WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL

RPPA · 1 WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 6:26 pm

RPPA

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I really can't understand the point behind senseless selling after announcement of rights. If the shareholder doesn't have money he can sell the right.

Mainly the reason behind rights issues are for future expansions or settling some debt. Which is to benefit the company in the longer run specially by strengthening the balance sheet.

Some can argue that the price of rights is too high. It is not the case in CSE once the announcement share holders selling outrageously what ever the rights price is. For me just people selling as a trend with no scene.

EX- ASCO rights priced 12.50 at a super discount with attached warrant. Very attractive but price still came down.

Forum members this is open for your valuable comments.

Fairtrade

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RPPA. There is a fundamental issue in understanding. I hope they are afraid of subscriptions of funds for the rights. Or else ppl who want to buy low may panic investors an buy.

RPPA

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Fairtrade wrote:RPPA. There is a fundamental issue in understanding. I hope they are afraid of subscriptions of funds for the rights. Or else ppl who want to buy low may panic investors an buy.

Yes but they can sell the right no ??????

I feel now this has become a trend to follow the others. Any way the main people behind the stocks benefiting as they can buy low.

Thnks FAIRTRADE for your comments.

Others please share your views. At least try to change the thinking pattern of investors on substance rather than follow trends.

Roboticfx

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I couldn't get the exact point you meant but I like to explain how market price falls after a rights issue.

It occurs due to increase in liquidity. For an example,

X company has issued 20,000 shares at Rs.10 each.
Total amount(Capitalisation) = Rs. 200,000

It issues rights at 2:1 ratio @ Rs.5 each.
Total Amount = 50,000
New 10,000 shares injected. (20,000/2)

With the assumpiton of static capitalisation,
(Market Capitalisation does not change)

New Capitalisation = 250,0000 /
Available no of shares = 30,000
So, assumed price of a share will be = Rs. 8.30

This is really a model example and in the real world it is affected by investors sentimants and other related facts.
As an example I can point out, 'the reduction of DPS after a rights issue'.

Roboticfx

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As you stated, rights owner can sell his/her rights, but definitely there should be a buyer available to buy, what he/she sells. At the end of rights trading, all requested rights are converted.

RPPA

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Roboticfx wrote:I couldn't get the exact point you meant but I like to explain how market price falls after a rights issue.

It occurs due to increase in liquidity. For an example,

X company has issued 20,000 shares at Rs.10 each.
Total amount(Capitalisation) = Rs. 200,000

It issues rights at 2:1 ratio @ Rs.5 each.
Total Amount = 50,000
New 10,000 shares injected. (20,000/2)

With the assumpiton of static capitalisation,
(Market Capitalisation does not change)

New Capitalisation = 250,0000 /
Available no of shares = 30,000
So, assumed price of a share will be = Rs. 8.30

This is really a model example and in the real world it is affected by investors sentimants and other related facts.
As an example I can point out, 'the reduction of DPS after a rights issue'.

Roboticfx

Thanks for what you have posted. But i very well know the scenario after the rights issue. The problem for me is why sell immediately after the announcement. Rights supposed to be raised for the betterment of the company.

Fairtrade

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Roboticfx is correct after the exright date. But our concern is why price comes down immediately after the announcement of rights without at least knowing the dates of the rights.

Roboticfx

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Yeah, I understood what you meant.

That's mainly due to investors sentiments

1. When a weak company is going to issue rights, it would be a signal of applying remedies against a highly material threat.

2. When right's price looks not much attractive, investors try to exit early, because after rights trade, there would be a price fall.

3. If number of rights issued is a higher value, it definitely affects to DPS adversely. This reason becomes active when DPS before rights is a higher value and dividend date is (xd) not much close.

4. misunderstand by new investors. They may think it's mandatory to buy rights. This facts looks not much effective, but it's not a rare incident.

5. Postpone purchasing decisons untill price falls afer rights traded. (when rights are not much lucrative)

6. If majority of current shareholders are holding less quantities. The benefit they receive through the rights issue is lessen by higher payment charges. (eg: bankdraft fees etc.)

randikagap

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The company them self had valued the share price at Rs.100.36 (Rs.2,526,532,200/- represented by 25,175,322 shares)
That could be the fundamental reason for sudden down fall in price.

