Thursday, April 12, 2012

Rights Issues - get it right!

People like me, who are not hyper-active in the markets tend to sit on decent percentage of cash for extended periods of time. While this cash typically earns the regular 7-8% in liquid funds, I keep on looking for ways to improve the return on this large part of my portfolio. Rights issues are a great way (among others!) to put the cash to some use and earn that extra return. If you are lucky, you will earn lots in rights issues. If you are unlucky, you wont lose much! Me likes! My kind of situation. :-)

Here is how it works..

One should not deploy money in each and every rights issue which hits the market. Some basic pointers..
1) The company should be a decent company, not going at atrocious valuations. (Although it doesn't matter if its a bit expensive)
2) The rights issue price should be at a decent discount to the current market price. So, a Bajaj Hindustan will not do, but a Neuland Labs will do!
3) If its an unknown company will less institutional holding, it would be great. (I will clarify why it is so in due course.)

Lets say that A Ltd is coming out with a rights issue. The ratio is 1 share for every 2 shares held. The CMP is Rs.50 and rights issue price is Rs.30. Record date is April 19, 2012 (Ex-date will be April 18).

1) Buy 100 shares of A Ltd. close to the ex-date, on lets say April 15th itself at Rs.50. (So that on ex-date, the shares will be there in your demat account.)
2) On ex-date, the stock price should fall in the proportion as well as price of the rights issue. (Although, in the recent case of Neuland Labs, it did not fall at all!) Lets say here, it falls by Rs.8 to Rs.42.
3) Sell your original shares on ex-date. There would be a total loss of Rs.800. However, since you sold on ex-date, you are still eligible to apply for the rights issue.
4) Now, you can participate in the rights issue. On the original 100 shares, you will get 50 shares guaranteed (1 for every 2 held) at Rs.30.
5) However, while applying for the rights issue, you can always apply extra. Here, lets say that you applied for 950 extra shares. Total application would be 50+950=1000 shares at Rs.30 each.
6) Now, if all shareholders apply for the issue, you will not get anything extra. So, you will get only 50 shares at Rs.30. Lets say you are able to sell them at Rs.42. Thats a total profit of Rs.600. So, along with earlier loss of Rs.800, net-net, there is a loss of Rs.200 on the entire transaction. Since original position is small, the amount of loss is not much, in absolute terms/as a % of portfolio
7) However, if its an unknown company etc, where other shareholders did not apply, you can get extra allotment. Lets say, you got all 1000 shares you applied for, at Rs.30. And you managed to sell them at Rs.42. Thats a profit of Rs.12000! Minus original loss of Rs.800, which gives us a net profit of Rs.11200. Not bad. (I am not considering short term cap gain tax etc to just to keep things simple.)
8) The only risk here is in a situation where you got full allotment, and by the time the allotment was done, the stock price just crashed much below the rights issue price..then you are in trouble. That is why I laid down some basic pointers above.

So if you are lucky (yes, total luck, not skill!), you will get extra allotment and earn decent amount. If you are not lucky, the loss will not be very high, since initial position itself was small.

Some rights issues in which I got lucky in the recent past were Camlin Fine (got HUGELY lucky here!), SBBJ, etc. Others, in which I was not so lucky (no extra allotment) were Veljan, Sadbhav Engg (this one was interesting, since there were attached warrants too), etc. However, there was no loss in the same. Lets see what happens in Neuland!

One tukka in rights issues, where you get massive allotment, can give a huge alpha to your portfolio. e.g. in Camlin Fine, market price was Rs.105 (Rs.10 paid up), while the rights issue was at Rs.15.75!!! I applied a lot extra and for some reason, I got full allotment! Great return, without much analysis or trouble to the brain! Super balle balle.

Hope you get the rights right! Till then..

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
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66 comments:

Raja said...

Thanks Neeraj,

Great post and some great learning.

I have a query regarding the Ahlcon Parenterals, the open offer is already announced by B Braun to acquire 26% of the shares from public. Pursuant to which B Braun will exercise the option of acquiring the rest from promoters to make it a total of 75%.
As per current shareholding structure 70.95% of the shares are with promoter. So, open offer is for 26% out of 29.25% lying with public.
My question: is the expectation of less than 100% acceptance the only reason, why the share is quoting at 418 and not very close to 460 ?
Or am i missing something ?
Is there a possibility that not all public will offer their shares in the open offer and hence there is a theoretical chance of 100% acceptance and 10% gain ?

Or am i missing something ?

Regards
Raja

Abhishek Basumallick said...

Excellent post! Really informative and well written. I have never considered rights issues before, but now surely I will.

bujjanna said...

Neeraj bhai,

Thanks a lot.You deserve an award for helping penny(retail) investors.

Can you also explain how to apply for rights issue and how log the money is blocked(incase of ipo the money should be held in a/c for some time).

