What does rights issue mean?

Allotment is a form of stock issuance, which gives existing shareholders of a company the first right to purchase newly issued stocks. This approach protects the legal pre-emptive rights of existing shareholders. For example, if a company has issued 100 million shares and wants to issue 20 million new shares, it must place allotments to existing shareholders at a ratio of 1:5 (20 million:100 million).

Each shareholder is eligible to preemptively purchase new shares at the rate of 1 subscription for every 5 shares held. Rights issues are usually conducted on an underwritten basis, whereby the underwriters purchase new shares at a certain price that are not purchased by existing shareholders.

Shareholders can also vote to waive their preemptive rights, allowing the company to issue new shares to new shareholders. Such a vote may be necessary, for example, when new shares are issued to acquire an affiliate or to establish a management stock option plan.

Extended information:

Example: The current market price of a company’s stock is US$3 per share, and it announced an additional share issuance at a ratio of 3:1 (one share for every three shares) , the new shares were issued at a price of $2.48 per share.

Analysis

Theoretically, the ex-rights price is the average price, calculated as follows:

3 old shares, worth $3 per share, ***9 . 00 US dollars;

1 new share, worth US$2.48, ***US$2.48;

Theoretical value of 4 shares is US$11.48;

Theoretical ex-rights price: $2.87 ($11.48 ÷ 4).

The issuance price of the new shares is US$2.48, which is a discount of US$0.39, or 13.6%, to the theoretical ex-rights price.

When selecting the discount range, the discount cannot be too small, because the stock price will fall after the rights issue announcement is released; at the same time, the discount cannot be too large, otherwise the price of the rights issue will be too low and investors will be disappointed with the company. Concerns about financial health.

Baidu Encyclopedia-Allotment