Deciphering Corporate Actions
What is a Right Issue?
Right issue is a mean for companies to raise funds by issuing new ordinary shares. Companies can issue other securities such as preferential shares, bonds and warrants instead of new ordinary shares. The company can ask the existing shareholders for capital for the following reasons:
- To fund acquisition or expansion plans.
- To repay maturing debts as an alternative. The company may be unable to secure more borrowings.
Existing shareholders are given the opportunity to maintain their stake in the company to prevent dilution. When there is a right issue and the existing shareholder chooses not to subscribe for the new shares, the shareholder's stake in the company is diluted, as the new shares are added to the total shares outstanding in the market.
*Important Note* Right issue is an entitlement to buy new shares at a specified price. You will need to pay the exercise price to obtain the shares. The right issue does not equate to you receiving new shares for free.
How does it work?
The flow of the rights issue goes like this:
- The company announces a right issue and the reasons for it.
- The key important dates and timings will be announced.For those who like to know the general terms such as Ex- Date and Record Date, please refer to the earlier post.
Distribution Ratio: There are 2 ratios in the event of a rights issue. - The rights issued to the existing shares held,and - the rights exercised to one new share.
Offer of 5 for 1 means that the shareholder gets 5 rights for every existing share held.
5 rights : 1 new share means that the shareholder will get 1 new share for every 5 rights subscribed.
Exercise: Subscribe and make payment for the Rights Entitlement.
Over subscription: The existing shareholder can apply in excess of the entitled amount. However, it is important to note that this option is not always offered, and the excess rights allotment is subjected to balloting.
Buy-In Last Cum Date: It is meant for short sellers, where they are required to pay the right entitlements if they have shorted before the Ex-Date. If you do not short sell, the date is irrelevant to you.
Renounceable Rights: The rights are tradable.
Non- Renounceable Right: The rights are non-tradable.
Rights Trading Period: The right entitlements are listed on the stock market and are tradable during this period. It is important to note that not all right issues entitlements are tradable and is dependent on the discretion of the company who issues them.
The rights are traded as a separate counter from the parent company, indicated by an alphabet “R” at the back of the parent company's name. For example, Capitaland Commercial Trust R and Capitaland Commercial Trust R1.
If you buy the rights entitlements from the stock market, you are required to pay the exercise price to obtain the new shares, on top of the price you paid for the rights entitlements.
Rights Closing Date / Pay Date: The last day where existing shareholders can subscribe for the right issue. Existing shareholders can subscribe for right issue via ATMs. Do take note that there is a cut-off time on the closing date.
Expected date of crediting of Right shares: The date where the new shares are credited to you.
Expected date of refund of unsuccessful or invalid application: If you had applied for rights entitlement in excess previously and was not allotted any excess, you will receive a refund.
If you had exercised the rights wrongly, you will receive a refund.
Expected date of commencement of trading of Rights Shares: The date where you can sell off the new shares if you want to.
Nil Paid Rights: No payment has been made to exercise the right.
Underwritten Rights Issue: Rights Issue can be underwritten by an underwriter at times. Sub-underwriters can be involved to provide a guarantee that the company raises a fixed amount of funds by subscribing to any Rights not taken up by existing shareholders. Underwriters are remunerated by an underwriting fee.
Irrevocable Undertaking: Substantial Shareholders or Directors can commit and show a proof of confidence in the company by giving their irrevocable undertakings to subscribe for rights which are not fully taken up by other existing shareholders. The company may opt for a Right Issue without underwriting to save on cost in underwriting fee.
What are your Options?
You can exercise the rights. (obviously)
You can exercise the rights and apply in excess.
You can sell the rights entitlement during the Rights Trading Period.
Take no action, and your rights entitlement will lapse. This is the worst case scenario.
Every beneficiary owner of the rights needs to send an official instruction to their custodian or Central Depository (CDP). If your shares are held under CDP, you can subscribe for your rights entitlement directly at the participating banks.
How do you calculate the Theoretical Ex-Right Price?
For example, Mr Top Investor owns 6,000 shares of MIDAS. MIDAS has announced a Right Issue with an offer of 1 for 2 at $0.150 and Ex-Date: 01/02/2018. The closing market price for MIDAS on 31st January 2018 was $0.177 This means that Mr Top Investor will receive 1 right entitlement for every 2 existing shares that he owns. Thus, Mr Top Investor will receive 3,000 rights entitlement and he will need to pay 3,000 rights entitlement x $0.150 = $450, to receive 3,000 new MIDAS shares. This is provided that Mr Top Investor subscribes fully for the right issue, without any excess.
Therefore, the theoretical ex-right price on the ex-date is $0.168. On the Ex-date itself on 1st February 2018: If MIDAS' share price is trading above $0.168, Mr Top Investor will have a capital gain should he sell off his shares. If MIDAS' share price is trading below $0.168, Mr Top Investor will have a capital loss should he sell off his shares. This includes taking into account of the new right shares credited.
Distribution Ratio: You will receive 166 rights entitlement for every 1000 existing shares that you own. 1 right will grant you 1 new share.
Ex-Date: 27th September 2017
Exercise: You will need to pay S$1.363 per right.
Renounceable Rights: The rights are tradable. Search for CapitaCom Trust R or CapitaCom Trust R1.
Rights Trading Period: 4th October - 12th October 2017
Rights Closing Date / Pay Date: 19th October. Last day to exercise the rights.
Expected date of crediting of Right shares: 26th October 2017
Theoretical Ex-Right Price:
Let's assume you have 1,000 shares and the closing price of CapitaCom Trust on 26th September 2017 was $1.665.
If CapitaCom Trust's share price is trading above $1.622, you will have a capital gain should you sell off the shares.
If CapitaCom Trust's share price is trading below $1.622, you will have a capital loss should you sell your shares. This includes taking into account of the new right shares credited.
I hope you've enjoyed this article, and feel free to leave your feedback in the comments section below.
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