Bujjanna

Neeraj Marathe said...

Hello Raja,
I dont think you are missing anything. :)
cheers!
Neeraj

Neeraj Marathe said...

Thnx Abhishek,
Ya, it is an interesting way to deploy cash for sure.
cheers!
Neeraj

Neeraj Marathe said...

Hello Bujjanna,
Thnx, but this isnt anything special..i am sure lotsa people know about this.
regarding rights issue, you will get the application form for the same by post. You have to fill it up and submit it at the designated bank, along with the cheque. the money will be blocked for 15-20 days..however, now, with ASBA, the money doesnt go out of your account.
cheers!
Neeraj

Anonymous said...

Hi Neeraj,

So like in your example if you applied for 1000 shares.. won't others guys also apply for extra shares (even if some 'brain dead investors' don't apply)??

Can't I or some other big guy go out and apply for maybe 1 crs shares?

Just trying to understand the process how it actually works...

Neeraj Marathe said...

O yes Anon,
You can absolutely APPLY for 1 cr shares..but u will be 'lucky' to be ALLOTTED the 1 cr shares :)
As far as i know, the unapplied part is distributed pro-rata (in extreme cases, lottery system may also be adopted) to the shareholders who applied extra..if still there is undersubscription, as mentioned in the rights issue document, the promoters subscribe the shortfall.
cheers!
Neeraj

Karun Sandha said...

Hi Neeraj,

Thank for the info.
I cud go thr the FAME Rights issue.
They offered Rights isue at Rs.34/- Premium.
What does it mean?
Does it mean shares would be alloted at Rs.34 or Rs 34 + FV.
Pls help me on this.
Thanks in advance

Regards
Karun Sandha

Raja said...

Hi Neeraj,

Any idea how the NRI investor's can handle the kind paper work involved in such cases ?

Regards
Raja

sameer said...

Hi Neeraj,
Thanks for sharing interesting and new way to play in market.
I would definitely like to play it for next right issue.
1)Any intersting right issues coming now?
2)Is all process done online or offline???Do we have to provide money while subscribing for right issue(like IPO)????If yes then it could lock money for some time.
3)If no then do we get letter from them about no of shares allocated and then we have provide cheque to them????

sameer said...

all power lies in "you can always apply extra" about which many retail investors may not be aware. But this scheme is successful only if few know about it. By providing post u have increased competitors for u :)

sameer said...

all power lies in "you can always apply extra" about which many retail investors may not be aware. But this scheme is successful only if few know about it. By providing post u have increased competitors for u :)

Neeraj Marathe said...

Hello Karun,
Fame rights issue is at 44 bucks. (FV 10 plus premium of 34).
Cheers!
Neeraj

Neeraj Marathe said...

Hello Raja,
Sorry yaar, not much idea about the procedures for NRIs..you can check the rights issue document for the same.
cheers!
Neeraj

Neeraj Marathe said...

Hello Sameer,
I dont see any rights issues except Neuland open currently. (Neuland's record date is already over)

And i was waiting for someone to say what you said :) well put! Ya, the entire game is about applying extra and if many people apply, my chances become lower..but, not many people read my blog! and the market is big enuf for everyone..besides, sharing increases friends, not competitors, wont you agree? ;-)
cheers!
Neeraj

Neeraj Marathe said...

Hello Sameer,
All the process takes place offline. You get the rights issue form by post..and all the application procedures are just like that of an IPO.
cheers!
Neeraj

saurabh shankar said...

Good One Neeraj :)

One risk could be that share price tanks below the rights price...and so one can be stock with inventory. Any thoughts on this?
Also, how much time does it usually take in rights process.

cheers,
saurabh

Raja said...

Hi Neeraj,

One Doubt.

The share holding of an independent director of a firm should be considered as part of public share holding, right ?

Regards
Raja

Neeraj Marathe said...

Hi Saurabh,
I didnt understand the first part of your question..
About the time, it takes 1 month MAX.
cheers!
Neeraj

Neeraj Marathe said...

Hi Raja,
O boy, legal question..i am not a legal expert, but as per Clause 49 of the listing agreement, it is expressly stated that directors other than independent directors are considered related parties. So, independent directors' shareholding will form part of the public shareholding in my view. Again, i am not a legal expert..
cheers!
Neeraj

saurabh shankar said...

Hi,

Sorry lots of typos from my end. What i wanted to ask was this-
Suppose I get large amount of shares at Rs. 30, their is a possibility that when i want to sell these shares the stock price could have fallen below 30. So i do have a chance of losing money. Is my understanding correct?

Regards,

Neeraj Marathe said...

O yes boss, absolutely..thats one risk i had mentioned too..which is why i wrote that the rights should be at a reasonable discount to the market price..
cheers!
Neeraj

Dayanand Deshpande said...

