What To Look For In A Rights Issue

Date: 07-03-2017
Views: 1079

How does a stocks investor investor whether to invest in a rights issue announced by a company. Here is what they need to consider.

Edited transcripts

UDAYAN RAY Welcome to Fundoo Money, your 24X7 buddy on all matters related to personal finance. In this web series, we are discussing various things people need to keep in mind while investing in shares. Yeah, that’s right, we are not giving you any tips out here to get rich quickly.

In this particular segment we have – we are going to be analysing some of the things that people need to keep in mind when they get information about a company issuing fresh shares. So, it could be typically in the form of rights issue. That will come up in a moment.

Well as I was mentioning, information like rights issue and other fresh issue of shares are fairly important and in this particular segment, we will be analysing the impact of how an investor should be decoding this information.

Just as you saw a little while back, somebody popping out on your screen! We have with us our stock market expert Mohit Satyanand. Right now the focus of the camera will be entirely on him. And Mohit, there is always a lot of discussion about rights issue and it gets an equal kind of amplification in the popular press and media etc. Now, for a lay investor is that significant? Fresh shares being issued?

MOHIT SATYANAND Well firstly, I would have to say that very few Indian companies actually go for rights issues. And I think that’s an index of the fact that return on capital employed in Indian companies has typically been fairly good. So, companies are able to expand their operations without issuing fresh shares. And to that extent that there are rights issues.

I think the underlying analytical issues which you need to look at when you are buying shares of a company remain the same. So, if a company is doing well, and has a good return on the capital employed, which is a number I keep coming back to, because I think that’s the essence of investing, how is the money that the company is employing, how is it being  serviced? Then one should be very happy that one has an opportunity to buy more shares in the company at a predetermined price.

Of course, you need to understand what that money is being used for. What are the plans? And luckily because of the kind of regulatory regime that supervises share markets in this country and most well developed financial markets, the company would have a prospectus out there which would require it to explain what this money is going to be used for. Not only that, but the regulatory authorities then track for the subsequent periods, whether the company has utilized those funds as per its prospectus. So you can be fairly sure that the money is going to be used for that purposes. And if those make sense, you must go out and subscribe to those rights shares.

UDAYAN RAY I think that possibly for me is a most lucid explanation of rights issue. Just in case you think we missed out something, why don’t you go down to the comments section and add in your two bits. If you have a suggestion for any other video, we would welcome those suggestions. If you have liked this video, what are you waiting for? Why don’t you subscribe to our channel? And of course, click on the like button and of course stay connected with us on leading social media platforms.

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