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A public company that wants to raise capital can opt for a Public Issue or a Rights Issue. Oftentimes they opt for latter, followed by former. In a rights issue, existing shareholders have the right to buy a specified number of new shares of the firm at a specified price within a specified time. Usually this price is below market price. The idea is to reward existing shareholders with an investment opportunity, which is perceived to be attractive.
Long-term investors can purchase additional shares in right issue at lower than current market price and hold the stocks.
From short-term investment prospective, one can sell the rights entitlement.
Alternatively, the rights may be allowed to lapse.
If a company is not in growth phase, rights issue tends to lower earnings per share and dividend yield. In such a scenario, offering rights (or public issue, for that matter) may not be a prudent course of action.
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Declaration date This is the date on which the board of directors announces to shareholders, and the market as a whole, that the company will pay a dividend, the quntum of dividend per share and the date on which it will be paid. Declared dividend is an obligation for a company.
Record Date is the date set by the company to determine, from the records, who are the holders of shares/bonds of the company. Holders of securities on that date, are entitled to dividend/interest. An investor must be listed as a holder of record to ensure the right of a dividend payout.
Ex Date is the date when existing shareholders are entitled to get dividends/ Rights Issue shares. If you buy a dividend paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-dividend date, you won't get the dividend. On its ex-dividend date, the price of a stock usually falls by an amount approximately equal to the value of the upcoming dividend. Conversely, if the price stays same on that date, the share price is said to have risen by an amount equal to declared dividend.
Date of payment (payable date) - This is the date on which the company mails out dividends to holders of record.
The Investor:
Current Shares 100@100rs=10000, right issue declare as 1:1 offer price is Rs 50, 100@50=5000 so Total Purchase price 200@150=15000Rs
At the day of Ex Date the share price will be rs75. So First day Investor will not get any profit.
The Company:
Company has 100,000,000 Shares @ 100rs= Capitalization of the stock is 10,000,000,000 Rs.
After Right issue Company Has capitalization of the stock (100,000,000 Shares @ 100 rs) + (100,000,000 Shares @ 50 rs ) = 15,000,000,000
If the company were to do nothing with the raised money, its Earnings per share (EPS) would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to acquire another company), the EPS may be impacted depending upon the outcome of the reinvestment.
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