A post for Newbies – Understanding rights issues

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    Disclaimer: None of the prospectuses included in this post are investment recommendations. They were the first examples I found when I searched for the various rights issues when writing this post. I am also not employed in the finance industry; this post is based on my own learning over the years, shared here to assist those new to the market.

    In the interests of keeping this post as simple as possible for newbies, I acknowledge that I have not mentioned things such as trading strategies, the tax implications of trading, the 45-day rule concerning dividends, the costs of brokerage, the merits of a rights issue and other important considerations related to trading and trying to make a dollar.

    This is a post that simply tries to explain the basics of rights issues.

    So you just got home and are reading through today’s announcements and see one of the companies you hold shares in is conducting a rights issue.

    What is a rights issue?
    A rights issue is a form of Capital Raising (CR) that is offered to existing holders of a company, or to investors that hold shares in the company on the Ex-Date, (and I’ll get to that later in this post) at a pre-determined price and on a ratio as stated in the prospectus (and probably in the announcement you just read). Occasionally they may be accompanied with sweeteners such as bonus options on a ratio to the fully paid shares you subscribe for.

    A rights issue means your company intends to issue more shares and a decision not to participate means that your holding in the company will be diluted. Information regarding dilution is disclosed in the section noted ‘Effect of the Offer’ in the prospectus the company issued.

    Before I get to the different types of rights issues, I need to clarify some very important terms so that you don’t lose your rights due to any confusion. This part is important, so get your highlighter out:

    Rule #1: Buy cum, sell ex, and forget the record date

    This rule is also true for other events such as dividend payments.

    When you log into your trading platform after the announcement has been made you will see a code in the ‘trading basis’ box or similar depending on your trading platform. Usually equities will state ‘normal’ but you may see another code such as CD, XD, RE, PU etc. or in the event a rights issue has been announced, CE, CR or even CB. I’ll tackle the ones that you are likely to encounter in a rights issue but for a full listing of what all the other codes mean see here:
    In the event that by the time you are reading this post the ASX has reorganised its website, just do a search there for status codes.

    These are the codes that affect rights issues and that are important for you to understand.

    CE – Cum entitlement
    Usually associated with a non-renounceable rights issue (although it may signify some other corporate activity, such as an entitlement to shares in a spin-off company, for example). Provided you hold or purchase shares in the company whilst it is showing CE, you are eligible to whatever the entitlement is as per the issued prospectus.

    CR – Cum rights
    Usually associated with a renounceable rights issue. Providing you hold or purchase securities whilst they are showing CR, you are eligible to whatever the entitlement is as per the issued prospectus.

    CB – Cum bonus
    This indicates that the company is intending to issue bonus shares, options or other tradable instruments on a ratio as declared by the company in their announcement or prospectus, usually at no cost to you. Loyalty issues (discussed below) also sometimes fall into the category of ‘bonus’ even though the company may make a small charge for them.

    In all cases above, an equity will carry the Cum status until the close of market on the day before the Ex-date.
    To be entitled to whatever rights are being offered, you must hold by 4:11pm (Closing Single Price Auction – CSPA) on the day before the security goes Ex.

    I.e. XE XR XB …​


    This is the date that holding or purchasing shares no longer carries any entitlement to the offer. (Proofing note: if you held yesterday, you have your entitlement). It is also the date that the share price may fall (perhaps significantly in the case of a dividend entitlement) as people take some money off the table, already having received their entitlement.

    You will also notice that all orders are purged and the market boards are reset in the pre-open stage on the first ex-entitlement day.

    Record date
    This date has no relevance to you.
    It is a date that confuses matters and is important only to company secretaries and share registries. In the past, record dates were up to four days after the ex-date. Many, including me when starting out, thought that holding on this date was necessary to receive the entitlement. Not true.

    These days, the record date is generally the day after the equity goes ex. This allows for the sale/purchase of shares to be recorded.

    Chapter 7 listing rules.pdf consultation_paper_rights_issue_timetable_3Jul12.pd.pdf

    PU – Protection unavailable
    This code is displayed for a security when the underlying security commences trading on an ex-basis of quotation and remains until the close of business on the applications close date. Protection unavailable is a warning to option holders that if they exercise their option during the underlying security's ex period, they will not receive the entitlement associated with the underlying security. All orders are purged at the end of the trading day prior to the security being quoted on a PU basis.

    So where do you find all this information?
    Get your hands on the prospectus. Whilst many companies will include an indicative timetable on the announcement when released, it is the prospectus that lists the official dates. Sometimes dates will vary between the announcement and the prospectus. In addition, dates may be extended for various reasons, most commonly because there may be limited interest in the issue and the company may decide to extend the closing date in the hope that more holders take up their entitlements. Extensions to any closing date need to fit within the ASX listing rules and be reported to the ASX within a timeframe, currently three business days prior to the closing date.

    Types of rights issues
    There are a few different types of rights issues:

    Non- renounceable issues
    This type of offering means that you, or the holder of the shares come the ex-date, is entitled to the rights. The rights to a non-renounceable rights issue cannot be sold and are only of value to holders of the securities come the ex-date.

