Martin Lee @ Sg
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Understanding Rights Issues

There have been a spate of rights issues by listed companies recently. And you can expect many more to come as SGX recently announced some changes that will make it easier for companies to raise capital through issuing rights. These changes are no doubt bought about by requests from companies.

So, what exactly are rights issues?

Rights are essentially a way for companies to raise capital (money). Fresh capital is essential for a company if they need more funds for their business operations. In the current economic climate, more and more companies find that they require more funds. There is also the problem of existing credit lines of companies being reduced, thus increasing their need to raise capital.

Traditionally, there are two main ways for companies to raise capital. Via debt or equity.

Debt can be raised through bank borrowings or the issuing of bonds. The problem with bank borrowings now is that banks are unwilling to lend money. And if they do agree to lend, the interest rates are higher than normal. For bonds, there might not be enough takers. 

Equity can also be raised through issuing preferred shares, private placement of shares or rights issues.

In a private placement, shares are issued to a selected group of people at a particular price. The problem with this method is that the traded price of many companies are at very low levels now. Existing shareholders will be extremely unhappy if a private placement is done at low prices and their shareholdings get diluted. It would be like daylight robbery.

A rights issue overcomes the problem of a private placement by offering all shareholders an equal chance to subscribe to the new shares at the low price. While this might seem fairer than a private placement that would benefit only selected people, it does come with its disadvantages to existing shareholders.

This would be better illustrated with an example.

Lets say you own 1000 shares of company X and the shares were purchased at $1 each. The company has 100000 shares in circulation so you own 1% of the company.

Suppose you were only willing to commit $1000 of your capital when you purchased the shares. And that is the amount you will lose should the company go bust. Your liability is limited to your initial capital.

Now company X decides to issue a 1 for 1 rights at a price of $0.80. Assuming you subscribe to your entitlement, you would have paid an additional $800 to purchase 1000 shares. 

While the number of shares you own has now increased to 2000, your percentage of shareholdings actually remain unchanged. 2000 out of 200000 shares is still 1%.

What this means is that you have been “forced” to pump in more of your money just to maintain your ownership of the company. Your capital at risk has also increased from $1000 to $1800.

This is like the reverse of issuing dividends.

You have the right to refuse to subscribe for the rights of course.

If you do nothing at all, your initial shareholdings of 1000 shares will become only 0.5% after all the new shares are issued. This would be a huge mistake as the very least you should have done is to sell off the rights to recover some capital if you are not going to subscribe for the new shares. This will help to compensate slightly for the dilution of shares.

I always find the term “rights” an irony. The rights of shareholders are these few options:

  1. Subscribe to the rights based on the amount of money needed by the company. You are at the mercy of the terms of subscription price as well as number of shares you can subscribe to.
  2. Sell off the rights, keep the shares and have your shareholdings diluted.
  3. Sell off the shares before they go ex-rights.

Sometimes, an investor could feel that he is having no rights as none of the options are attractive.

For example, an investor could be pretty positive about the company but he doesn’t have the cash on hand to subscribe to the new shares. Neither option 2 or 3 would be good for him.

Take my case where I was holding the shares of a particular company in my CPF OA.  As my CPF stock limit was already maxed out, I can’t subscribe to the rights that was being offered.

The option given to me was to top up cash into my CPF investment account and use it to subscribe to the rights. This is not attractive to me at all as the money would basically be stuck inside CPF after the transfer.

So, faced with the prospect of a massive dilution of my shares, I had to decide whether to sell off my holdings (at firesale prices).

One way out (if I am positive about the company) is to sell the shares inside CPF, repurchase them using cash and subscribe to the rights. Very messy and it does incur additional transaction costs.

This is a case of  “Damned if you do, and damned if you don’t“. Very bad timing also as I have only purchased the shares 2 days before the company announced the proposed rights issue!

More on some of the mathematical aspects of a rights issue in my next rights post.

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46 comments
Jerry says 7 years ago

Hi, I recently subscribed to baker tech warrants, and having 24 lots, i was eligible for 9600 warrants, so i applied for another 400 excess warrants.

Refund date was supposed to be yesterday and I didn’t receive any refund with regards to the warrants. So I assumed that I’ve successfully gotten my excess warrants?
However, I just received my CDP statement informing me that I have 9600 provisional warrants and no mention of any excess warrants in the statement.

Does the CDP statement only reflect the actual number of warrants that you are eligible to subscribe for and not state the excess warrants that you applied for? Or there is a delay in the refund?

Kindly advise please, thanks!

Reply
    Martin Lee says 7 years ago

    Dear Jerry,

    Are you referring to the CDP statement which told you how much warrants you received? That should include the excess. The refund will not come in so quickly. Can take up to 2 weeks.

