A public company can choose to issue a Public Note or a Right Issue if it wants to raise capital. They often choose the latter followed by the former. Existing shareholders can buy new shares at a specific price and within a certain time frame through a rights issue. This price is usually below the market price. This is done to reward existing shareholders by offering them an investment opportunity that is attractive.
Investors who are looking for long-term capital can buy additional shares in the right issue at a lower price than the current market and keep the stocks.
One can also sell rights entitlements for short-term investments.
Alternativly, rights can be allowed to expire.
Rights issue can lead to lower earnings per shares and lower dividend yields for companies that are not in the growth phase. Offering rights, or public issue, in such a situation may not be prudent.
Declaration date The date that the board of directors informs shareholders and the entire market that the company will pay dividends, the amount per share, and the date it will be paid. A company is bound to declare dividend.
Record date The company has set a date to determine from its records who the owners of shares/bonds are. All holders of securities as at that date are eligible for dividends/interest. To receive a dividend, an investor must be listed on the record.
Ex date The date on which existing shareholders can receive dividends/ rights issue shares. You will still receive the dividend if you purchase dividend-paying stock on the day of the ex-dividend. However, if you do not buy the stock by the ex-dividend date you will not get the dividend. The price of a stock drops by approximately the same amount as the dividend on its ex-dividend day. If the price remains the same, it is considered that the share price has risen by the declared dividend.
Date of payment (payable day) The date that the company sends dividends to shareholders of record is the date.
The Investor: Current shares 100@100rs=10000. Right issue price is Rs 50. 100@50=5000. Total purchase price 200@150=15000Rs. Share price at Ex Date will be rs75. The first day investor will not receive any profit.
The Company: 100,000,000 shares @ 100 rs = Capitalization of stock is 10,000,000,000 Rs. After Right Issue Company has capitalization (100,000,000 shares @ 100 rs = 15,000,000,000) If the company did nothing with the money raised, its Earnings Per Share (EPS) would drop by half. If the equity is reinvested (e.g. EPS could be affected depending on the outcome of the reinvestment.