Hi Neeraj,

I have been trying this strategy and it worked as well, in many cases..however I lost most of the gains in Muthoot capitals where I oversubscribed and got the full amount.the stock is yet to reach the rights price itself..

So you have to be very careful and cannot be complacent..also, generally when you are holding large amount of cash, the markets are generally at higher levels and the market risk is big...

Neeraj Marathe said...

Hello DD,
Yes, absolutely agreed..which is why i am of the opinion that one should apply to every rights issue that hits the mkt..i gave issues such as bajaj hindustan, lgb forge and muthoot too, a pass..what i try to do is form an elementary opinion on the company..without going in huge depth, as i would do in longer term investing situations. if this opinion of mine is not good, i prefer to give the rights issue a pass..did you get into neuland?
cheers!
Neeraj

Neeraj Marathe said...

And i hope u didnt mind me calling u DD..apologies if u did..its kinda shorter to type :D
cheers!
Neeraj

Dhwanil said...

Hi Neeraj,

Excellent! I am loving this due to sheer simplicity of the strategy. Low risk high return possibility for sure.

I too had never considered rights issue as important "special situation", but your post gives a new perspective to look at it.

Thanks for sharing.

Best Regards
Dhwanil Desai

Anonymous said...

hii neeraj ,

just to be clear

can i can just buy 1 share to be eligible for rights issue and then apply for lots more ?


seriously thanks i mean i really did not know abotu the extra wala funda

by the way have you ever been lucky in the karur vysya bank rights issues ?

Neeraj Marathe said...

Hi Dhwanil,
Simpler the better right? :)
i keep on looking for ways like this to deploy cash. It is not foolproof or sure-shot, but definitely something one should look at.
cheers!
Neeraj

Neeraj Marathe said...

Hello Anon,
I would suggest that you buy in the proportion of the rights issue. e.g if the issue is for 1 share for every 4 shares held..and you buy just 1 share, you wont be eligible. You need to buy at least 4.
I didnt get into KVB issue. i do not understand banks much.
cheers!
Neeraj

Dayanand Deshpande said...

Hi Neeraj,

You forgot the most important word "NOT" in your reply to my post "which is why i am of the opinion that one should apply to every rights issue that hits the mkt.." well, that's a costly (for me) typo :-))

And no I won't mind being called DD. And NO I did not subscribe to Neuland issue.happy hunting for value picks currently..
I used to study SEBI website for upcoming rights issues and used to be ready with the shortlist before the actual issue. The list can help you to prepare in advance.
-Daya.

Neeraj Marathe said...
This comment has been removed by the author.
Neeraj Marathe said...

O boy! quite a typo! my apologies sirji.
Ya, i also keep chking SEBI website and exchange announcements for rights issues.
I got into Neuland ONLY for the rights trade..otherwise, zero interest in the company.
cheers!
Neeraj

Anonymous said...

Samtex Fashions - Obscure, Ugly but probably one of the cheapest opportunities out there
Samtex Fashions

Consolidated Turnover for TTM is around 750 crores and EBITDA is 54 crores

This company has a Garment Business which is listed and owns 100% of a Rice Company whose name is SSA International

The standalone numbers are ugly but the Consolidated Numbers are Mouth Watering

Almost all the Consolidated Debt is tied to the Paddy Inventory that it holds

Run by decent management which is not very open in communicating with fellow shareholders but is competent and knows what it is doing

Recently took a Convertible Warrant issue at a big premium over the current stock price

The market cap is less than half of the EBITDA

This type of a business usually trades at around 15-20% of sales which makes it a market cap of 110-150 crores, all that is required is patience and loads of it

Neeraj Marathe said...

Hello Anon,
I have never seen the company, so dont really know..
Since you posted this as a comment to the rights issue post, can i ask you what does rights issue have to do with Samtex?
cheers!
Neeraj

Raja said...

Ooops!! I saw the same comment about samtex on another blog too :)

New way of Digital marketing ? ha ha

Regards
Raja

Neeraj Marathe said...

haha..o is it Raja? shouldnt he do his marketing in places where lotsa people read? Yaha kya kar raha hai wo? :-D
cheers!
Neeraj

Value Fiend said...

This was copied from a blog I have

I wish the copy/paste artist talked to me directly about this

I have a vested interest in whatever I write on my blog or elsewhere but never thought somebody would share this interest in a company like this

Cheers !
Value Fiend

Neeraj Marathe said...

Ooo..ya..plagiarism is everywhr on the net it seems..
cheers!
Neeraj

Anonymous said...

Hi Neeraj,

Lets say rights issue is at 1:2.
U buy 2 share & apply for 1000 extra. While i buy 200 shares & also apply for 1000 extra.

Are we considered same for rights issue??

If yes, then you can make a huge money (if lucky) in this just by buying 2 shares. That won't cost too much. Am I missing something??

