Contemplating participating in an upcoming right issue of shares. This is your first time, and you wonder what happens after rights issue? Read on to learn about the aftermath of this compounding method.
What Happens After Rights Issue?
What happens after rights issue is there’s a balance sheet impact, an adjustment in share price, ownership dilution occurs, a strategic use of funds, and altered corporate control. To effectively answer what happens after rights issue? let’s look at each event.
Balance Sheet Impact – A rights issue raises new capital from the existing shareholders of the issuing company. The capital base of the firm is strengthened and the balance sheet’s equity line-item increases. This can lead to a healthier firm as the additional shares reduce the debt-to-equity ratio.
Share Price Adjustment – After a rights issue, the stock price adjusts lower to account for the new capital raised and the increase in the number of outstanding shares. The dilution effect is the catalysis for a lower post-share price in relation to the firm’s pre-rights issue trading price. The market’s positive or negative reaction to the rights issue can gyrate the share price, as well.
Ownership Dilution – Additional rights issue shares spread the firm’s value over a wider share base and will precipitate ownership dilution for shareholders who elect not to participate in the rights offer. If a shareholder does not wish to exercise his rights, he can sell his rights in the market and potentially mitigate the dilution.
Strategic Use of Funds – The new rights issue funds are usually allocated to growth initiatives, acquisitions, operation expansion, and debt reduction driving long-term stability through improved profitability. These positive externalities can raise the company’s share price over time, however, if the funds are used to ward off bankruptcy, cover mounting losses, or pay overdue debt, market sentiment could cause the stock to plummet.
Corporate Control Impact – The dilution component of a rights issue can be used as a weapon against a hostile takeover. The issue not only dilutes the ownership stake of non-participating existing shareholders, but it would also dilute the aggressively obtained holdings of an unwanted acquirer.
Inside or outside a takeover, if a small faction of shareholders purchases a significant number of rights shares, the concentration of ownership will change.
What happens after right issue? Various events simultaneously occur to form the financial fabric of a post-rights issue company.
How Long Does a Rights Issue Last?
From the rights issue announcement to the listing of new shares is usually a two-month process. Here is a skeleton timeline:
January 2 – Rights Issue is announced
January 16 – Record Date: Shareholder eligibility deadline date.
January 15 – Rights Distribution Date: Eligible shareholders receive rights offer.
January 15 - January 27 – Subscription Period – Shareholders decide to invest or not.
January 15 - January 25 – Rights Trading Period – Renounceable rights may be traded.
January 27 – Subscription Period Ends
February 1 – Allotment Date: Excess shares are distributed to shareholder applicants.
February 2 – New Rights Issue shares are distributed.
What Happens If I Do Nothing in a Rights Issue?
If you do nothing in a rights issue you allow your rights to purchase additional shares to expire worthless. Non-participation will result in a lost opportunity to purchase additional shares from a familiar company at a discount and you may experience a loss in the value of your existing company holdings. By exercising your rights or selling your rights will mitigate these adverse effects.
What happens after rights issue? Significant events occur after a rights issue that cause temporary price adjustments, alter a firm’s capital structure, and can adversely affect shareholder ownership. This corporate event must be carefully considered by the issuing firm and thoroughly understood and researched by investors prior to making a capital commitment.
