Exercising your rights
Part 2
ON November 4, 2018, my colleague Toni-ann Neita-elliott wrote an article titled “Exercise your rights”. She explained that companies often issue new shares to investors to raise funds. These funds can be used to expand or take advantage of new business opportunities.
This can be a sign that a company is trying to accelerate its rate of growth. The shares are usually offered at a discount to the market price, as a way of making the investment more attractive. This process of offering shares is called a rights issue.
Today, we look at some frequently asked questions about rights issues.
Who can Participate in A rights issue?
In a renounceable rights issue, both existing shareholders and new investors can apply to purchase shares in the company. Non-existing shareholders can purchase shares in a renounceable rights issue. This is done by purchasing shares that the existing shareholders do not take up.
In a non-renounceable rights issue, only existing shareholders can apply to purchase the shares being offered.
Why Would An investor Want to Participate in A rights issue?
The attractive price is the most obvious benefit to a shareholder or to a new investor. By getting in below the market price, the investment’s upside potential is maximised and the downside potential is minimised.
This becomes even more attractive in very expensive equity markets such as Jamaica. The value of the JSE Main Index has almost tripled in USD terms over the last five years. The rise in prices means that good value has become harder to find.
Other less obvious benefits to a shareholder are that there are a greater number of shares now in circulation which increases the liquidity of the stock.
In a renounceable rights issue the shares that are not taken up by shareholders become available for new investors. A wider cross section of people holding the stock aids in increasing liquidity. Once liquidity increases, more buyers and sellers trade in the stock, which, in turn, helps the market to discover the company’s true value.
This is particularly challenging in Jamaica due to the less liquid nature of the total stock market.
A rights issue will also cause significant changes to the company’s cash flow. However, the capital raised through a rights issue can further strengthen the company’s balance sheet and allow it to pursue strategic opportunities in core markets, thereby benefiting the company and investor in
A company undertaking a rights issue will contact shareholders to ask them what they want to do. Investors can also approach their broker for assistance. If you still believe in the company and have the funds to take up the offer, there aren’t too many reasons not to take up your rights issue allotment.
If you are not a shareholder but are interested in a rights issue of a company, remember that, in a renounceable rights issue, if shareholders don’t take up all the shares then the remaining shares will become available for new investors to buy, so contact your broker or a representative at the company to place an order early.
This could be your opportunity to get into that company that you have had your eyes on!