Rights issue is a way for company to raise capital. Capital can be raised when the market pays for the new stocks that are being issued. There are other ways in which a company can raise capital such as by issuing bonds or by borrowings from banks. However, this depends on the economic climate and situation on which is the most favorable method to raise capital. There can be times where the interest rate on the borrowings charged by the banks or the issue of bonds is high or if the company is not doing well, banks may be reluctant to borrow. Thus, rights issue is a way in which company can raise capital.
Basically during a rights issue, the company will issue the rights to the existing shareholders. The shareholders will then decide if they wish to subscribe to the rights i.e. pay the amount of money to exercise the rights and receive the stock. It may also be possible for the existing shareholders to sell the rights to other buyers in the market.
There are some technical terms which are associated with rights issue and they are listed below.
Nil paid rights are rights which have not been paid yet. It means that those who are holding the rights have not pay up yet to exercise the rights and receive the stock.
Non-renounceable means that the rights are not transferable. It means shareholders who are receiving the rights cannot sell the rights to other buyers.
Some of the dates to watch out include ex-rights date. Basically, if you buy before the ex-rights date, in which there is a 'XR' symbol beside the stock symbol being displayed in SGX, you will receive the rights. If you buy after this date, you will not receive the rights.
The main issue with rights issue is that the holdings of the shareholders in the company will be reduced if they do not take up the rights to purchase more stocks. The reduction of the holdings of the shareholders in the company due to the issue of additional shares is called dilution To illustrate this, let me give an example.
For example, Singtel's profits for this year is $100,000 and all the profits are attributed to its shareholders. There is a total of 10,000 shares on the market and you are holding 2 shares. Thus you are entitled to $100,000 / 10,000 shares * 2 shares = $20 from the profits.Thus in order to avoid dilution, shareholders will need to take up the rights to purchase the stock.
Subsequently, Singtel carries out a rights issue and offers the right to purchase 1 share for every 2 share you are holding at a discount from the current stock price. You decide to ignore this rights issue. At the end of the rights issue, there is a total of 15,000 shares on the market and you are still holding on to 2 shares. This time round, you are only entited to $100,000 / 15,000 shares * 2 shares = $13.33 from the profits.
In a rights issue, the company will declare how many rights it is issuing for a certain quantity of share and the price to exercise or to subscribe to the rights, which is usually at a discount to the current stock price of the company. For example, Singtel may be offering rights share at a ratio of 1 to 5 at a issue price of $1.00 and the current stock price is $2.00. That means that for every 5 shares you are holding, you will given the right to buy 1 share at $1.00 each and that is a discount of 50% from the current stock price of $2.00.
When a rights issue is being issued, the stock price will fall due to dilution and this will happen on the last day of cum-rights i.e. CR or the day before ex-rights i.e. XR. The theoretical drop in the stock price which is also known as the ex-rights price can be calculated as below.
If the rights are traded in the market, the theoretical price of the rights can also be calculated by subtracting subscription price from the theoretical ex-rightsFor example, Singtel may be offering rights share at a ratio of 1 to 5 at a issue price of $1.00 and the closing price on the last day of CR is $2.00.The theoretical stock price as a result of this rights issue will be [($2.00 * 5) + ($1.00 * 1)]/6 = $1.83.
For example, the theoretical ex-rights price of Singtel is $1.83 and the subscription price is $1.00. Thus the theoretical price of the rights is $1.83 - $1.00 = $0.83.
Posts
For Singtel case, if i sell out one right and I can only earn #30 ($0.83-$0.80),right?
ReplyDeleteIs there any meaning for book closure date (the date after ex-rights)?
Thanks.
Hi Edwin,
ReplyDeleteMy apologies as I don't really get what you mean. Maybe you can elaborate more. Book closure date is mainly more for accounting purposes.
Kay
As your analysis goes, it is then better to buy XR than CR? Or is there no difference, since after considering the right share in your cost, the cost bought at CR will thoretically be averaged down to XR price.
ReplyDeleteHi James,
ReplyDeleteThere is no difference in buying before or after XR as the market is efficient. It is actually the same if you think about it. Maybe you can elaborate more on your question so that we can discuss more about this.
Kay
Hi Kay,
ReplyDeleteafter thinking it thru again, theoretically speaking, I agree that by right it should be no difference. However as we all know the mkt is not perfectly efficient and usually it seems like rights issue are generally seen in a negative light. Thanks for the confirmation though.
Hi james,
ReplyDeleteI agree that the market is not perfectly efficient. The market may not always see a rights issue in a negative light but a rights issue to me is negative for shareholders. A sound company with positive recurring cash flow, strong balance sheet and increasing earnings will not have a need to carry out a rights issue. There are better ways for a company to raise capital without penalizing its shareholders.
Genting is a pretty good example of the irrational nature of the market. This company is not attractive as an investment if you look at its financials. The general consensus of the market is that the new integrated resorts will bring the company fantastic earnings. But this is all in the future and no one can tell if this will be true. Besides, what about the construction loan that the company took ? However, when the rights issue is announced, the price of its shares simply rose through the roof.
Kay
Hi Kay,
ReplyDeleteCan one buy "nil-pais" rights during the trading period? What is the cons of doing that?
Hi ken,
ReplyDeleteOf course, one can buy the nil-paid rights during the trading period. Once again, it depends on your investment objective with regards to the cons of doing that.
Kay
Hi,
ReplyDeleteHow do you sell your rights?
Hi,
ReplyDeleteThat is a pretty broad question. Maybe you would like to narrow it down further.
In general, you can sell your rights on the stock exchange during the trading period of the rights after you have received the rights which has been entitled to you.
