Over the past 8 months, there have been 11 announcements regarding listed companies expressing their interest in raising capital through a rights issuance. Most recently companies such as Fawry and Madinet Nasr Housing and Development. How do they do it you ask?
Companies issue “rights”, which are basically tickets that allow investors to buy company shares at a discounted price. If you own a right, you will be required to pay a subscription fee in order to convert those rights to shares. Alternatively, you can sell the rights. It is also important to note that rights do not exist forever like stocks. They are only available for trade during the subscription period, after that the rights cease to exist (and so does their value). The question is why do so many listed companies choose to raise capital?
The reasons are too many to count but here are a few:
- Debt Financing
- Financing a new project
- Expansion into new markets
In my personal opinion, deciding to subscribe is an indicator that the investor believes in the company and the future of their share price. If that is the case, then by all means go and pay the subscription fee. The thing is, given my experience with subscribing to a rights issuance, the process of subscribing itself is redundant to a point where I began to question is it even worth it.
The process begins with your broker notifying you that you have new rights. You are then obligated to obtain a physical account statement to prove that you own the rights. You then take that account statement and go to the bank responsible for taking subscription orders, and fill in the needed subscription form. Obviously, make sure you have the required subscription fee with you. Also, make sure your national ID is valid and not expired.
Once that adventure is done and over with, the waiting begins. It takes around 1-3 months for the rights to be converted. Also, there is a risk of the share price dropping and so you can potentially end up subscribing to the rights and paying a higher amount than anticipated. Some would say avoid that hassle, sell the rights and use that extra cash to buy the actual shares from the market.
To conclude, if you believe in the company issuing the rights, go and subscribe. If you don’t want to go through the hassle, just sell the rights in the market. Just don’t neglect the rights because you will end up losing the investment value of those rights if you don’t take action.
- I/we have a beneficial Long or Short position in the mentioned security.
