Rights Issue of Shares – upto 100% returns – Should you opt?
In the next 2 weeks, VIP Clothing and Jost’s Engineering Rights Issue would open. VIP Clothing is trading at 100% higher than the rights issue price fixed by the company. Jost’s Engineering is trading at 50% higher than the rights issue price. These look like a multibagger shares to Indian investors. If you are not the existing share holders, you cannot buy the shares of the company through Rights Issue. What are Rights issue of Shares? How does Rights Issue of Shares work exactly? Which are the recent Rights Issue that got closed? Which are the upcoming Rights Issues in India where existing share holders can buy those shares? This article would provide some insights about Rights issue of shares in India.
What is Rights Issue of Shares?
Right issue of shares also known as ‘subscription right’ or ‘share purchase right’ is the privilege of existing shareholders to buy more shares in proportion to their current holding at a rate lower than the current market rate. For example – 1:5 right issue means that the shareholder can buy 1 share for every 5 shares held in the company. The existing shareholders are allowed a certain time limit within which they need to exercise this option otherwise it is treated as foregone. They may exercise their right in part also. The shareholders who do not want to exercise this right can sell their rights in the stock market (if the company permits) like you are an existing share holder but don’t want to invest more but somebody else who is not a shareholder of that company wants to buy shares of that company, then you can sell your subscription right to him for a consideration.
The shareholders exercising their right may not subscribe to all the rights offered. They may exercise some of the rights to purchase additional discounted shares and the remaining rights may be sold in the market or foregone.
Advantages of Rights Issue in Shares
The right issue of shares offers the following advantages:
1) The shares are available at cheaper rate than the prevailing market price.
2) It is made at the discretion of directors. There is no need to take prior permission of shareholders or stock exchange.
3) These are available only to existing share holders of the company.
Negative Points in Rights Issue of Shares
It’s not that right issue of shares has only positive impact on the company and investors. It has some negative impacts also.
1) The addition of new shares to existing shares in the market creates a share dilution where each share owned is devalued. When the shareholders are not exercising this right, then their shareholding is devalued.
2) The company can raise limited fund from this option as existing shareholders may not be willing to invest more. A rough thumb rule says that a company can raise 25% of the existing equity value through right issue.
3) In some of the cases, after the rights issue, the shares are traded below the rights issue price.
What is the procedure for Rights Issue of Shares in India?
Here is the process which companies follow for righs issue of shares in India.
1) A board meeting is called by issuing the notice of meeting.
2) The right issue needs to be approved with ‘letter of offer’ which shall also include ‘right for renunciation’.
3) Send offer letters to all the existing shareholders as on the date of offer. It should reach all the shareholders at least three days before the opening of the issue.
4) Receive letter of acceptance or rejection or renunciation of rights from the shareholders and also from the persons in whose favor right is renounced.
5) Call a board meeting and approve allotment by passing of board resolution.
6) Issue of share certificates / allotment in demat account.
Recent Rights Issue in Nov-2017
There were 2 companies HCL Info Systems and Hindi Rectifiers which offered right issue in the last few weeks in Nov-2017.
1) Hind Rectifiers Ltd – the company is planning to raise 1204.63 lacs through right issue to its shareholders. The company is undertaking an expansion plan in its factory at Nasik for the manufacturing of products like Electrostatic precipitator, roof mounted package, switch board cabinet etc. The company is using term loan and retained earnings also for the same.
2) HCL Info Systems – it is aiming to raise 499.09 crore from rights issue. The company planning to use the raised funds towards the prepayment or repayment of all or certain part of the borrowings of the company and for general corporate purposes. This will enable the company to maintain a favorable debt-equity ratio and enable utilization of internal accruals for further investment in business growth.
Upcoming Rights Issue in Dec-2017
1) Jost’s Engineering Rights Issue: The rights issue would open on 30th November and closes on 14th December, 2017. They are coming up with rights issue for 168,223 shares at Rs 594 (including premium). It was trading at Rs 940 as on 27th November, 2017.
2) VIP Clothing Rights Issue: The rights issue would open on 28th November and closes on 12th December, 2017. They are coming up with rights issue for 1.65 Crore shares at Rs 26 (including premium). It was trading at Rs 53 as on 27th November, 2017.
Should you opt for Rights issue of Shares?
The investor should not be carried away to the discounted rate of shares and go for extra investment. Firstly, they should satisfy completely that the extra funds raised by the company are for its betterment and the performance of the company is going to improve. Investing in rights issue of a bad company could be worst if you don’t do your home work.
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Rights Issue of Shares – upto 100% returns – Should you opt