Kay
Hi,
ReplyDeleteFor example, I am allocated 400 rights. The price of the rights is $1 each. When can i start selling my rights? And how much would the selling price be?
Hi,
ReplyDeleteYou can sell your rights during the trading period of the nil-paid rights. To find out when will this trading period be, you will have to look at the document mailed to you by the company. Alternatively, you can look at the announcements being made by the company on its website or on SGX's website.
There is no way of telling what will be the selling price of the rights until the commencement of the nil-paid rights trading period. However, you can make a rough estimate of the price of the rights by applying the formula which I have discussed above in this post. I hope this helps.
Kay
Hi Kay,
ReplyDeleteI was hoping for your clarification:
(1) I have the following -
10m shares in issue priced at $2.40
4 for 5 rights issue and rights issue of $1 subscription price
I know my TERP is $2. Just wanted to check with you what the 'Value of a right' amount is and what the 'Value of a right per existing share' amount is please?
Is it correct to say that the difference in Cum Rights Share Price and Ex Rights Share Price = Value of Right per existing share?
Thanks,
J
Hi J,
ReplyDeleteThe TERP that I have calculated is around $1.78. Since the subscription price of the rights is at $1, I will be expecting the rights to be trading at around $0.78 theoretically. To put it in another way, the price of the rights is equal to the difference between the TERP and the subscription price. You are partly right since the difference in the cum rights share price and the ex rights share price accounts for the trading price of the rights price but they are not exactly the same.
Kay
Hi Kay,
ReplyDeleteYour calculation of the value of the right is TERP less Subscription Price.
I've seen another common method which is Closing Price (of last day of CR) less TERP.
May I ask which one is "correct"? Thanks
Andy
Hi Andy,
ReplyDeleteI do not think it is the correct method. If you read the Singtel example in my post, the price of the last day of CR is $2.00 and the TERP is $1.83. But the value of the rights as calculated is $0.83 instead.
Kay
Hi Kay,
ReplyDeleteFirst i must thank you for providing useful and relevant information for a beginner like myself. You have answered so many of my doubts on buying/selling stocks.
In this post, i want to check with you some stuff on rights; just to make sure my knowledge obtain from your post is correct.
Recently Popular holding declares 194,101,328 rights for its shareholder at issue price of $0.13for each rights on the basis of 3 rights shares for every 10 existing ordinary shares. Let's assume the prices closes at 0.18. I am right to say that the share price will drop to $0.168 on XR.
Can ask for your suggestion based on experience, if i have not hold any shares in popular, it is better to buy some at $0.18 now and also at $0.13 when rights issues or is it better to wait to buy the shares on XR date when the shares dilutes to $0.168. I am asking this because they are giving out dividend after the rights issue.
Please advise. Thanks.
Hi,
ReplyDeleteYour calculation of the TERP is correct. It makes no difference whether you should buy after or before the rights exercise. The market is efficient generally thus there is no chance of hoping to profit from this as the market has already take this into account. One should buy a company based on their fundamentals and valuation.
Kay
Hi Kay,
ReplyDeleteDid you get your terms wrong?
I think your definition for Renouceable is wrong. That should be for Non-Renouceable rights.
Hi Chew,
ReplyDeleteYou are right. Thanks for the information.
Kay
Dear Mr Kay,
ReplyDeleteI m recently allocated 4000 VGO provisional rights. I want to sell them, but there are no buyers (fr teletext). The selling price shown is 0.005.My question is if i want to sell them but there are no buyers, any other way that i can sell the rights? I will only get S$4000x0.005=S$20 if i sell them,after deducting the brokerage fees,so instead of getting the money, i may hv 2 folk out some money to pay the difference. Am i right to say that? tk u.
Hi,
ReplyDeleteI'm assuming that you are currently holding on to 20 lots of VGO Corp stock. Indeed, there are no buyers for the rights and as of the last trading day, there is a selling volume of 769 lots. Your selling price may not be $0.005 since you do not the price that the buyers are offering. In the case where your selling price is $0.005, it is true that there is no point in selling the rights. I glanced through the OIS and I don't think there is any other way to sell the rights. I suggest that you subscribe to the rights and after the rights are converted to rights shares, you can proceed to sell off the shares.
Kay
Hi Kay,
ReplyDeleteThanks for your prompt and valuable information. You are right, i am currently holding on to 20 lots of VGO shares. I hv read thru the documents and the offered price for the VGO rights is $0.03. Currently the market price is "buying" $0.025 and "selling" $0.03. which means if i were to buy directly from the market, i may get cheaper price than the offered price. Am i right to say that it is not worth to subscribe the rights?
Hi,
ReplyDeleteIt depends on the movement on the share price. If the selling price on the open market is $0.03, which is the same as the offer price for the rights, then it will make no difference. Similarly, if the selling price on the open market is lower than the offer price, it will make no sense to subscribe to the rights.
Kay
Generally speaking rights are alright because you can buy the shares at a little discount from market.
ReplyDeleteHi, Kay.
ReplyDeleteI have this shares going to issue rights but I have the intention to sell the share before the rights.
May I know the share price will drop immediate after 19 Jun or 23 jun.
1) The above Company's securities will be traded and quoted [ "Ex - Rights Issue" ]
as from : [ 19 June 2014 ]
2) The last date of lodgement : [ 23 June 2014 ]
Hi, Kay.
ReplyDeleteMay I know the share price will drop(diluted) after 19 Jun or 23 Jun?
1) The above Company's securities will be traded and quoted [ "Ex - Rights Issue" ]
as from : [ 19 June 2014 ]
2) The last date of lodgement : [ 23 June 2014 ]
Thank you.
M