In case of a rights issue, a company may come out with a fresh batch of shares, but exclusively for the existing shareholders.
Typically, rights issue is offered in proportion to number of shares an existing shareholder is holding. RIL is offering one rights issue share for every 15 shares held by the shareholder.
With an aim to bring down the company’s debt, Reliance Industries Ltd (RIL) has come up with a rights issue offer, through which the conglomerate is planning to raise about ₹53,125 crore. RIL is not the first company to come with rights issue of shares. Read more to know what is a rights issue and should invest in the Reliance Industries’ offer?
What is a right issue?
When a company needs funds for expansion, acquiring assets, or clear debts, they have various options such as coming up with an initial public offer (IPO), follow-on public offer (FPO) or rights issue.
However, IPO is only available to the companies that are yet to be listed on stock exchanges and are offering shares to the public for the first time. In case of an FPO, an already listed company comes out with a fresh tranche of shares. While in case of a rights issue, a company may come out with a fresh batch of shares, but exclusively for the existing shareholders. What it means is that only shareholders on a given date, known as “record date", will have the right to buy these shares.
Typically, rights issue is offered in proportion to number of shares an existing shareholder is holding. RIL is offering one rights issue share for every 15 shares held by the shareholder. So, if a shareholder owns 150 shares on the record date, she or he will get the chance to buy 10 right issue shares. However, it is not compulsory for an existing shareholder to opt for the rights issue, you may refuse to subscribe to the rights issue and just let your "right" lapse.
But the question is, should shareholders subscribe the rights issue? The shares are offered at a discounted price compared to the prevailing market rate. For instance, RIL’s right issue offer is priced at ₹1,257 per share, while on the day of announcement i.e. 30 April, the company’s shares closed at ₹1,466 apiece. However, after the announcement of the rights issue, generally, the shares go up, as investors may want to buy the shares so that they can avail of the rights issue offer. This happens if investors see a positive impact from the rights issue on the company’s future financial fundamentals. Even in case of RIL, after the rights issue announcement, price of RIL shares went up by about ₹100 since 30 April.
Subscribing to a right issue offer is similar to that of investing in a company. Do not consider it just because of the discount. Look at other factors such as growth prospects and the reason behind the company’s decision to come out with a rights issue and so on. As per reports, Mukesh Ambani, chairman and managing director of RIL, who holds 50% stake along with other controlling shareholders have pledged to buy the full extent of their entitlement and also subscribe to all unsold shares in the rights issue. This shows the promoters commitment and confidence in the company. Experts suggest that existing retail shareholders can go for the rights issue. “I would suggest RIL rights issue for only existing investors who bought before the Facebook deal valuation and are ready to hold the stock for at least three years," said Varun Girilal, founder, Mitraz Financial Services. At the ratio of 1:15 and only 25% on call, the capital commitment is not very high i.e. less than 7% of your capital cost. RIL seems to be arranging different sources of funding to pare debt and build their liquidity options. It could also be a hedge against possible delay or call off of Saudi Aramco deal. The FB deal has created a lot of interest but will also have to pass through government approvals for data security or anti monopoly and so on, explained Girilal.
Even if you do not currently own the shares, but if you buy it before the record date, you will be able to exercise the rights issue option. “However, I would not suggest buying RIL shares at current valuations after recent run-up, as it has a high chance of correcting and getting diluted post rights issue. In that sense, it is not exactly a very attractive valuation in terms of a rights issue. For short-term traders and those taking loans or funding to buy now, the margin of safety is less and they should better avoid," said Girilal.
Remember, if you are an existing shareholder and choose not to exercise your rights, you may see a dilution in your shareholding since post the rights issue, there will be dilution in earning per share.