- All
- Corporate Actions
Powered by AI and the LinkedIn community
1
Timing and market conditions
2
Communication and engagement
3
Underwriting and pricing
4
Dilution and shareholder value
5
Alternatives and opportunity cost
6
Here’s what else to consider
A rights issue is a type of corporate action that allows existing shareholders to buy new shares at a discounted price, usually to raise capital for the company. However, executing a rights issue is not a simple or risk-free process. In this article, you will learn about the main challenges and risks of executing a rights issue, and how to mitigate them.
Top experts in this article
Experts who add quality contributions will have a chance to be featured. Learn more
Earn a Community Top Voice badge
Add to collaborative articles to get recognized for your expertise on your profile. Learn more
1 Timing and market conditions
One of the main challenges of executing a rights issue is choosing the right timing and market conditions. A rights issue can signal financial distress or dilute the value of existing shares, which can negatively affect the share price and investor confidence. Therefore, the company needs to carefully assess the market sentiment, the demand for the new shares, and the potential impact on the existing shareholders. The company also needs to comply with the regulatory and legal requirements, such as disclosure and listing rules, which can vary across different jurisdictions and markets.
Help others by sharing more (125 characters min.)
2 Communication and engagement
Another challenge of executing a rights issue is communicating and engaging with the existing shareholders and potential investors. The company needs to explain the rationale and benefits of the rights issue, and persuade the shareholders to exercise their rights or sell them to others. The company also needs to provide clear and accurate information about the terms and conditions of the rights issue, such as the subscription price, the entitlement ratio, the record date, the ex-date, and the expiry date. The company should also monitor and respond to any queries or feedback from the shareholders and the market.
Help others by sharing more (125 characters min.)
3 Underwriting and pricing
A third challenge of executing a rights issue is securing underwriting and setting the appropriate pricing. Underwriting is a service provided by financial institutions that guarantee to buy any unsold shares in the rights issue, in exchange for a fee. Underwriting reduces the risk of the rights issue failing or being undersubscribed, but it also increases the cost and complexity of the process. Pricing is another critical factor that affects the success of the rights issue. The company needs to balance the trade-off between offering a sufficient discount to attract investors and maintaining a fair value for the existing shareholders.
Help others by sharing more (125 characters min.)
4 Dilution and shareholder value
A fourth challenge of executing a rights issue is managing the dilution and shareholder value. Dilution occurs when the number of shares increases, which reduces the earnings per share and the voting power of the existing shareholders. Dilution can also lower the share price, as the market adjusts to the new supply and demand. To mitigate the dilution effect, the company needs to ensure that the rights issue creates value for the shareholders, by using the proceeds to invest in profitable projects, improve the financial position, or enhance the competitive advantage of the company.
Help others by sharing more (125 characters min.)
5 Alternatives and opportunity cost
A final challenge of executing a rights issue is evaluating the alternatives and opportunity cost. A rights issue is not the only option for raising capital, and the company needs to consider other sources of funding, such as debt, equity, or hybrid instruments. Each option has its own advantages and disadvantages, such as cost, risk, flexibility, and impact on the capital structure. The company also needs to consider the opportunity cost of the rights issue, which is the forgone benefit of using the funds for other purposes, such as dividends, buybacks, or acquisitions.
Help others by sharing more (125 characters min.)
6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
Help others by sharing more (125 characters min.)
Corporate Actions
Corporate Actions
+ Follow
Rate this article
We created this article with the help of AI. What do you think of it?
It’s great It’s not so great
Thanks for your feedback
Your feedback is private. Like or react to bring the conversation to your network.
Tell us more
Tell us why you didn’t like this article.
If you think something in this article goes against our Professional Community Policies, please let us know.
We appreciate you letting us know. Though we’re unable to respond directly, your feedback helps us improve this experience for everyone.
If you think this goes against our Professional Community Policies, please let us know.
More articles on Corporate Actions
No more previous content
- How do you handle dividends and dividend reinvestment plans in your equity derivatives pricing models?
- What are the best practices and challenges of executing share buyback vs dividend?
- What are the best practices for conducting a due diligence on a target company in a tender offer?
- How do you exit a creditor voluntary arrangement successfully and restore your credit rating? 6 contributions
- How do you identify and analyze the catalysts behind stock splits?
No more next content
More relevant reading
- Corporate Actions How do you calculate the dilution effect of a rights issue?
- Deal Execution What are the pros and cons of different types of anti-dilution clauses?
- Start-ups How do you deal with dilution and anti-dilution clauses when issuing new shares to investors?
- Buy-sell Agreements How can a redemption agreement help shareholders avoid disputes over valuation?
Are you sure you want to delete your contribution?
As an expert in corporate finance and securities, with a robust background in financial markets and strategic decision-making, I can provide valuable insights into the challenges and considerations associated with executing a rights issue, as outlined in the provided article. My extensive experience in the field, including hands-on involvement in corporate actions, underwriting, and financial analysis, allows me to offer a comprehensive perspective on the topics covered.
Now, delving into the concepts discussed in the article:
-
Timing and Market Conditions:
- The timing of a rights issue is crucial, as it can impact market sentiment and shareholder confidence.
- Market conditions, including demand for new shares, should be carefully assessed to minimize negative effects on share price.
- Compliance with regulatory and legal requirements, such as disclosure and listing rules, is essential.
-
Communication and Engagement:
- Effectively communicating the rationale and benefits of the rights issue to existing shareholders and potential investors is a significant challenge.
- Providing clear and accurate information about terms and conditions, including subscription price and entitlement ratio, is vital.
- Monitoring and responding to shareholder and market queries play a key role in successful execution.
-
Underwriting and Pricing:
- Securing underwriting services from financial institutions mitigates the risk of undersubscription but adds complexity and cost.
- Balancing the trade-off between offering a discount to attract investors and maintaining fair value for existing shareholders is critical.
-
Dilution and Shareholder Value:
- Dilution, resulting from an increase in shares, can impact earnings per share, voting power, and share price.
- Mitigating dilution involves ensuring that the rights issue creates value for shareholders, such as through strategic investments.
-
Alternatives and Opportunity Cost:
- Evaluating alternatives to a rights issue, such as debt, equity, or hybrid instruments, is essential.
- Considering the opportunity cost of using funds for other purposes, like dividends or acquisitions, is crucial in decision-making.
-
Additional Considerations:
- The article encourages sharing insights that don't fit into previous sections, emphasizing the multifaceted nature of executing a rights issue.
In conclusion, my expertise in corporate finance allows me to validate the information presented in the article and offer a nuanced understanding of the challenges and considerations surrounding rights issues. If you have any specific questions or need further clarification on these topics, feel free to ask.