    Reply
Sam says 7 years ago

Hi,

I accidently purchased rights “adv sys r” without knowing that this it a rights,

When would happen to the rights if I can’t afford to pay the issue price?? Or can’t sell It before the closing date??

Reply
    Martin Lee says 7 years ago

    Sam, you have until Monday 5pm to sell the rights.

    If not, you will have to subscribe to it (at $0.025 per share) or it will expire worthless. Not too sure when is the deadline for this. You can check with your broker.

    Reply
yonginvest says 8 years ago

Hi Lioninvestor,

I have recently received some Rights issue for my Sinotel shares. However I had sold off my Sinotel Shares after XR. I believe this is why they still forward me the rights. The closing date for the rights application is 15-Oct-2010. I didn’t apply for it. I don’t see the Sinotel Shares in my CDP account anymore but I still see the Rights (Sinotel R) in it with the quantity in the balance.

Am i still entitled to these rights such that I could sell them? If so I do I go about selling them?

Appreciate your help. Thanks.

Reply
    lioninvestor says 8 years ago

    Hi Yonginvest,

    Last day for trading of nil-paid Rights Shares : 11 October 2010 at 5.00 p.m.
    Last date and time for acceptance and payment of : 15 October 2010 at 5.00 p.m

    Unfortunately, it’s too late to do anything now. You could have gotten back some money by selling off the rights (Sinotel R) before 11 Oct. Usually, the window of period for trading the Rights is quite short.

    When you hold the shares across the Xright dates, notice that the price will drop slightly. This will be almost the same value as the rights given to you.

    Reply
yonginvest says 8 years ago

Hi hi,

I found from Ezra the Ezra 200 counter will only be there for one month starting from 15-Oct.

Reply
    lioninvestor says 8 years ago

    Yes, it’s one month.

    Actually a unit share market also exists. You can dispose of any odd lots through it (liquidity might be poor).

    Reply
yonginvest says 8 years ago

Hi hi,

When will the Ezra 200 counter be closed?

Thanks.

Reply
newbie says 8 years ago

Hi lioninvestor,

Pls advise why is Ezra R and Ezra R200 having a remark :BI = Buy-in?

Is it because the last date and time for trading of “nil‐paid” Rights was 30 September 2010 at 5.00 p.m. and today is for those who fail to deliver the securities and broker can buy the securities and deliver them on their behalf?

But where is there no trades on these counters?

Appreciate your explainations! thanks!

Reply
    lioninvestor says 8 years ago

    Hi newbie,

    Last day of trading for Ezra R was 30th Sep 2010, therefore there are no more trades today.

    Buy in market is for those who shorted the shares. SGX will do a forced buyin for those who shorted the shares a few days ago.

    Reply
ling says 8 years ago

Hi lioninvestor,

It’s not worthwhile buying from “Ezra R” and “Ezra R200” if I want the mother share right?

Then why people want to trade in “Ezra R” and “Ezra R200” when in the end if they want the mother share, they have to pay to convert them?

Is it because they want to save commission, as our purchase commission to the broker is based on how much the sum total of our purchase and paying through atm to convert their rights to shares only cost $2.

What are other reasons why people trade rights?

Thank You very much!

Reply
    lioninvestor says 8 years ago

    Hi Ling,

    Say Ezra trade for $1.73. Then Ezra R should theoretically trade at around $0.55. (1.73-1.18). There’s not much difference in buying either. What you mention could be one reason.

    However, if you buy Ezra R, don’t forget you also get some free credit as in you do not need to pay for the full price of the Ezra share now compared to buying the mother share.

    Let’s think along another line. Assume nobody wants to buy Ezra R at $0.55 even though there is no price difference. However, note that those Ezra R holders who have no money to take up their entitlement would be quite desperate to sell their Ezra R. They might then try to sell it for $0.54. When that happens, it will actually become cheaper for a potential Ezra shareholder to buy the Ezra R and convert it compared to buying Ezra directly.

    At the end of the day, demand and supply market forces will determine the price of Ezra R.

    Reply
ling says 8 years ago

Hi lioninvestor,

So how much will Ezra 200 be trading at? Would it be at around the theoretical market price $1.67?

Thank You very much!

Reply
    lioninvestor says 8 years ago

    Hi Ling,

    The price of Ezra 200 will be similar or close to the price of Ezra.

    Reply
ling says 8 years ago

Hi lioninvestor,

I have 5 lots of Ezra, hence I have 1 lot of rights. And can I go to Ezra R200 to buy up to 1000 shares? So in the end I have 7 lots?

Thank You!

Reply
    lioninvestor says 8 years ago

    Hi Ling,

    Why do you want to do that? If you buy Ezra R200, note that you will still need to pay $1.18 to convert them to Ezra share. It will cost almost the same as buying Ezra outright from the market.

    Try applying for 1000 rights (your entitlement) and 1000 (or more) excess rights instead.

