Last Updated on February 9, 2021 by Chin Yi Xuan

So, you invested in a company in the stock market and one day, you received a notification about rights issue by the company. What exactly is a rights issue and what should you be doing with it?

Let’s address this in this article:

A rights issue is an action by companies to raise capital – be it for expansion, debt repayment, and so on.

Through rights issue, a company allows investors to purchase additional shares at a discounted price. The number of additional shares that can be bought depends on how many shares an investor owns.
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Highlights of a Rights Issue

  • Rights issue is a process where companies raise funds for various purposes (eg. acquisition) by offering equities at a discounted price. It is an alternative to methods like taking up debt which comes with interest payments.
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  • The number of additional shares that an investor can buy is in proportion to the investor’s existing shareholding.
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  • Rights issue is optional. This means that an investor can choose whether to take up the offer (a.k.a. subscribe), or to ignore the rights issue.
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    However, ignoring a rights issue will cause the investor’s existing share value to become diluted after the release of additional shares into the market. (Just imagine adding more water to your Ribena drink)

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Example – How to calculate a Rights Issue?

Step 1: Before you proceed,  find out the following details first:

  1. How many shares do you own in the company?
  2. What is your average acquisition price for this investment?

So, let’s use an example from Atrium REIT, an industrial REIT that manages warehouses and manufacturing facilities. Let’s say I own 1000 shares of Atrium REIT, with an average acquisition price of RM1.05 per unit.

Then, Atrium REIT announces a rights issue, as seen below:

Atrium REIT rights issue announcement.
Atrium REIT 2019 rights issue announcement. (Source: KLSE Screener)

Step 2: Entitlement Ratio & Issue Price

At first glance, things seem to be a little intimidating, but don’t worry – you just need 2 pieces of info from the screenshot above:

 

atrium reit rights issue 2019
We only need 2 info: Entitlement ratio and the issue price of the rights issue.
  1. Entitlement Ratio: How many rights do investors get to subscribe in proportion to their existing shareholding?
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    In this example, the ratio is 2:5
    . Meaning, for every 5 shares you owned in the company, you are entitled to buy 2 additional shares.
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  2. Issue Price: At what price is the company offering the rights?
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    In this example, the issue price is RM1.02/unit.
    The issue price is usually offered at a discount relative to the market price to entice existing investors to subscribe to the rights issue.
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Step 3: Now that we have all pieces of info that we need, we can proceed with the calculation.

a. What’s the initial value of my portfolio (before rights issue)?

= Total shares owned at the start x Average acquisition price

= 1000 shares x RM1.05

= RM1050

b. How many units of right am I eligible to subscribe?

= Total shares owned at the start x Entitlement Ratio

= 1000 shares x (2/5)

= 400 shares

c. How much do I need to subscribe to all 400 shares from this rights issue?

= Total shares I am eligible to subscribe x Rights offering price

= 400 shares x RM1.02

= RM408

d. Total portfolio value after rights subscription:

= Initial portfolio value + Value of Rights Issue

= RM1050 + RM408

= RM1458

e. Theoretical acquisition price after rights issue:

= Total portfolio value after rights subscription/Total shares owned after rights subscription

= RM1458/1400 units

= RM1.041

Notice that I mentioned the acquisition price per share as ‘theoretical’. This is because the market fluctuates up or down upon rights issue depending on market sentiment.

If the rights issue is received with positivity, then an increase in share price upon rights issue means that investors will benefit from capital appreciation. If the rights issue is not perceived well by the market, then the share price will drop and investors’ capital will depreciate.

In this example, I’ll need a total of RM408 to subscribe to all my rights issue. Subscribing to this rights issue allows me to prevent dilution to my existing share value. It is also a good way for me to dollar cost average into companies that I am already investing in.

(Note that you can also choose to subscribe partially to your rights. Meaning, for whatever reason (eg. lack of capital) if you do not want to subscribe to the full rights issue of 400 units, you can choose to only subscribe to 200 units, and so on.)

