Rights Issue

Dear Mr. Tan

I would like to seek your invaluable adivce on the upcoming rights issue offered by X. Do you think it is a good investment? What actually is a rights issue?

REPLY

If a company wishes to raise additional capital, it offers a rights issue to its existing shareholders. The price is usually lower than the current market price of the shares.

Let me give an example. A company has 10 million shares. It is now trading at $3. The company needs raise an additional $10 million in capital. It decides to issue 5 million shares at $2 to the existing shareholders. Each shareholder is allowed to buy 1 share for every 2 shares that they now own.

Many shareholders will take up the new shares because it is offered at a price ($2) lower than the current market price ($3). After the rights issue have been completed, the share price may drop below $3 due to the dilution of new shares issued at $2.

If the shareholder does not wish to invest in the new shares, the shareholder can sell the rights in the market. The value of the rights depend on supply and demand and is likely to be around $0.30.

I am not able to give an specific comment about the rights issue of X.