A lot of people are unfamiliar with Rights Issues for the company they invest in. This is because it is seldom discussed.
What is Rights Issue
Rights Issues is a method for the company to get additional funding for business.
The business is essentially make up of Assets = Debt + Equity.
There are 2 ways a listed company can seek large funding. One is by issuing more debts, the other is more equity.
Rights issue is to issue more equity.
A company will typically declare a 2 for 1 rights issue or another ratio meaning for how many existing shares you can apply for another number. In the case of recent First REITs rights issue, it is 5 shares for 4.
What is Excess Rights
Not all existing share holders can apply for rights issues.
- Foreigners typically have restrictions of not able to.
- Some existing share holders are not willing or do not have enough capital to do that.
You can apply for these excess rights
As long as you become share holders you can apply for these rights and excess rights.
Applying for rights provides no kicker. It is just to prevent dilution of your existing shares.
The kicker is the excess rights. It is basically like IPO jackpot. These rights is normally at a huge discount from current traded price.
In the case of first reit it is trading at eventual 70 cents but your cost of acquiring these rights is at 50 cents.
Take a look at this example here to understand why getting 2000 excess rights can mean a small win: First REIT Excess Rights Results: I got 2750 excess rights!