Every rights issue is not profitable for investors. These factors to look when evaluating typical rights issue before investing in it.
Rights issue is an issue of additional new shares for existing shareholders in proportion to their existing shareholdings. Money raised from shareholders goes directly to the underlying company.
Rights issue is an important source of new equity funding for publicly listed companies. Shareholders often subscribe to a rights issue merely on the basis of discount in share price as compared to prevailing market price.
But, issue price is not the only thing to look before investing in a rights issue. A rights issue with a huge discount can still be overvalued for investors depending on various other factors.
Therefore, investors are always advised to subscribe to a rights issue only after considering different factors together. Sometimes, your decision to continue old investments in underlying company may also change. Here are 10 critical factors influencing attractiveness of a company’s rights issue:
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(1) Main Objective Or Purpose Of Rights Issue
It is one of the biggest factors to look when evaluating typical rights issue. Every rights issue is meant to raise cash for certain purpose. It is usually described by the firm in its Letter of Offer that is submitted to the stock exchange regulator i.e. SEC in US & SEBI in India.
Investors can gain valuable insight about a particular rights issue from company’s Letter of Offer. It describes where the company plans to use the proceeds from a rights issue.
Some of the main objectives behind a company’s rights issue include project expansion, retiring debt, promising acquisitions, augmenting working capital, research & development, land acquisitions, & many more.
Once main objective along with its proportion in the raised funds is clear, you can make an informed decision. If the use of money seems to be a good idea & makes sense for further investment then rights issue is a good bet for investors.
However, if you are not satisfied with the rationale behind rights issue then it will be better to stay away or even cut your current exposure in the company. If a large number of shareholders prefer to sell their current holdings then it can even adversely affect the viability of rights issue itself.
- Evaluating Typical Rights Issue: Shutterstock