Here's how Reliance Industries right issue may affect the share price
- A rights issue is an invitation to existing shareholders to buy more shares at a discount to the market price.
- RIL's investors can subscribe to the right to own one new share for every 15 held in the company at ₹1,257 per share, 14% below Thursday’s (April 30) closing price.
- Even if you expect that RIL shares will be worth a lot more in the future, if the share falls to ₹1,257, or below, investors can buy the shares from the market instead of subscribing to the rights.
RIL's investors can subscribe to the right to own one new share for every 15 held in the company at ₹1,257 per share, 14% below Thursday’s (April 30) closing price. A rights issue is an invitation to existing shareholders to buy more shares at a discount to the market price.
How does it work?
AdvertisementSince there will be more entering the market, the value of your existing shares will go down. That can be made up via additional shares via rights to make up for the fall.
If you had 120 shares on Thursday (April 30), you will get rights to 8 new shares. Theoretically, if the value of RIL shares don't change, the value of 128 shares will be the same as the old 120 shares.
While it is difficult to estimate the exact value of the total shareholding (after subscribing for rights)— since it can be affected by business and market factors — the theoretical price of each share can be calculated in the following manner.
|Before rights issue||120 (assumed)||₹1464 (April 30 closing)||₹175680|
|Rights issue||8 (1 share for every 15)||₹1257 (set by company)||₹10056|
|Post rights issue||128 (sum)||₹1451.06*||₹185736 (sum)|
The above calculation assumes that RIL share price doesn't change, which will never happen. So, in fact, you might gain or lose money.
Should I subscribe to the rights issue?
Depends on the price.
Even if you expect that RIL shares will be worth a lot more in the future, if the share falls to ₹1,257, or below, investors can buy the shares from the market instead of subscribing to the rights.
The gap between the market price of each RIL share tomorrow and ₹1,257 will be the gain from the additional shares that you get from the rights issue. If the share price falls on Monday (May 3) and the closer it gets to ₹1,257, it will make lesser sense for investors to subscribe to the rights because the room for gains will shrink.
How does it affect the company?
RIL is expected to use the money received from subscriptions to the rights issue to repay debt. So, the lesser it makes, lesser the debtit can repay.
What if the share price falls and shareholders don't subscribe to the rights issue?
"The promoter and promoter group of the company have confirmed they will subscribe to the full extent of their aggregate rights entitlement. In addition, they will also subscribe to all the unsubscribed shares in the Issue,” Reliance Industries said in a statement.
This means, Mukesh Ambani and his family, who own roughly 50% of RIL will subscribe to all the shares they can under the proposed rights issue, which means the promoters will have to cough up about ₹26,500 crore.
They will also have to fill in for any shortfall in demand for rights from other shareholders. Lesser the subscription, more money the promoters will have to put in.
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