Then after the right issue of new 12,587,661 of shares, average price will be accounted at Rs.93.57

However unless the company or the major share holders (14 out of 20 main share holders are related parties) expect to under value the price of the share, price might rise back to Rs.110/- or close (high or low) prior to the xd.

Further, as secondary reasons one might consider the company position after the new directive by CBSL to amalgamate financial companies. Since SDB will be the only company not be amalgamated (as per my knowledge, correct me if I'm wrong), it's capability will be questionable and at prevailing interest rates sustainability in market is also at stake.

Even if the case might be, Rs.7.0 or similar dividend in the next financial year will be highly attractive compared to what is offered by other FIs and price might be re gained to a reasonable value in the medium run.
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RPPA

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It is really appreciate that some members are sharing their valuable comments.

If we look at the last 3 years or even more for all rights issues what ever the price they have issued at what ever the company is the share price reduced immediately after the announcement.

EX- even JKH

For me this is some sentiment issue in our market. In other developed markets it not as ours. They react based fundamental facts where they look at future after the rights.

Remember COMPANIES ARE VALUED AT ITS FUTURE EARNINGS POTENTIAL. not on hysterical data.

I think i our market a fear of trend has been created over time. So all follow the trend." where is the buyer match it & sell'.

Have you seen yesterday the marker had a real negative impact due to the big fall of SDB. For me it's a fairly sound stock on paper with good earnings & higher NAV.

Some doesn't like the name SANASA not that posh like JKH isn't it. It's a old fashion government connected company.

Any way i didn't promote that share thankfully. But it's good stock just look the financials.

worthiness

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Being a way of raising capital for companies, rights issues are offered to existing shareholders at a discounted price. Thereby, net profit of the company is shared by a large number of shares after the addition of new shares to existed level resulting a diluted earning per share.
So, as Robotic explained above, the value of existing shares will decline by a certain percentage. Some are in view of ignoring the offer is unwise. Some attracts it considering the future prospects & strength of the company into long term period. SDB concerned, current downfall, as I feel, is combination of investors sentiment, manipulation activity. heavy profit taking & switching to new counters.

Chanuque

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The bottom-line is that when an entity goes for rights, means lacking reserves ( bad performances or management ). Thus, the negative sign has been there already. So, funding its debts or future expansions, has to done prudently ..

windi5

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http://forum.srilankaequity.com/t37318-sdb-what-to-do.

RPPA. Encouraging panic and senseless selling.

IO3+O

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windi5 wrote:http://forum.srilankaequity.com/t37318-sdb-what-to-do.

RPPA. Encouraging panic and senseless selling.

WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Ext_se10

RPPA

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windi5 wrote:http://forum.srilankaequity.com/t37318-sdb-what-to-do.

RPPA. Encouraging panic and senseless selling.

No i am not. Just read the content carefully & make your own call.

I am happy to help out people on what i know. Not what i don't know.

Fairtrade

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Hoping to see what will exactly happen. Don't forget big investors eying on this share to increase their stake since there are no big shareholder and no of shares in the market is also less. If they have a big shareholder who owns at least 40% this right issue will not come.

RPPA

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Fairtrade wrote:Hoping to see what will exactly happen. Don't forget big investors eying on this share to increase their stake since there are no big shareholder and no of shares in the market is also less. If they have a big shareholder who owns at least 40% this right issue will not come.

You got the point exactly right. BANG 6,6,6,6,6,6

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WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL

1 WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 6:26 pm

RPPA

2 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 9:52 pm

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3 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 10:24 pm

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4 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 10:32 pm

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5 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 10:35 pm

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6 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 10:43 pm

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7 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Tue Oct 07, 2014 11:22 pm

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8 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Wed Oct 08, 2014 12:08 am

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9 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Wed Oct 08, 2014 1:21 am

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10 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Wed Oct 08, 2014 10:12 am

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11 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Wed Oct 08, 2014 11:49 am

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12 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Wed Oct 08, 2014 1:17 pm

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13 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Thu Oct 09, 2014 12:14 am

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14 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Thu Oct 09, 2014 1:15 am

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15 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Thu Oct 09, 2014 8:55 am

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16 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Thu Oct 09, 2014 9:05 am

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17 Re: WHY RIGHTS ISSUES LEAD TO IMMEDIATE SHARE PRICE FALL Thu Oct 09, 2014 9:10 am

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