Rights issues should be priced properly

Similar to IPOs, rights issues need to be properly priced, with good understanding of market sentiment for the stock and general market conditions – if not they will go under as in the case of some recent rights issues, analysts say.

“Supply and demand for the stock also plays a critical role in getting the rights issue fully subscribed. If the issue is priced with a low discount to market price it may not have takers. On the contrary, if it is stock that has a heavy demand from several interested parties even with very low discount to market the issue may get fully subscribed,” an analyst said.

Up to September 30, 2018, Rs. 38 billion was raised through rights issues, while for the whole of 2017 it was 50.6 billion.

NDB’s 1 for 3 rights issue at Rs. 105 which offered 59.15 million shares was only 61 per cent subscribed or 36.7 million shares were taken up. Some 32.85 million ( 56 per cent - lower than 61 per cent due to single shareholder limitations) were allotted. NDB rights was initially announced on June 19 when the NDB share price was Rs. 132.70.

Institutional shareholders of commercial space owners, RIL Property PLC did not subscribe for their recent rights issue. Some 200 million RIL shares were listed via 1: 3 rights issue at Rs. 8 per share on April 27. The rights were done as a cash call to pay off part of the debt they took on for the United Motors acquisition. Many institutional investors who invested in RIL at its IPO, thinking this property company with a growing food chain (BreadTalk) will do well were disappointed with this acquisition, analysts say. “This acquisition is now proving to be a major burden for the company given that United Motors’ Mitsubishi franchise is not performing well in the current market,” one analyst said.

However, contrary to popular belief, he said that it’s not correct to say that rights were not successful this year. “There were several successful issuances, for example Sampath Bank, which, in April finished a second rights issue within six months.”

Another analyst noted that the success of a rights issue, under any market condition depends on the underlying company’s fundamentals. “Raising new capital should be done for new projects, and value- accretive business expansions. That’s when investors will be interested in taking part in the issuances,” he said.

Up to September 30, 2018, Rs. 38 billion was raised through rights issues, while for the whole of 2017 it was 50.6 billion.