    Non-renounceable issues have a shorter timetable to the closing date than other types of issues as the rights are not tradeable on the ASX. Check the prospectus to see if the company is offering a top-up offer, this will enable you to subscribe for shares in excess of your entitlement if you choose to do so. Top-up offers may be scaled back depending on demand or scrapped completely if the rights issue is over-subscribed.

    You will also notice that all orders are purged and the market boards are reset in the pre-open stage on the first ex-entitlement day.

    Non renouncable timetable.JPG

    Example non-renounceable.pdf

    Renounceable issues
    This type of offering means that if you do not wish to participate, or only want to partially participate, you can sell all or part of your entitlement on market. It also means that if you wish to participate beyond your entitlement, you can buy additional rights on market.

    Companies sometimes use renounceable issues as a way of getting new holders into the company rather than let rights lapse with holders who are not interested in participating.

    The trading of renounceable rights commences the day the shares go ex, in this case XR. You will find your rights trading under your company’s ticker followed by the letter ‘r’ for rights. For example, you own company ABC, the rights will be trading under ABCR. Rights generally trade for around two weeks, however, check the prospectus for specific dates and keep an eye out for any extensions to the closing date.

    You will also notice that all orders are purged and the market boards are reset in the pre-open stage on the first ex-entitlement day.

    (Just a note as I am proofing this. If you buy rights on-market – especially if you didn’t hold any in the first place – your trading platform may send you an exercise form to complete your application. If you buy close to the last day of rights trading, I suggest you call the company secretary to get advice on how to exercise your rights so that you don’t miss the boat. The closing date for a renounceable rights issue is generally five trading days after rights cease trading).

    As I stated at the get go, I am leaving trading strategies out of this post and just concentrating on giving you the basics. Perhaps I will add to this post later and outline a few strategies you could use, or even a tip or two.
    Renouncable Timetable.JPG

    Example renounceable.pdf

    Bonus issue
    Congratulations … do nothing. Just hold on the ex-date (or buy into the company before the ex-date) and get whatever your entitlement is for nothing!

    See this announcement for confusion. You don’t need to be a holder on the record date … you need to hold on the ex-date! If you purchased shares on the 19th September as suggested in this announcement you would not be entitled to the bonus options!

    Bonus Timetable.JPG

    Loyalty rights issues
    These issues are normally conducted by newly listed companies (IPO’s – Initial Public Offerings) somewhere between them first listing and six months of trading. Such issues are normally heralded in the company’s IPO prospectus under details of the offer or additional information. They were very common not so long back when there was an IPO every week.

    The benefit of the promise of these issues is that it encourages shareholders to hold their shares for their entitlement and therefore keep a stable share price. However, see my rule above … buy cum, sell ex. You could stag a good ipo and buy back lower. So long as you held shares on the ex-date, you’d still be entitled to the rights.

    Loyalty issue example.pdf

    (A further proofing note. I know I promised to keep this simple, but as an aside, if you read this post within a day or two of my posting, look at how the share price of a company can be affected by a promise of a loyalty issue. Take a look at ASX:TNO, a newly listed ASX company that plans on a loyalty issue of options at 1c on a 1:4 basis. The strike price of the options is 25c with a two year expiry date. Also, watch what happens to the share price come ex-date. I should say here that I hold ASX:TNO. Whether I hold for the free options or sell for the profit will depend on the overlaying share price action between now and the ex-date.)

    Some leftover bibs and bobs
    Other types of capital raisings

    Share purchase plans (SPP)

    These are offered to holders in specific dollar amounts at a specific price.

    Share purchase plan example.pdf

    These are usually offered to Sophisticated Investors. Existing holders may or may not get a look in.

    VWAP – Volume weighted average price
    More often than not, when reading the prospectus or the announcement, you will see this anachronism used. Capital raisings are generally (but not always) issued at a discount to the current share price to make them attractive to investors. A prospectus may mention VWAP when they set the issue price.

    VWAP is a calculation of the average price a share trades at over a specified period of time. It is the total value of shares traded divided by the number of shares traded.

    So what does ‘subject to shareholder approval’ mean?
    Companies are limited to how many shares they can issue within a year without shareholder approval. Under listing rules 7.1 and 7.1a, a company can only issue 15% and an additional 10% respectively of the existing shares on issue without shareholder approval. If a company wishes to issue more shares than the listing rule allows during a rights issue, they must seek shareholder approval. This is usually ratified at the AGM but may need to occur at a general meeting prior to the AGM. Details of this will be mentioned in the prospectus.

    Chapter 7 listing rules.pdf

    One last thing, over time you will notice some price action ‘givens’ that are associated with rights issues or other capital raisings directly related to how the shares trade according to the timetable of cum and ex-dates. Note these down for future reference and learning.

    So I hope I covered off on everything @Madmin. If you got something from this post, you may like this one as well. It explains company issued options.

    So I’ll get back to my next post related to getting your head around assay results. I’m hoping to have it finished by Christmas. I’m at 25 pages so far and think I’m only half way.

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