Their additional investments have fetched handsome returns — thanks to the cheaper cost of acquisition and the firm trend in share prices. This could augur well for companies planning to raise funds through rights issues in the future, subject to favourable market conditions and a positive industry outlook, according to analysts.
Among recently closed rights issues, Hatsun Agro Product is a notable example. The Rs 6,400-crore milk and milk products company offered one share for every thirty shares held by the existing shareholders at a price of Rs 419 per share.
Based on Thursday’s closing price of Rs 897 on the BSE, the shareholders have earned a staggering 115% short-term return from their fresh investments through the rights issue. The offer remained open between December 19, 2022, and January 9, 2023.
and are two other relatively smaller-sized companies figuring among the shortlisted rights-issuing companies.
These companies offered rights in the ratio of 1:13 at Rs 35 per share and 4:17 at Rs 400 per share, respectively. Based on their current market prices, the value of the rights shares has been multiplied 2.5 times and 2.2 times, respectively, since the allotment.
Among other noteworthy examples, investors in rights of and earned huge returns of 3 times and 5 times, respectively. Over a dozen other relatively lesser valued companies have also offered rights at a sharp discount to the market price. Leading the pack in this category, Choice International issued rights at Rs 51 per share, which are now quoting at Rs 265, thus offering over 4 times returns on the additional shares.
A rights issue is a follow-on offering to the existing shareholders to invest in additional shares of the company on a pro-rata basis and often at a discounted price. It is a right that a shareholder may or may not choose to exercise. There is no obligation to buy the shares. The rights shares cause a dilution in the equity capital, depending on the ratio at which shares are issued. They are renounceable, which means shares can be transferred or sold to other investors in the open market. Such renounceable shares are available for trading under the R-group on the BSE.
“Highly discounted rights issues are among effective ways of rewarding shareholders and that, too, without diluting promoters’ stake in the companies,” said Pranav Haldea, Managing Director, Prime Database, a Delhi-based research firm tracking fundraising activity in the primary and secondary market.
When an established, fundamentally good company offers rights at an attractive discount, it helps to maintain a high level of confidence among its shareholders. He, however, feels fund-raising through rights issues has slowed down significantly due to a shift in focus to other relatively better avenues, such as QIPs.
Most of the shortlisted companies offered small-sized rights at a very low ratio. “Investors tend to respond positively to attractively priced offers which do not result in a major dilution in equity capital and adversely impact earnings per share,” said a merchant banker, adding, “Many companies need to raise funds for small purposes like working capital and repayment of debt, which can be met through rights issues.”
Most of the companies covered in this article have raised funds with the objective of fulfilling their financial obligations.
For instance,
Product raised Rs 301 crore for repayment of outstanding borrowings and general corporate purposes, as disclosed in its rights issue document. Som Distilleries intended to use its rights issue proceeds to meet long-term working capital requirements and for general corporate purposes. Bhagiradha Chemicals, too, listed similar objectives in its offer document.
In 2022, the rights issue market was mainly dominated by small and medium-sized companies, and hence fund mobilisation remained muted during the year. A total of 10 companies raised Rs 4,053 crore, sharply down from Rs 28,000 crore by 11 companies in 2021 and Rs 65,000 crore by 20 companies in 2020.
(Rs 53,000 crore), (Rs 21,000 crore) and (Rs 25,000 crore) were among the large-sized rights in recent years.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
