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Rights Issues

In simple terms, a rights issue is an offer for new shares to existing shareholders in proportion to their current shareholding, for a specified period and at a specified (usually discounted) price.

What is a Rights Issue?

When a company needs to raise capital it may choose to create a new block of shares and offer them to existing shareholders at a discount. The announcement of a rights issue will often result in the share price falling initially because the market will question the motives of the company if it needs to raise money but also because the new shares issued will 'dilute' the existing shares. The company's objective is to provide current shareholders the opportunity to maintain their percentage of ownership of the firm.

Some companies will be raising cash to fund expansion or acquisitions, and shareholders may be keen to participate in a compelling growth story. Alternatively, funds may be required to 'strengthen balance sheets'. This could mean that existing lenders want some of their money back or the company wants to avoid breaching covenants on existing loans. This might not be as compelling to investors as a growth story, but the reasons are no less logical.

Overseas Rights Issues

Due to the investment restrictions in other countries, non-resident shareholders may not always be able to participate in a rights issue or be eligible to receive lapsed proceeds.

The eligibility of a shareholder may not be known at the time of writing and any instructions received may be rejected at any time during or after the offer. Nil-paid rights, particularly from overseas rights issues, may have limited or no liquidity and it is not always guaranteed that you will be able to buy or sell these rights.

What are the benefits?

  • With this type of issue existing shareholders are given 'nil-paid rights' which simply provide the right to purchase new shares at a discount to the market price on a stated date.
  • Until the date at which the new shares can be purchased, shareholders may trade the nil-paid rights in the same way they would trade ordinary shares.
  • Some companies that offer a rights issue will use the capital to fund activities such as acquisitions that will afford the company future growth. In order to provide assurance that the required capital will be raised, the company will normally have its rights issue underwritten by an investment bank.

What are the risks?

  • It is easy to be enticed by shares offered at a discount, but shareholders should not assume that they are getting a bargain. An informed decision should be made by looking at the rationale behind the fund raising exercise.
  • A company may use a rights issue to cover debt, especially when they are unable to borrow money from other sources. Shareholders should be concerned with whether or not the management are addressing any underlying problems.
  • If you decide not to take up the rights your overall shareholding in the company will be diluted as a result of the increased number of shares in issue.
  • If you do not participate in the rights issue within the specified time-frame your nil-paid rights will lapse. The company will sell these entitlements and distribute any net proceeds after deduction of the offer price and costs. The amount of lapsed proceeds, if any, will not be known until the offer has closed. Lapsed proceeds are not guaranteed.
  • Investments and income arising from them can fall in value and you may get back less then you originally invested.

Info Point

Due to the short timescales for rights issues we endeavour to communicate with custody clients by post as swiftly as possible and also by email if we hold a valid email address.

If you are a custody client to help speed up communications we recommend that you register an email address with us. Send an e-mail to quoting your name and account number.

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Rights Issue Information Sheet (PDF: 279k)

Contact us

To discuss further please contact your usual Redmayne-Bentley contact, for details visit our branch pages.

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If you have not fully subscribed to your ISA for the current tax year you may wish to use your subscription allowance to take up a rights issue complete an ISA application form.

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