Should I Subscribe to Reliance Rights Issue ?
Whether Subscribe to Reliance Rights Issue – Reliance Industries Ltd (RIL) has come up with a rights issue offer of Rs 53,125 crore. Read for more. Now, the question is, should shareholders subscribe the rights issue?
Key Highlights :
What is a right issue?
A rights issue is when a company offers its existing shareholders the chance to buy additional shares for a reduced price. Usually the discounted price will stand for a specified time frame, after which it is returned to normal.
There are other option to raise fund for a company when they need funds for expansion, acquiring assets, or clear debts, like initial public offer (IPO), follow-on public offer (FPO) or rights issue.
Typically, IPO is only available to the companies that are yet to be listed on stock exchanges and are offering shares to the public for the first time. In case of an FPO, an already listed company comes out with a fresh tranche of shares.
In case of a Rights Issue, a company may come out with a fresh batch of shares, but exclusively for the existing shareholders. Only shareholders on a given date, known as “record date”, will have the right to buy these shares. Rights issue is offered in proportion to number of shares an existing shareholder is holding
This is also to note that, it is not compulsory for an existing shareholder to opt for the rights issue, you may refuse to subscribe to the rights issue and just let your “right” lapse.
Rights Issue Calculation
Only those who own RIL shares as on the record date will be eligible for subscribing to the rights issue. The company will issue one new share for every 15 held by the eligible shareholders. So, if an investor buys 15 shares of RIL at Rs 1,466 (closing price on April 30, 2020), then the effective cost per share after subscribing to the rights issue will be at a discount of only 1 percent to the closing price.
Should you invest in Reliance Rights Issue?
Subscribing to a right issue offer is similar to that of investing in a company. It is important to remember that one should not consider it just because of the discount. Other factors must also be considered such as growth prospects of the company and the basic purpose to come out with a rights issue.
It is advised by many of the experts that one should go for the RIL rights issue by only such existing investors who bought before the Facebook deal valuation and are ready to hold the stock for at least three years. At the ratio of 1:15 and only 25% on call, the capital commitment is not very high i.e. less than 7% of your capital cost. RIL seems to be arranging different sources of funding to pare debt and build their liquidity options. It could also be a hedge against possible delay or call off of Saudi Aramco deal. The FB deal has created a lot of interest but will also have to pass through government approvals for data security or anti monopoly and so on.
Even if you do not currently own the shares, but if you buy it before the record date, you will be able to exercise the rights issue option.
Why shouldn’t you invest in Reliance Rights Issue ?
It is not advisable by many of the experts to buy the RIL shares at current valuations after recent run-up, as it has a high chance of correcting and getting diluted post rights issue. It is also not a very attractive valuation in terms of a rights issue. For short-term traders and those taking loans or funding to buy now, the margin of safety is less and they should better avoid.
NOTE : if you are an existing shareholder and choose not to exercise your rights, you may see a dilution in your shareholding since post the rights issue, there will be dilution in earning per share. Details on RIL here
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