    Reply
      ling says 8 years ago

      Hi lioninvestor,

      So you mean I go to the atm and apply for my 1000 rights and also 1000 excess rights? But I may not neccessary get the 1000 excess rights and may get odd lots in the end?

      Thank You!

      Reply
        lioninvestor says 8 years ago

        Hi Ling,

        you can always sell off the odd lots. Every excess rights that you manage to get would be instant profit since it will be like buying the Ezra share at $1.18.

        Reply
          ling says 8 years ago

          Hi lioninvestor,

          So for odd lots, I would have to sell at Ezra R200?

          Thank You!

          Reply
            lioninvestor says 8 years ago

            Not Ezra R200 but Ezra 200. This is a temporary counter which will be created later.

            You can also sell odd lots of normal Ezra shares through your broker in the odd lots market.

            R200 refers to the rights.

            If in doubt, please call your broker to check. Selling the wrong thing or applying wrongly can be very costly.

            Reply
Philip says 8 years ago

Hi,

I am given 800 rights from Ezra (I have 4 lots of Ezra shares).

1) How do i go about in subscribing this 800 rights? How much do I need to pay?
2) Should I buy another lot of Ezra R200 and subscribe 1000 rights? How much do I need to pay?
3) Should I subscribe 800 rights and apply 200 excess rights?
4) What if I do not get the 200 excess rights, when is the time I get to know it?

Sorry, I am new with Rights… please help

Reply
    lioninvestor says 8 years ago

    Hi Philip,

    You need to refer to the rights offer document on the timelines and all the details. They will mail all registered shareholders a copy.

    1) It’s via atm of the local banks usually. Sometimes, one of the banks might be missing. Another way is to pay by cashier’s order. It will cost you $1.18 x 800 to take up your full entitlement.
    2) Up to you. One share of Ezra R200 costs about $0.60.
    3) Yes, that is one way. You will need to pay $1.18x 1000 and if your excess rights is successful, you will end up with 1000 Ezra shares. Personally, I would do this rather than 2). You can also try applying for more excess rights. eg 1200.
    4) At the end of the entire rights exercise. Typically, priority for the excess rights will be given to odd lot holders. If you are unsuccessful for the excess rights, you will have 800 Ezra shares. Usually, they will have a temporary counter (about a month) for you to trade odd lots after the rights issue.

    Reply
Tommy says 8 years ago

I would like to know if say for EZRA, i have done nothing about the rights issue and now that it is XR, will i be entitle to the rights? Am i too late to suscrible to it and how do i go about doing it? Thx

Reply
    lioninvestor says 8 years ago

    Hi Tommy,

    You can either sell your rights or subscribe to them.

    Tentative dates:

    Commencement of trading of “nil‐paid” Rights : 22 September 2010 from 9.00 a.m.
    Last date and time for trading of “nil‐paid” Rights : 30 September 2010 at 5.00 p.m.
    Last date and time for acceptance of and payment for Rights Shares : 6 October 5pm.

    Please refer to the Rights Announcement posted on SGX for further details.

    Reply
      Tommy says 8 years ago

      Hi lioninvestor,

      Thks, i have just receive the mail from EZRA. ;p

      Reply
Baoqiang says 9 years ago

Hi Lion,

Recently more and more companies are proposing to offer rights issue in SGX, whereby some offer are too attractive to be true, example 90% discount from market share price or 5 : 2 ratio rights offer.

Though it is being announce in SGX, but no firm date has been given due to certain approval that the companies that need to get, will there be chances that the company cancel off the rights issue or no further news on the rights issuing?

My concern is that will companies use this announcement to attract investors to take up their shares but end up they did not actually offer the rights due to some changes later on.

Reply
    lioninvestor says 9 years ago

    Hi Baoqiang,

    Actually, a rights issue on its own doesn’t really add value to existing shareholders, no matter what price they might appear to give.

    For eg, if the price of a stock is currently $1 and they give you 1-for-1 rights at $0.01, the price will end up trading at around $0.505 (if all else remains unchanged).

    The value add only comes if the money is put to good use.

    When a company calls for a rights issue, it means they need money and they are (perhaps) going to you as a last resort. So it is not likely they will change their mind suddenly.

    It is like a reverse of them giving shareholders dividends.

    Will you like it if a company ask you to give them dividends year every year?

    Reply
      Baoqiang says 9 years ago

      Hi Lion,

      Yes dividends is the best especially for long-term investor which targets high yield rate shares.

      Understand that rights issue does not add value to existing shareholders as they dilute the shares value, but still alot of investor purchase the shares hoping the company to perform, as a result pushing the shares price up.

      For short-term players that targets capital gain, can they play it by purchasing the shares before Ex-rights, and sell it on the Ex-right date to get the rights and then sell off the rights to make a gain? This is risky but seems like many investors are playing the game like this.