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What’s the impact of not subscribing to the rights issue?

So, let’s say I decide not to subscribe to Atrium REIT’s right issue above, how would it impact my share value?

Total impact of not subscribing to the rights issue:

= (Theoretical acquisition price after rights issue x Initial shares owned) – Total portfolio value IF I subscribe to rights issue

= (RM1.041 x 1000 shares) – RM1458

= RM1041– RM1458

= – RM417

This means that the value of my shareholding on Atrium REIT would be diluted by RM417 if I do not subscribe to the rights issue.

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Should You Subscribe to a Rights Issue? (+ tips)

Essentially, subscribing to a rights issue allows you to buy shares in the company that you are investing in at a discounted price.

If you are investing in a company for the long-term and the company requires additional capital for expansion, it’d be logical to take on the rights issue. Doing so will prevent the dilution of your existing shares in the company while preparing you to enjoy any potential reward from the expansion in the future.

As such, a tip here is to ALWAYS have additional cash prepared in your brokerage account so you can respond to a sudden rights issue in your investing journey.

How Atrium REIT is using the proceeds from a Rights Issue?
This is how Atrium REIT is going to use the proceeds from the rights issue – ie. an acquisition. (Source: Bursa Announcement)

On the contrary, if a company is under huge debt, and it announces a rights issue to repay the debt, it is wise to think twice before subscribing to the rights issue. If the market doesn’t perceive this rights issue positively, chances are you might lose more by taking up the rights.

Bursa Malaysia announcement
Any corporate action announcement can be obtained from Bursa’s website. (Source: Bursa Announcement)

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How to Subscribe to Rights Issue?

Subscribing to a rights issue is a simple process. Just remember that you’d need to have enough funds in your brokerage account to subscribe to a rights issue!

Below are how you can do so via Rakuten Trade (Malaysia market) and Tiger Brokers (Singapore, US, HK, Australia, and China market):

a. Subscribing to Rights Issue via Rakuten Trade (Malaysia stock market)

  • Step 1: If you are eligible for a rights issue, you will receive an email notification from Rakuten Trade.
  • Step 2: To subscribe to the rights issue, log in to your Rakuten Trade account. Then, under ‘My Account’, select ‘Corporate Action Subscription’.
  • Step 3: Follow the instructions shown to subscribe to the rights issue.
  • Step 4: You will receive your additional shares in your brokerage account on the stated entitlement date.
    (eg. For the Atrium REIT example above, it’d be on 30th August 2019)
Subscribe to rights issue via Rakuten Trade
Investors can subscribe to rights issue on Rakuten Trade‘s platform easily.

READ MORE: How to Build Your Powerful Bursa Stock Screener on Rakuten Trade?

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b. Subscribing to Rights Issue via Tiger Brokers (Singapore, US, HK, Australia, and China stock market)

  • Step 1: If you are eligible for a rights issue, you will receive an email/app notification from Tiger Brokers.
  • Step 2: To subscribe to the rights issue, log in to your Tiger Brokers app. Then, under ‘Tiger Account’, select ‘Corporate Actions’.
  • Step 3: Follow the instructions shown to subscribe to the rights issue.
  • Step 4: You will receive your additional shares in your brokerage account on the stated entitlement date.
Subscribe to corporate action via Tiger Brokers app.
Subscribe to corporate action via Tiger Brokers app.

READ MORE: Tiger Brokers review – the broker I use to invest in the SG, US and HK stock market!

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No Money Lah’s Verdict

Hopefully this article sheds some light for you about rights issue!

Ultimately, it is just one of the many ways companies raise funds for their business objectives. As an investor, it is important for us to know how to calculate and deal with rights issue when we are eligible it.

What are some other corporate actions that you want me to cover? Feel free to share with me in the comment section below!


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b. The broker I use to invest in the overseas stock market (SG, US): Tiger Brokers (Read my review HERE)

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