Thread by @CaJainankur

Recently I learned, #Right Issue by a listed company can be a great opportunity for an investor to make quick & decent money. While I will try to explain the process and risks of applying in a Right Issue, let us first look at the result of the few right issues applied by me. 1/n

#NATURAL CAPSULES LTD 2/n

#Aurum PropTech Ltd 3/n

#SABOO SODIUM CHLORO LTD 4/n

Let us understand now what is Right issue?
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. 5/n

With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date. Every shareholders on the record date is entitled to apply right shares in the proportion of his/her holding in the company. 6/n

The entitlement is called Right Entitlement (RE). For example, if the company is issuing 2 rights for every share, the entitlement is 2:1, and if the shareholder holds 1000 shares in the company on the record date, he/she gets 2000 REs. 7/n

REs trade in the market (in the same way a share trades) till right issue closing date. An interested investor may buy the REs and may apply for Right shares. Every REs will entitle him/her 1 Right shares. A non interested investor may sale REs at the market price
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An investor may participate in the right issue in two ways:
1. Every shareholder on the record date is entitled to participate in the right issue using the REs he/she gets from the company
2. By buying Right Entitlement (RE) from the market. 9/n

SH on the record date gets additional benefit of applying extra shares (more than his/her RE). He/she will get higher allotment in case of lower subscription of the right issue. This benefit is not available to the investor applying the right issue by buying REs from market. 10/n

So, how does it work? Right issue generally comes at a discounted price. On Ex date price of the original shares get adjusted to the extent of discount (in the same way as dividend/bonus/split). 11/n

The opportunity lies in many investors not applying for the right issue due to ignorance, and hence an investor may get higher allotment then the entitlement. 12/n

For example, #Add-Shop ERetail Ltd came with right issue of 1 rights at INR 54 per share for every equity shares. Just before ex date the original share was trading at INR 100. So, price of the original shares gets reduced on the ex date at INR 77. (refer working below)
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So you do not make any money if you just apply for number of right shares equal to your entitlement. If you do not apply. You are losing INR 23 (INR 100- INR 77). What if you get double of your entitlement? You will get INR 23 profit. 14/n

If you are not interested in applying for Right issue, you may sell the Right Entitlement at the market price and you may recover your loss. 15/n

Risk: If the price of original shares moves too much in discount due to market sentiments or due to any reason, the strategy may cause loss. Note that, by getting higher allotment your cost actually reduces and hence the loss may be lower. 16/n

Return Kicker: Some time companies come with right issue of partly paid shares, where the right issue price is to be paid to the company in 2 or more instalments.
This will help in reducing your investment while giving higher exposure in exactly the way a Call Option works. 17/n

For example: If Original share price is 100, 50% partly paid share should be valued at INR 50. Now if price of the original shares move from INR 100 to INR 150 (50% gain), price of partly paid shares would move from INR 50 to INR 100 (100% gain). 18/n

The leverage would backfire if the price goes down as Partly Paid shares would lose more.
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Please retweet or share if you learned something new. The entire tweet is for educational purpose, I may or may not have holding. I will post right issue opportunities in future to track the performance. You may consult your financial advisor if you wish to apply.
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