to consider is to ask the public for money. There are three ways it can do so.
When a company comes out with an Initial Public Offering, it offers shares to the public. The public buys the shares and the company gets money. These shares are then listed on the stock exchange for the public to buy and sell. The investors will then get rewarded as the company does well and the value of their shares increases.
2. New issue
If a company that is already listed (has its shares listed on a stock exchange for buying and selling) is coming out with a fresh tranche of shares, it is called the new issue.
3. Rights issue
Sometimes, a company may come out with a fresh batch of shares but may choose not go to the public (as in a new
issue). It may just approach only the current shareholders (people who own the shares of that company).
This is called a rights issue.
What it means is that only the current shareholders have a right to buy these shares.
Simply put, rights issues are shares issued by a company only to its existing shareholders.
What's not great about a rights issue
The shares do not come free of cost.
Bonus shares are offered free of cost. They are a gift. A bonus.
A rights issue will need you to buy the shares. They do not come free.
What's great about a rights issue
The good news is that the shares will be cheaper than the current market rate.
When a company offers new shares via a rights issue, it is usually at a discount to the current market rate.
What this means is that if the market price of the share is Rs 100, the company may offer the shares for Rs 90. So you get more shares at a cheaper rate than what you would get if you buy it from the market.
Let's take the example of the Bata India stock.
The price of the shares was moving between Rs 80 to Rs 90 when the rights issue was first announced in February. The price of each share in this rights issue was only Rs 54.
However, after the announcement of the rights issue, the share price fluctuated widely between Rs 75 and Rs 100.
Generally, the price will go up because investors now want to buy the shares so that they can avail of the rights issue.
Can I pick up however many shares I want?
No. that will not be possible. A rights issue is offered in proportion to your existing holding.
The company may come out with a 2 for 1 rights issue.
This will give the shareholder who has 1 share, the chance to buy 2 additional shares.
So, if you own 100 shares, you will get the chance to buy 200 additional shares.
Who gets the rights issue?
The company will make an announcement that it is offering the rights issue to all shareholders (those who own the shares of the company) on a particular date. This date is called the record date.
After the rights announcement but before the record date, the shares are known as cum-rights. Even if you do not currently own the shares but if you buy them at that time, you will get the rights issue. On the record date, they become ex-rights. If you buy them after this day, you do not get the rights issue.