Rights Issues And Open Offers

What are Rights Issues and Open Offers?

Rights Issue and Open Offers are means of capital raising for a company. Essentially the company is asking its shareholders for money to fund its business generally for the following reasons:

  • To fund its acquisition or expansion strategies
  • To repay maturing debts in times when the company is unable to secure more borrowings

In a Rights Issue, the company offers all existing shareholders who own the shares of the company the right but not an obligation to purchase additional new shares (“Rights Shares”) in proportion to their existing shareholdings at a fixed price (the “Rights Issue Price”, “Offer Price” or “Subscription Price”) within a specified time (“Subscription Period”).

The usually discounted Rights Issue Price at which existing shareholders can subscribe for the new Rights Shares serves as an incentive for shareholders to purchase the new shares by taking up and exercising their rights entitlements.

In this article, we will share with you on the different forms of Rights Issue and how to interpret the technical jargons associated with it.

What is the difference between Rights Issue and Open Offer?

Open Offers are similar to Rights Issues except that it is a non-renounceable Rights Issue. Read on to find out the difference between renounceable and non-renounceable Rights Issue.

Renounceable and Non-Renounceable Rights

In a renounceable Rights Issue, the rights offered to an existing shareholder are traded as a separate temporary counter from the parent share as indicated by an alphabet “R” in the counter trading name. Examples are “TigerAir R” and “TigerAir R500”.

“Renounceable rights”, also referred to as “transferable” or “tradable” rights, can be sold to other investors on the open market during the life of the rights, that is, during the rights trading period spanning 2 calendar weeks. Upon trading, these rights are known as “nil-paid rights” as they have yet to be exercised by the holders into new Rights Shares at the Rights Issue Price.

In contrast, “non-renounceable rights”, also known as “non-transferable” or “non-tradable” rights, refer to rights offered to an existing shareholder which cannot be traded on the open market. Holders can either take up and exercise the rights into new Rights Shares at the Rights Issue Price or allow the rights to lapse upon expiration. “Non-renounceable Rights Issues” are also known as “Open Offers”.

Underwritten Rights Issue

Rights Issue or Open Offer may optionally be underwritten by an underwriter and in some instances, sub-underwriters whose role is to guarantee that the company will raise a minimum amount of capital by subscribing to the Rights Shares not taken up by the Shareholders in exchange for an underwriting fee.

Irrevocable Undertaking

The Substantial Shareholders or Directors of the company may give their support for the Rights Issue to demonstrate their commitment and confidence in the prospects of the Company. They will give their irrevocable undertakings to subscribe for the Right Shares which are not fully taken up by other shareholders. With the irrevocable undertakings by the Substantial Shareholders or Directors, the Company may then pursue a Rights Issue on a non-underwritten basis, thereby bringing about cost savings in the form of the underwriting fee. 

How do Rights Issues / Open Offers work?

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After the announcement on the Rights Issue, the parent shares will be trading on a “cum-rights” basis as denoted by the “CR” remark. As long as an investor purchases the parent shares while they are trading on “CR” basis, the shareholder will be eligible to receive the rights entitlements as declared by the company. Once the parent shares trade on “ex-rights” basis as denoted by “XR” remark, an investor who purchases the parent shares will no longer be eligible to receive the rights entitlements as declared by the company.

Last Cum Date [Tth Trading Day]

This is the last trading day on which the parent stock is still trading with the declared rights entitlements attached to it.

Ex-Date

The trading day starting which the parent stock is traded ex-rights, that is, without the previously declared rights entitlements attached to it.

Record Date (Also known as the Books Closure Date) [T+3th Trading Day]

The date at the close of the business on which the securities accounts of shareholders must be credited with the company’s shares in order to participate in the rights offering declared by the company.

Example

Mr. Z owns 1000 shares in GlobalInv with each share trading at S$0.138 on the stock exchange on cum-rights basis.

Subsequently, GlobalInv announced a 1-for-2 Rights Issue at Issue Price: S$0.128 per Rights Share with Ex-Date: 13/03/2012 and Books Closure Date: 15/03/2012.

This means for every 2 GlobalInv shares Mr. Z purchased before the Ex-Date which he owned till the Books Closure Date, he will be entitled to subscribe for another 1 new Rights Share at the subscription price of S$0.128, a 7% discount to the market price of S$0.138 per share trading on cum-rights basis. In total, Mr Z can subscribe for 500 new Rights Shares.

The existing shareholders are entitled to

 1.  accept in full or in part;

By exercising in full all the rights entitlements offered under the Rights Issue, the shareholder get to maintain his proportionate ownership in the company with the enlarged share capital without experiencing shareholding dilution, such that an x% stake before the Rights Issue remains x% stake after the Rights Issue on the assumption that the Rights Issue is fully subscribed.

Generally, in the case of a discounted Rights Issue, the stock market will, on the Ex-Date, price into the share price the effect of shareholding dilution as a result of the new additional shares issued. That means once the shares are traded on ex-rights basis, the share price will drop to the Theoretical Ex-Rights Price.

Theoretical Ex-Rights Price
(A theoretical price which does not take into account other corporate or market factors)

= (A x Market Price Per Share) + (B x Rights Issue Price or Open Offer Price)
                  (A + B)                                                  (A + B)

= (2 x S$0.138) + (1 x S$0.128)
 
       (2 + 1)              (2 + 1)

= S$0.135 per share on Ex-Date

Mr. Z’s shares trading on ex-rights basis upon the conclusion of the Rights Issue are therefore worth S$0.135 per share instead of S$0.138 per share trading on cum-rights basis before the conclusion of the Rights Issue. However, this loss as a result of a fall in share price is offset by the gain made when Mr. Z subscribed the new Rights Shares at S$0.128, a 7% discount to the market price of S$0.138 per share trading on cum-rights basis.

2.  decline, thus allowing the “nil-paid” rights to lapse upon expiration; or

By allowing the rights entitlements to lapse upon expiration, the shareholder’s stake in the company will be diluted together with a reduction in the value of his shareholdings following the conclusion of the Rights Issue due to the lower Theoretical Ex-Rights Price as illustrated in the above example brought about by the dilutive effect of the new Rights Shares being issued.

3.  renounce and trade their provisional allotments of “nil-paid” rights during the life of the rights
     (Only applicable when Rights Issue is offered on a renounceable basis).

By renouncing and selling the rights entitlements, the shareholder’s stake in the company will be diluted but he stand to make some gains by selling his rights entitlements away in the open market to compensate for the fall in value of his shareholdings.

Estimated Value of “Nil-Paid” Rights

= Theoretical Ex-Rights Price – Rights Issue Price

= S$0.135 – S$0.128

= S$0.007 per rights entitlement

Effects of Rights Issue on Historical Price Data

As explained above, corporate actions such as Rights Issues have an effect on the price of the share when it trades on ex-rights basis following the conclusion of the corporate action. Hence, price adjustment on historical data prior to the Ex-Date will be applied where applicable. The purpose of the historical price adjustment is to allow for comparability between prices on the Ex-Date and Cum Dates.

Rights Issues – Are they attractive value propositions for shareholders and investors?

Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts. Investors should therefore look beyond Rights Issues or Open Offers as bargains in landing discounted shares, but rather, look into the reasons underlying such capital-raising exercises before accepting or declining their rights entitlements.