Companies can raise money in a few ways. They can borrow from the bank or raise money from existing shareholders through rights issues. They can also issue other debt securities like corporate bonds, warrants etc.
When a company issue rights, the announcement will be something like this, “1 rights share for every 2 ordinary shares at $1”. This means that every shareholder will be entitled 1 rights share for every 2 shares that they owned. The shareholder can choose to subscribe to the rights and pay $1 for each share. At the end of the rights issue, the company will use the proceeds to fund the activity that she has promised to do.
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As one of my stocks (Blumont) was involved in a Rights Issue recently, I find it easier to explain the procedure using this example.
(Day 0) 22 Apr 13 – Rights Issue approved during Annual General Meeting (AGM)
The board of directors have to seek approval for the rights issue from the shareholders during the AGM. This is an opportunity for shareholders to ask the reasons for issuing rights and question if there are better funding options. Most importantly, figure out the management’s intent to issue rights. The rights issue was approved during Blumont’s AGM on 22 Apr 13.
(Day 98) 29 Jul 13 – Announcement of Rights Issue
Blumont announced and released the rights issue details. The company set the limit of 861,002,293 additional shares to be converted from the rights. Each rights share will cost $0.05 and each shareholder is entitled to 1 rights share for every two ordinary shares.
The company also added that this is a non-underwritten and renounceable rights issue.
Non-underwritten means that the company has not engaged an investment bank to structure this deal which most companies would do so.
Renounceable and non-renounceable rights
Renounceable rights will be listed on the SGX and shareholders can sell the rights to other investors. These rights will have a separate counter name. In Blumont’s case, they have Blumont R and Blumont R500 (in lots of 500 rights). Non-renounceable rights are not listed on the exchange and hence, these rights cannot be traded. The rights will be converted to ordinary shares and deposited in the CDP account after a certain date if the shareholder subscribes to the issue. Thereafter, the shareholder can choose to sell the additional shares.
(Day 119) 20 Aug 13 – SGX approval-in-principle for the listing of rights
Blumont have successfully sought approval from SGX to list the renounceable rights.
(Day 136) 6 Sep 13 – Announcing Book Closure Date
Blumont announced 23 Sep 13, 5pm, as the deadline for accounting the list of share holders for the rights issue.
(Day 149) 19 Sep 13 – Ex-Rights
Blumont went Ex-Rights on 19 Sep 13. New buyers of Blumont shares after this date will not be entitled any rights. Shareholders can sell Blumont shares after 19 Sep 13 and still receive the rights in their account.
(Day 155) 25 Sep 13 – Offer Information Sheet (OIS)
OIS will provide details on the trading of the rights shares. Shareholders should pay attention to the important dates like the trading period of the rights.
(Day 156) 26 Sep 13 – Listing of Rights and trading commences
Blumont R and Blumont R500 began trading on 26 Sep 13. These are known as ‘nil-paid’ rights because shareholders have yet to pay for them. Rights holders can sell these rights to other investors.
Usually the share price would drop after a rights issue because there are going to be more shares created. Blumont share price should be about $1.67 after the dilution of shares but it continued to go up to $2.43 on 27 Sep 13. Blumont rights also caught up with the price and listed at a price of $2.10. Considering the rights share only cost $0.05, 4,100% gain for the rights holders! This is an unusual scenario and investors should not take every rights issue as positive news. There must be something valuable about Blumont that shareholders are buying up the shares and the rights.
(Day 164) 4 Oct 13 – Trading of Rights ceases
Blumont R and Blumont R500 cease trading and rights holders are finalised.
(Day 170) 10 Oct 13 – Payment of rights shares
Rights holders to subscribe and pay for the rights shares.
(Day 182) 22 Oct 13 – Crediting and trading of rights shares commences
The rights are converted to shares and credited to the rights holders. The additional shares are traded over the exchange.