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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.

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