Rights issues at deep discount could be a good bet for investors

Mumbai: Retail investors stand to lose out by not participating in rights issues of good companies that offer stock to existing shareholders at deep discounts to current market prices.

Some companies, such as Heritage Foods, Sandur Manganese, PTC Industries, Choice International, and Suzlon Energy, have recently offered rights issues at 40-95% discounts to the prevailing market prices. In some of them, the retail investors' portion was not fully subscribed.

Recently, Heritage Foods announced a rights issue of equity shares in the ratio of 1:1 on a par at ₹5 per share, compared with market price of ₹326.

Market participants said that many retail investors are unaware of the rights issues and the consequences of non-participation.


"A Rights issue is unlike a bonus or split, with the latter not requiring investors to do anything. In a Rights issue, if retail investors want to get the benefit of acquiring shares at a lower price, they must apply and pay for the Rights issue," said Nimish Maheshwari, an independent market analyst. "Investors can lose money if they do not apply for the Rights issue at steep discounts as promoters will subscribe to the remaining unsubscribed portion."

Sandur Manganese in July issued two rights shares at ₹10 each for every one share held when the market price was nearly ₹3,116 per share. Promoters subscribed to the unsubscribed portion, and their stake increased from 73.23% to 74.37%. Currently, the stock is trading at ₹767 post-adjustment.

Although a Rights issue is one of the best ways to raise capital for a company, retail investors should check out the reason for issuances before opting for them, said analysts.

"If the company uses the proceeds for expansion or growth, then a rights issue at deep discount is a good investment," said K Dileep, head of PMS, Geojit Financial Services. "However, an investor should ensure that the company has strong earnings visibility and credible management."

PTC Industries issued rights in July at a face value of ₹10 per share when the stock price was ₹4,193. Here also, the promoter stake increased from 67.80% to 69.41% as public shareholders did not fully subscribe to the issue. Another 15 companies have announced Rights issues in the past two months.

According to analysts, investors should also consider the company's performance and earnings potential after the issue as it has an adverse impact in some cases due to the higher number of shares.

"Ideally, investors should ascertain the basis of the discount and should take a holistic view of the company based on fundamentals and business outlook," said Swapnil Shah - head of research, Stoxbox.