Rights issues

What a rights issue is

A rights issue is a way for a listed company to raise money by offering new shares to the shareholders it already has, in proportion to what they hold. The price is usually below the market price on the day the issue is announced.

The offer is described as a ratio. A ratio of 1:5 means one new share can be bought for every five shares held. A shareholder with 100 shares would be entitled to apply for 20 new shares.

Record date and entitlement

The company fixes a record date. Shareholders whose names are on the company’s register on that day are the ones entitled to the offer. Because shares bought on the exchange take time to settle, the last day to buy shares and still be on the register is before the record date; from that day the shares trade "ex-rights".

The number of new shares each shareholder can apply for is called their entitlement. Shareholders can apply for their full entitlement, for part of it, for more than it (additional shares, allotted only if others do not take up theirs), or not at all.

Rights entitlements (REs) and renunciation

Entitlements are credited to shareholders’ demat accounts as rights entitlements, or REs, which have their own separate ISIN. An RE is the right to apply for one new share at the rights price.

A shareholder who does not want to apply can renounce, which means passing the right to someone else. REs can be sold on the stock exchange during the renunciation period (on-market) or transferred privately (off-market). Whoever holds the RE at the end can apply for the shares.

REs that are neither used nor sold before the deadline lapse and become worthless. They are not paid out in cash.

How the price works

Because new shares are issued below the market price, the share price usually adjusts on the ex-rights date. Exchanges and data sites adjust past prices to keep charts comparable. A rights issue at a discount is not a gift: the value of each existing share tends to fall to reflect the cheaper new shares.

The offer document (the letter of offer) gives the ratio, price, record date, dates of the issue and how the money will be used.

Partly paid shares

Some rights issues ask for the price in instalments, called calls. Until all calls are paid, the new shares are "partly paid" and trade under a separate symbol. Missing a call can lead to the shares being forfeited.