Thread by @FincademyIn

What is Right Issue ? How does it impact the share price ?

A Thread 🧵👇

You will understand:

- What is a right issue?
- Types & Features
- Why company comes out with a right issue?
- Right issue Eligibility criteria and options available to investors.
- How right issue work? Calculation of Theoretical ex-rights price (TERP)
- Impact on share price

1/ Right issue is an offer in which the company raised additional capital via equity in the primary market after already having shares listed in the secondary market. It provides an opportunity to existing shareholders to purchase an additional share at a discount price.

2/ Features of Right Issue

- Shares are allocated on a pro-rata basis i.e., proportionate allocation.
- Preferential treatment to existing shareholders at a discount price but there is no obligation to buy shares.

3/ To be eligible to qualify for the issue you must hold shares of the company on or before the record date. For instance, to apply for Pricol limited right issue, one must have shares on company’s books on or before the record date i.e., 25th Nov 2020.

4/ It means one should ideally buy shares on or before 23rd Nov (as trade settlement date is T+2 working days) to be considered as existing shareholders in the company’s book. Below is the right issue date of Pricol Ltd.

5/ So, how does the right issue work?
Suppose you hold 1000 shares of Deepak Fertiliser and to fulfil debt obligation and loan prepayment company raised ₹178 crore by issuing 1.43 Cr shares to existing shareholders.

6/ Company issues 3 right equity shares for every 20-equity share held on record date i.e.,3:20 ratio at discount price of ₹133. This price is 13% less than market price (₹152) at the time of issuance on September 28, 2020.

7/ With new SEBI guidelines, a company offering the right issue, will have to directly credit proportionate right entitlement shares on a temporary basis in qualified shareholder’s demat account. The right entitlement process starts when company issue offer letter to

8/ each eligible shareholder about right entitlement credited to their demat account with trading duration. If you do not want to exercise your right entitlement you can sell the share to another investor called renouncee. This process of transfer or sale is called renunciation.

9/ There are four-way company’s classified their right issue offerings.

10/ Shareholder has below options to execute right issue.
- Exercise the right issue in full.
- Exercise the right issue in full + apply for additional shares.
- Ignore the right issue offer and let it lapse.
- Apply for partial right issue.

11/ Continue:
- Apply for partial right issue and transfer the remaining to other shareholder. This process is called renunciation.
- Transfer the entire right entitlement to other shareholders.

12/ Company’s objective to offer the right issue with an example.
- When a company is planning for huge expansion, and instead of debt, they go for equity to avoid fixed interest payment expenses.
- Looking for improvement of debt-to-equity ratio.

13/ Continue:
- Fastest and low-cost way to raise capital without incurring debt burden.

For instance, Pricol Ltd. objective was to meet the working capital requirement and for other corporate purposes

14/ - Companies like Reliance, Deepak Fertilizers and Minda Industries to use net proceeds from right issue for various purpose such as investment in the company’s joint venture, to meet debt repayment/prepayment.

15/ Now, let us understand how Right Issues impact the share price.

Unlike in buyback, when a company comes up with the right issue its share price gets diluted due to the increase in a number of additional shares and its likely that share price will go down post-issuance.

16/ We can derive the theoretical ex-right share price immediately after the right issue closes.

Formula = (Right issue price* new right shares + Existing market price * old shares) / Total number of shares after right issue.

Calculation below is of individual shareholding.

17/ From the above example, due to increase in shareholding, the value of your existing shares will decline from ₹342 to ₹338.72. But this loss on your existing shareholding is exactly offset by the gain in new share price which cost you a discount price.

18/ Nowadays, the company is opting for the right issue as an additional source to raise capital as SEBI has streamlined the process and reduced the processing time to 30 days. Investor should not just sway by the discount offer on share price instead

19/ one should look at the compelling reason why dilution is required as part of the company’s management plan, future growth perspective, reasons as to why company come out with rights.

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BY : @Dharmangi_S

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