The Reliance Industries Limited declared the reliance rights issue on 30th April, 2020. It is a brave step by the company in a market situation like this. You might be wondering what’s in it for you? This article explains the theory of rights issues and Is Reliance rights issue a good investment?
What is the right issue?
The right issue is an investment opportunity for existing shareholders to purchase additional shares in the company. It provides additional security to the shareholder also known as right. The shareholders are allowed to buy stocks at a discounted price. But it is different from IPO.
The company opts for the right issue mainly to repay its own debt. It turns to its shareholders to come out of the cash strapped situation. The right issue is not an obligation for shareholders to buy the right issue shares.
How rights issue work?
Let us understand how the rights issue works by taking the example of the upcoming Reliance rights issue.
Reliance Industries Limited (RIL) has announced India’s biggest rights issue of Rs 53,125 crore in the ratio of 1:15 at a price of Rs 1,257 per share on a 14% discount.
Suppose you hold 1500 shares in RIL. Now you have three options :
1. You can subscribe to the right issue in full
2. Ignore your rights
3. Sell the rights to another interested investor
Let us understand these three options in detail
Subscribe to the right issue in full
If you want to subscribe to the right issue in full, you have to pay Rs.1257 per share for the shares you are entitled to buy. As you hold 1500 shares, you are entitled to buy only 100 shares. You will receive a discount of 14% and you will pay Rs. 1257 per share.
However, the discount on the shares is 14% of the market price on the last close at April 30th, 2020. After the right issue is complete, the market value of the shares will also decrease. Because, new shares will be issued. The value of the shares after the issue will decrease according to the theory of demand-supply cycle. But it will also depend on the prevailing market situation.
Ignore your rights
You may not have the funds to invest in the Reliance right issue. So you might decide to ignore your rights. You shouldn’t exercise this option. Your shareholding will get diluted when the new shares will be issued. Instead, you can exercise the third option.
Sell the rights to another interested investor
The shareholders have two types of rights: Renounceable & Non-Renounceable rights. Let me explain what is renounceable right. This right provides you an option to transfer or sell your rights. In simple terms, the rights which can be traded are renounceable rights. After the rights are traded, they are known as nil paid rights.
If you exercise this right, you can transfer or sell the rights to another interested investor. You might be wondering what will be the gain after selling the rights. It is the difference between the market price and the new right share price. In RIL right issue case, it will be approximately: Rs 1467- Rs 1257= Rs 210 per share
Why right issues are issued?
The purpose of right issue are:
1. Raise funds to meet current financial obligations or debts
2. Funds for acquisition
3. Funds for expansion
4. To fund new business projects or existing projects
The purpose of the Reliance right issue is likely to raise capital to complete their target of becoming debt-free by March 2021.
Reliance Rights Issue
Reliance Industries Limited on 30th April, Thursday reported a 38.73% year-on-year (YoY) fall in the net profit at Rs 6,348 crore for the quarter ending on March 31. The company also announced India’s biggest rights issue of Rs 53,125 crore in the ratio of 1:15 at a price of Rs 1,257 per share. The shares are offered at an approximate 14% discount from the closing price of Rs.1466 on 30th April.
The price of Reliance rights issue is Rs.1257 with the discount of Rs.210. The reliance rights issue history has been profitable. The shareholders are allowed to subscribe to one equity share for every fifteen shares held. The promoters will subscribe to the full extent of their rights and also to unsubscribed shares at the end of the issue.
Just a few days ago, Reliance and Facebook deal marked the change of the technology landscape in India. Facebook invested $5.7 billion or Rs 43,574 crore deal, capturing a 9.99% stake in Reliance Jio. It is also confirmed that Jio Platforms ltd. is getting another big investment. Reliance Industries has confirmed that investment firm Silver Lake will invest Rs 5,655.75 crore into Jio Platforms. Silver Lake is an American equity firm that invests heavily in technology companies which includes Airbnb, Alibaba, Ant Financial, Alphabet’s Verily and Waymo units, Dell Technologies, and Twitter.
Thus the future of RIL seems bright by receiving investments from such big giants. Now, let us proceed further and understand how to apply and why you should apply for the Reliance rights issue.
How to apply for RIL right issue?
You are eligible for the application of the Reliance rights issue if you hold the shares of RIL on the record date. The record date is the date on which the investors can apply for the right issue. But the condition is the investor should hold the share on that date. The board committee of the company sets the record date.
You can apply for the right issue through the Demat or trading account or via your broker. The record date of Reliance rights issue is May 14, 2020. However, the terms of payment of rights issue is you have to pay the 25% of the amount on application and balance in one or more calls decided by the board members.
Is it a good opportunity for investors?
Let us understand the profitability of the investment in three different situations:
If you are first time investor
If you are not holding any Reliance share and you are going to buy it only for the right issue. It is not advisable because you won’t be earning a profit of approximately not more than 1%. The value per share will go down after the right issue as the supply of the share will increase in the market.
If you have invested post-Facebook deal
When you have invested after the Facebook deal, you have already bought it at a high price after the Facebook deal. You won’t get an effective discount of 14%. Because the average cost price of both shares bought and right issue shares will be high. The value of shares is likely to go down due to increased supply of shares and the prevailing market condition.
If you have invested before Facebook deal
The investment would be ideal as you have invested in the shares at a lower price than the current market price. The average cost price after buying the rights issue shares will go down and it will help you to gain profits. But, the investment should be made for the long term to get more profits.
The value of Reliance shares will go down after the rights issue if the demand stays more or less the same. The petrochemical business will be under stress due to low consumer demand. The stock is likely to be weak in the near term and will take time to recover. Investors expected the price of the rights issue to be around Rs.1000 but the experts believe that the Reliance rights issue will sail through.
So, you need to think of various factors and do fundamental analysis before making the investment in the Reliance rights issue.
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