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Concepts & Tutorials

Featured Comment: What is a rights issue?

Sujit asks:

I am not sure what a rights issue is, something like, the Indian Hotels Co is going to bring in, thats the news today.
Suppose I own a 100 shares of Indian Hotels, then whats the implication for me??
Please comment.

Rights issues are fresh shares issued only to existing shareholders at a price. So each shareholder gets to buy a certain number of shares, based on their current holding.

A 1:5 rights issue means every shareholder gets to buy 1 share for every 5 they currentl hold, by paying a certain sum of money per share. It’s not free shares, it’s shares at a price, but you get absolute right to own those shares at that price (unlike IPOs where there is a lottery and such).

The amount per share is usually lesser than the current stock price, given that shareholders will exercise their right and the number of shares will increase, thus reducing EPS. For example, in 2005 Bata had a rights issue at Rs. 54 (I think it was one share for every five held). The market price of Bata at the time the issue was on, was Rs. 95. But after the rights issue, the share fell to Rs. 84 (proportionately because you got one more share for the 10 Rs.)

Rights issues are cheaper than going for full blown IPOs or Follow on public offers. But you as a shareholder MUST exercise the right otherwise you lose the price. In the Bata example above the market price fell by Rs. 10 after the issue – if you had not bought, you would have lost Rs. 10 per share (more than 10%!).

The only people that benefit if you don’t subscribe are other or large investors who put in extra money for additional subscriptions (for any unsubscribed amounts).

In the Indian hotels case, please check the wording. I have a feeling the issue is for non-convertible debentures at 6% – not exactly a rights issue.

  • Ankur says:

    >they r running 2 offers concurrently…
    1) is the rights issue
    2) is the debenture.. which r actually loans which can be optionally converted to shares at a later date

  • Kunal Bhasin says:

    >There is a news that Mc-dowell holdings is going to announce a right issue, is the defination mentioned in the psot is valid for that stock as well.

  • Deepak Shenoy says:

    >The concept of a rights issue does not change, Kunal, whether it’s a Mcdowell or an Indian hotels.

  • Anil says:

    >Deepak: How can I apply for rights issue ,I have 100 shares of indian hotel and I use icici direct to trade.
    Please let me know How to apply for rights issue ,whether in icicidirect gives facility to buy it online or I will have to apply manually.
    Anil

  • Deepak Shenoy says:

    >You can’t apply online, Anil. You’ll get a form at your address (the one tat ICICI Direct has) and you will need to fill up the form, attach a cheque and drop it at one of the collection centers (will be given in the form)

  • Anil says:

    >Deepak:

    Thanks for a prompt reply ,How do I will come to know about rights issue date and all the details .
    Where I can get all the details and when I can expect right issue form from Icici Direct ?
    Is it not possible to apply it online ?

    Thanks & Regards

    Anil

  • Deepak Shenoy says:

    >anil: Can’t imagine why but no one allows you to subscribe to the rights issue online (though you can check with ICICI direct if they do have it now, but I doubt it).

    You should get the form and further details directly from the company that is handling the issue (not ICICIDirect). What you can do is to contact Indian hotels and ask them, and they will direct you.

  • Anil says:

    >Deepak:

    Thanks again for prompt reply , I am a reguler reader of your blog and I appreciate your effort and pain you take to write this blog to educate people about investment/finace and all that stuff.

    Regards
    Anil

  • Sujit says:

    >Thanks Deepak,

    That clears my doubts.

    Regards
    Sujit

  • Kunal Bhasin says:

    >Thanks,

    Do share your thoughts on RPL’s future prospects…let’s say 2 yr from now..