      Reply
        lioninvestor says 9 years ago

        Hi Baoqiang,

        playing in such a manner is a zero sum game and is as good as buying any other share out there. It can go up or down in the short term – no one has a crystal ball.

        The reason why some people are buying up these rights issue is for the chance of getting excess rights. This is where the profit is (if you do get them).

        Using my earlier example, if you manage to buy 2 shares (instead of 1) at $0.01, you will make a nice profit when the price trades at $0.50.

        Reply
Tym says 10 years ago

thanks lion!! for your article which makes this whole rights thing much clearer.

in essence, rights issue is really not so good news esp. when compared to bonus issue.

“… Rights are essentially a way for companies to raise capital (money). Fresh capital is essential for a company if they need more funds for their business operations. In the current economic climate, more and more companies find that they require more funds. There is also the problem of existing credit lines of companies being reduced, thus increasing their need to raise capital….”

if you need extra funds for business operations, the question is why is the business operations not generating sufficient funds?

thanks again lion for your articles. very informative. am grateful that you took the effort to publish your articles and reply all the queries.

many thanks!! = )

Reply
    lioninvestor says 10 years ago

    Hi Tym,

    You are welcome.

    There’s perhaps some cases where businesses need money for expansion. So, its always on a case by case basis.

    Bonus issue, for that matter is another thing that doesn’t really add much value to shareholders.

    Reply
P/E says 10 years ago

interesting thanks.eagerly waiting for your next post

Reply
Peter says 10 years ago

Thanks alot Lion for your clear explanation.
So for the Capitaland Rights Issues which are about to be launched, the same principle apply. That is the moment you pay for the entitlement for the Rights Issues they are automatically converted to the mother shares. You dont have to pay anything more – Right. Once again Thanks

Reply
    lioninvestor says 10 years ago

    Hi Peter,

    Yes, that will apply to the rights you are entitled to. ie. 1 right for every 2 shares.

    If you do apply for excess rights, getting those are not guaranteed.

    Reply
Peter Chua says 10 years ago

Hi, I’m really quite confuse on the rights 1 for 2 share owned. As I owned 1lot I was entitled to 500 & successfully got alocated the excess which I susbsribed. So do I own the mother shares now that I have paid up the subsription?
I see in the CDP statement on holding that they had 2000 shares meaning 1000 my original mother share and I suppose the other 1000is the Right converted to mother shares? Your advise is much appreciated.

Best regards
Peter Chua

Reply
    lioninvestor says 10 years ago

    Hi Peter,

    Original holdings : 1000 shares
    Subscribe to rights : add 500 shares
    Subscribe to excess rights : add 500 shares

    Total: 2000 shares

    What you see in your CDP statement is correct (assuming you haven’t sold any more shares since then).

    Reply
      Peter says 10 years ago

      Hi Sir,
      Thank you for your prompt response. So the 1000 Rights which I successful subscribed is the DBS500 and not the mother share – correct me if I am wrong. I also understand that for Rights if I dont sell or exercise it it will expire is this correct or by subscribing i already actually exercised it.? Pls advise. Thank you & Best regard

      Reply
        lioninvestor says 10 years ago

        Hi Peter,

        If you had paid the $5.42/share (x 500), that means you have already converted your 500 rights to 500 shares.

        Otherwise, it would have expired worthless.

        The excess rights would have cost you another 500×5.42. If the money wasn’t refunded to you, that means you have received another 500 DBS shares.

        DBS 500 and DBS are the same thing.

        The DBS 500 allows you to trade odd lots, ie sell 500 shares of DBS.

        Reply
Rights and their Quantitative Implications says 10 years ago

[…] This post is a continuation of the previous post discussing rights issues. […]

Reply
lle says 10 years ago

a very good illustration which explain clealy the issue close to my situation. really looking forward for your next article. well done !

Reply
DN says 10 years ago

nice article, clear cut explaination…

i’m looking forward to your calculation on rights issue…

Reply
Fact of Life says 10 years ago

i don’t think there is any irony here. basically as a shareholder of the company, you have to bare the risks along with the potential returns. its only fair that when the company you own doesn’t do well, you have to chip in. if you don’t, then the company will fold. if others chip in to buy the rights, then naturally they should at least be rewarded with higher share ownership if you don’t buy it.

Reply
    lioninvestor says 10 years ago

    Hi Fact of Life,

    Agreed with you that shareholders have to bear the risks as well as the potential returns.

    Just felt the words “rights” isn’t so appropriate.

    Reply
Very Sian says 10 years ago

So it’s better not to buy shares this year. The worst has not come, we should see more companies going burst and the banks will report more and more bad debts. Just today, OCBC is sueing Jurong Tech for outstanding loans, and Jurong Tech may be wind up if they cannot pay and OCBC will lose the loan as well because who wants to buy a company that’s in trouble.

Reply
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