Rights issues are not a new thing in the world of securities. These surprising things of a company’s rights issue are unbeatable.
Rights issue is an invitation or offering of securities to all existing shareholders to buy additional new shares in the company. This type of offering or rights is not limited to shares only. It may also be in form of warrants, plain vanilla bonds, convertible bonds, preference shares, or a combination of any of these forms.
Rights issue usually provides existing shareholders a chance to increase their exposure in a given stock. All existing shareholders of the company have an option to subscribe to the issue in proportion to their holding on record date.
According to a post published in Investopedia, shareholders may trade the rights on the market like ordinary share trading until the date at which the new shares can be purchased.
Generally, the rights issued to a shareholder have a value to compensate current shareholders for future dilution of their existing value of shares. But, still several investors see rights issues as an unwelcomed choice in the market.
It is also rumored that rights issues may adversely affect the share price of underlying company. However, it is not true in each & every case.
Share performance will largely depend on company’s main objective behind the rights issue. Here are 10 surprising or basic things to understand a typical rights issue:
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(1) Company Can Issue Rights Shares At Any Price
It is one of the most surprising things of a company’s rights issue. Rights shares can be issued at any price that is decided unanimously by the board of the company. It can be either higher or lower or even equivalent to the market price of the shares.
Naturally, the company will prefer to issue rights shares at a certain discount to the market price. This is usually done to reward its existing shareholders to the new securities.
It also helps a company to get maximum subscriptions in order to raise the required capital. This form of rights issue is often referred as “in the money”. It is due to the fact that exercise price is lower than the market price of the shares.
On the other hand, the company can also set the exercise price in a rights issue too high as compared to prevailing market price. This form of rights issue is often referred as “out of the money”.
In such a case, rights issue would be unattractive for the investors. It is due to the fact that same shares could be bought in the market for a lower price.
Similarly, the company can also set the exercise price in a rights issue equivalent to prevailing market price. This form of rights issue is often referred as “at the money”.
In such a case, rights issue would again be unattractive for the investors. It is due to the fact that same shares could be bought in the market at prevailing price.
However, the rights issue is usually above the face value of the stock. It is because issue of quoted shares at below the face value is not allowed. Similarly, it would be rare case for this to happen even for unquoted shares.
Additionally, the shares in a rights issue can also be offered in a certain price band. The main objective behind keeping price band is to manage volatility in the market as well as to prevent spurious transactions.
Thus, investors should always be ready to accept or reject any given rights issue in terms of pricing structure.
- Company’s Rights Issue: Shutterstock