Chief Executive Officer EcoCapital Investment Management Ltd, Dela Herman Agbo
In our earlier article titled "Addressing the Conundrum of Investing in Equities," we endeavored to elucidate the concept of the stock market, followed by an exploration of corporate actions and how they influence equity portfolios.
In today's discussion, we will center our focus on the noteworthy occurrences within the capital market known as Corporate Actions. We will begin by delving into and providing an in-depth exploration of our first corporate action: the Right issue. So, what precisely is the right issue?
A rights issue is a type of corporate action in which a company offers existing shareholders the opportunity to purchase additional shares of the company's stock, usually at a discounted price, in proportion to their existing holdings. It allows shareholders to maintain their proportional ownership stake in the company by subscribing to the new shares.
To break it down further, here are some key points to understand about rights issues as a corporate action.
Purpose:
The primary purpose of a rights issue is to raise additional capital for the company. The proceeds generated from the rights issue can be used for various purposes set and approved by the board of directors of the issuing company, such as funding expansion plans, reducing debt, financing acquisitions, or investing in new projects.
Proportional allocation:
The next key point to note is the proportional allocation of the shares. Rights issues provide existing shareholders with the right to purchase new shares in proportion to their existing ownership stake. The number of shares offered to each shareholder is typically determined based on a predetermined ratio by the firm, such as (a 1:5 ratio) one new share for every five existing shares held.
Subscription price:
The subscription price for the new shares in a rights issue is usually set at a discount to the prevailing market price of the company's stock. This discount serves as an incentive for existing shareholders to participate in the rights issue
.
Subscription period:
Rights issues have a specific subscription period during which shareholders can exercise their right to purchase the new shares. This period is typically several weeks long, allowing shareholders sufficient time to decide whether to subscribe to the new shares or not. This is completely voluntary corporate action; the investor has the right to decide whether to exercise the right or not.
Trading of rights:
In many cases, the rights issued to shareholders can be traded on the stock market. Shareholders who do not wish to participate in the rights issue can choose to sell their rights to other investors, allowing those investors to subscribe to the new shares. This secondary market for rights provides additional flexibility and liquidity for both the firm and investors.
Dilution and ownership stake:
To avoid dilution and protect the percentage of ownership stake, participating in a rights issue allows shareholders to maintain their proportional ownership stake in the company. By subscribing to the new shares, shareholders increase their total number of shares held. However, if a shareholder chooses not to participate in the rights issue, their ownership stake will be diluted as other shareholders subscribe to the new shares.
Investment decision:
Investment decision is very important to the success of the portfolio. Therefore, shareholders need to evaluate the terms of the rights issue and assess whether it is in their best interest to participate in the rights issue or not.
Some key factors to consider include the purpose of the capital raise, the potential impact on share price and ownership stake, the company's financial health, growth prospects, and the discount offered in the subscription price of the stock in question.
Use of proceeds:
Companies typically provide information on how they plan to use the proceeds from the rights issue. Shareholders need to assess the company's plans and the potential benefits of the capital raise for their investment.
As we understand, the key to a successful portfolio lies in the careful selection of assets. Therefore, it is essential for shareholders to thoroughly examine the particulars and conditions of a rights issue, which encompass the subscription price, subscription period, and the intended utilization of proceeds.
Again, it is very important for shareholders to also seek advice from financial advisors like the EcoCapital Investment Management team or conduct their research to make an informed decision about participating in a rights issue.
For a deeper understanding of this subject and further assistance kindly contact EcoCapital Investment Management Ltd., on +233(0)50 155 3502.
EcoCapital Investment Management Limited (EIML) is a company incorporated in Ghana and licensed by the Securities and Exchange Commission (SEC) as an Investment Management firm, and by the National Pensions Regulatory Authority (NPRA) as Fund Manager of both second and third tiers of the national pension scheme.
The corporate mandate of the firm is to deliver premium financial solutions and investment management services to both retail and institutional investors in Ghana. Services on offer at EcoCapital include Wealth Creation and Management, Investment Portfolio Management, Pension Fund Management, Mutual Funds, Retirement Planning, Investment research, and Advisory. The firm has three mutual fund products under management, namely; Prime Fund, Nordea Income Growth Fund, and the Weston Oil and Gas fund
