Analysis of Financial Statements_10

RIGHTS ISSUE

A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding. The price at which the shares are offered is usually at a discount to the current share price, which gives investors an incentive to buy the new shares.

Rights issues are common because, in the UK and most other countries, shareholders have a right of first refusal (pre-emption rights) on new issues of shares.

The rights are normally a tradable security themselves (a type of short dated warrant). This allows shareholders who do not wish to purchase new shares to sell the rights to someone who does. Whoever holds a right can choose to buy a new share ("exercise the right") by a certain date.

Some shareholders may choose to buy all the rights they are offered in the rights issue. This maintains their proportionate ownership in the expanded company, so that an x% stake before the rights issue remains an x% stake after it. Others may choose to sell their rights, diluting their stake and reducing the value of their holding.

If rights are not taken up the company may (and in practice does) sell them on behalf of the rights holder.

It is possible to sell some rights and exercise the remainder. One possibility is selling enough rights to cover the cost of exercising those that are not sold. This allows a shareholder to maintain the value of a holding without further expense (apart from dealing costs).

As with a scrip issue, the price before the rights are issued needs to be adjusted for the rights issue. The calculation is a little more complicated as the new shares are paid for. Before comparison with share prices after the rights issue, prices before the shares went ex-rights need to be multiplied by:

((m ×y) + (n ×x)) ÷ (m ×(x + y))

where x is the number of new shares issued for every y existing shares
m is the closing price on the last day the shares traded cum-rights and
n is the price of the new shares

The same adjustment needs to be made to per share numbers such as EPS if they are to remain comparable, for example, when looking at growth trends. However, a large rights issue is often associated with other changes that will distort these numbers or change trends such as paying off debt, expansion, etc.

This calculation makes the assumption that all rights will be exercised. This is usually an acceptable assumption as rights issues are usually priced at a discount to the share price to ensure that they will be exercised.

Tata Steel to raise $2.3 billion in rights issue

·

Tata Steel Ltd will raise Rs.9135 crore ($2.3 billion) from a rights issue of equity shares and convertible preference shares, issue, a part of the financing for the takeover of Corus Group, comprises 121.79 million equity shares issued in the ratio of one for every five, and 548 million convertible preference shares in the ratio of nine for every 10 equity shares held. The equity shares are priced at Rs.300 each and the convertible preference shares at Rs.100 each.

.

Tata group company Tata Steel is coming out with a mega rights issue of about Rs10,000 crore to repay the ‘bridge loans’ raised for funding acquisition of British steel behemoth Corus.

“The proceeds will be used to repay bridge loans taken for acquisition of Corus. Tata Steel UK has raised 3.15 million pounds of debt for financing the acquisition,” a Tata Steel spokesperson told PTI.

The issue, opening on 22 November, will include 12.18 crore shares of Rs300 each to be issued on rights basis in the ratio 1:5 and Cumulative Compulsory Preference Shares (CCPS) of Rs100 to be converted into equity on 1 September, 2009, he said.

According to the Draft Letter of Offer filed with the Securities Exchange Board of India (Sebi), the rights issue will fetch Rs3,654 crore while CCPS will bring in Rs6,000 crore.

The company’s overall borrowings during 2006-07 increased by over 600% from Rs3,377 crore to Rs24,926 crore “principally in connection with its acquisition of Corus and expenditure in connection with other acquisitions and expansions,” said the document.

Tata’s decision to raise funds from rights issue will result in enlargement of its equity by 20% after the rights issue and 35% after conversion of CCPS into equity.

The enlargement of equity base may impair Tata Steel’s ability to maintain a high rate of dividend to its shareholders.

Tata Steel, whose credit rating was downgraded by international agencies, did not opt for grading of its mega rights issue.