Can I Sell My Rights Issue?

You open an email from a company in your portfolio announcing an upcoming right issue. Thinking instead of purchasing more shares, you wonder “can I sell my rights issue?” Venture on and discover a low-risk opportunity to generate capital.

Yes, you can sell your rights issue provided the rights issue is renounceable. A rights issue is an offering of rights extended to a company’s existing shareholders to purchase additional shares at a discount directly from the company, prior to the shares being offered to the public in the secondary market. If a shareholder does not want to purchase additional stock, she can sell her rights to another investor in the open market.

When investors elect to exercise their rights and purchase additional discounted shares from the firm, they are purchasing shares in the primary market. When investors choose not to participate in the rights issue and sell their rights, they sell them in the secondary market, also known as the open market.

Can I sell my rights issue? Yes, you can, and here’s how:

Rights Issue Renouncement – Renounceable rights issues are listed on the exchange which trades the company’s stock, and you can sell them to other investors seeking discounted shares.

Non-Renounceable Rights Issue – A non-renounceable rights issue cannot be sold. The options are to exercise your rights and invest in additional company stock or not purchase the offered shares and let the rights expire.

Can I sell my rights issue? Yes, if the rights issue is renounceable, and no if it is non-renounceable. The opportunity to sell is dependent on the offer terms and conditions, company policies, and the listing stock exchange.

What is the Value of a Rights Issue?

The value of a rights issue is the current share price minus the Theoretical Ex- Rights Price (TERP) and the equation is (Value of rights issue = Current share price – TERP). Rights issue value is best understood through illustration:

Our Destination: Value of rights issue = Current share price – TERP

Our Formulas:

Total New Shares = Existing shares X Rights Ratio
Proceeds from Rights Issue = Total New Shares X Rights Issue Price
Total Number of Shares After Rights Issue = Existing Shares + Total New Shares
TERP = (Existing Shares X Current Share Price) + (Total New Shares X Rights Issue Price) / Total Number of Shares After Rights Issue

Scenario Inputs:

Current share price: $50.00
Existing shares: 1,000,000
Rights issue price of new shares: $40.00
Rights ratio: 1 new share for every 4 shares currently owned. Numerically, (1/4)

We know the current share price, which is $50, and the first three formulas are used to calculate TERP, so let’s do the simple TERP math:

(Existing Shares X Current Share Price) = (1,000,000 X $50.00) = $50,000,000

(Total New Shares X Rights Issue Price) = (1,000,000 X (1/4) X $40) = $10,000,000

Total Number of Shares After Rights Issue = (1,000,000 + (Total new shares = 1,000,000 x ¼ Rights ratio = $250,000) = 1,250,000

And TERP = ($50,000,000) + ($10,000,000) / 1,250,000 = ($60,000,000) / 1,250,000 = $48.00

So, the Value of the Rights Issue per right = ($50.00 Current share price - $48.00 TERP) = $2.00 per right.

Keep in mind, that the $2.00 value reflects the value to the right themselves, not the value of the newly issued right shares. Assuming 100% shareholder participation, the rights issue total value is $500,000 (250,000 Number of Rights X $2.00 Value per Right).

Can I sell my rights issue? Yes, provided your rights issue is renounceable.