Neeraj Marathe said...

Hello Anon,
Plz refer to Pg 93 of the letter of offer of the rights issue.
"the allotment of such additional rights equity shares will be made as far as possible on an equitable basis having due regard to the number of equity shares held by such eligible equity shareholders on the record date..."
So, if i have 100 shares and i apply for 1000..you have 200 shares and you also apply for 1000, you will get more allotment. Buying 2 shares and applying much more may be theoretically correct, but if there are others who have much more shares and have also applied extra, probably, you wont be allotted anything extra.
Hope this helped.
Cheers!
Neeraj

Anonymous said...

Arihant Superstructures Ltd looks perfect case on your 3 pointer scale...

What say?

Neeraj Marathe said...

Hi Anon,
Quite a questionable company and mgmt..and very questionable stock price movement too! :-)
Worth a punt..at max..total punt..
cheers!
Neeraj

Neeraj Marathe said...
This comment has been removed by the author.
Anonymous said...

Ohk.

And EPC Ind??

Neeraj Marathe said...

Much better management, business and sector. Valuation is a question mark. But strictly as a rights trade, doable, imho.
Cheers,
Neeraj.

Vinay said...

Hello Neeraj,
Started value investing few months back and found in Prof Bakshi and you along with some other value investors great teacher.

I regularly look NSE corporate announcments and SEBI site, but was unable to track EPC and Arihant.

Can you plz suggest where more to look for daily updates, or where am I missing.

Neeraj Marathe said...

Hi Vinay,
Well, i read all the BSE announcements everyday. Thats how i track most of the special situations.
Sorry, if i wasnt of much help..
cheers!
Neeraj

Vinay said...

Neeraj,
You have already helped me and many others much more than one can expect.

Doing great job!

Hope one day I may be as much helpful to others... Amen!

Neeraj Marathe said...

Amen Vinay!
Cheers!
Neeraj

Suhail said...

Vinay,
You can follow NSE_Announce twitter feed: https://twitter.com/NSE_Announce

They have all sorts of disclosures, announcements, dividend, mgmt meetings updates, SEBI takeover regulation disclosures etc. However I've noticed one problem with this feed: When a stock is listed both on BSE/NSE, sometimes you would see the announcement only on BSE website, but not on this twitter ID (or maybe it happens very late).

I've not found anything similar for stocks listed only on BSE.

If anybody has better ideas to track BSE announcements similarly, I'd want to know that too.

Ved said...

EPC irrigation has announced right issues today. what is your take on it

Neeraj Marathe said...

Hello Ved,
i have already written bout it in the comments above. Plz do see the same..
cheers!
Neeraj

Vinay said...

Thanks Neeraj and Suhail

mypursuitofperfection said...

Thanks Neeraj, love your articles.

Do keep us posted on your next pick i.e the Rights issue. We will get more educated on such ideas.

Vikas

Neeraj Marathe said...

Sure Vikas, most welcome.
Cheers!
Neeraj

Rajat said...

Hi Neeraj

Fantastic post, I had never thought that rights issues could be so rewarding.
And now I am looking for the next rights issue to take part in :)

A query I had on the step 3 in the process, why do I have to sell my shares on ex-date?

The share price might go up after that? Or is it your general experience that stock keeps declining after ex-date?

Regards
Rajat

Neeraj Marathe said...

Well Sirji,
if you are comfy holding on to the company, by all means, one should hold on..No compulsion to sell..i was talking about it only from a rights TRADE perspective..not from a fundamental long term holding perspective. if one has that perspective, no question of selling.
cheers!
Neeraj

Anonymous said...

Neeraj ji,
Can you please elaborate on how to apply for right using ASBA?
I have my demat account with ICICIdirect in Hyderabad. Can I apply online or do I need to submit the forms to ICICI, Mumbai or ICICI,Hyderabad ?

Neeraj Marathe said...

Hi Anon,
The details of application using ASBA will be given in the form, which you have to fill.
You have to submit the application with the designated bank, as given in the form, irrespective of whatever your own bank might be. I do not think there is a provision for online application. At least i have never done it..
cheers!
Neeraj

pratik said...

Sir,
Suditi industries is coming up with a right issues....
it meets all your criteria...

Neeraj Marathe said...

Umm, well, it doesnt meet all criteria Pratik..
Neeraj

pratik said...

Sir,
Suditi Industries is coming up with an rights isuue...
It meets all the criteria.
whats your take on this

Neeraj Marathe said...

The rights issue is not at a significant discount to the mkt price..how does it meet all the criteria???

pratik said...

Yes Sir i just posted the comment in a hurry... the issue price is Rs. 10 very close to the cmp...

pratik said...

Yes sir i posted the mail in ahurry... The issue being Rs. 10 is very close to the CMP...