SBI RIGHT ISSUE

A rights issue an option that a company opt for to raise capital under a secondary market
offering or seasoned equity offering of shares to raise money. The rights issue is a special form
of shelf offering or shelf registration. With the issued rights, existing shareholders have the
privilege to buy a specified number of new shares from the firm at a specified price within a
specified time.[1] A rights issue is in contrast to an initial public offering (primary market
offering), where shares are issued to the general public through market exchanges. Closed-end
companies cannot retain earnings, because they distribute essentially all of their realized income,
and capital gains each year. [2] They raise additional capital by rights offerings. Companies
usually opt for a rights issue either when having problems raising capital through traditional
means or to avoid interest charges on loans.[3]

How it works
A rights issue is directly offered to all shareholders of record or through broker dealers of record
and may be exercised in full or partially. Subscription rights may either be transferable, allowing
the subscription-right-holder to sell them privately, on the open market or not at all. A right
issuance to shareholders is generally issued as a tax-free dividend on a ratio basis (e.g. a dividend
of one subscription right for one share of Common stock issued and outstanding). Because the
company receives shareholders' money in exchange for shares, a rights issue is a source of
capital.

Considerations

Issue rights the financial manager has to consider:

 Engaging a Dealer-Manager or Broker Dealer to manage the Offering processes

 Selling Group and broker dealer participation
 Subscription price per new share
 Number of new shares to be sold
 The value of rights vs. trading price of the subscription rights
 The effect of rights on the value of the current share
 The effect of rights to shareholders of record and new shareholders and right-holders

Underwriting

Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds
sought by the company will be raised. The agreement between the underwriter and the company
is set out in a formal underwriting agreement. Typical terms of an underwriting require the
underwriter to subscribe for any shares offered but not taken up by shareholders. The
underwriting agreement will normally enable the underwriter to terminate its obligations in
defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations
of the main underwriter; the underwriter passes its risk to the sub-underwriter by requiring the
sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is
obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be
financial institutions, stock-brokers, major shareholders of the company or other related or
unrelated parties. The Panel’s guidance covers both non-underwritten and underwritten rights
issues.

Basic example
An investor: Mr. A had 100 shares of company X at a total investment of $40,000, assuming
that he purchased the shares at $400 per share and that the stock price did not change between
the purchase date and the date at which the rights were issued.

Assuming a 1:1 subscription rights issue at an offer price of $200, Mr. A will be notified by a
broker dealer that he has the option to subscribe for an additional 100 shares of common stock of
the company at the offer price. Now, if he exercises his option, he would have to pay an
additional $20,000 in order to acquire the shares, thus effectively bringing his average cost of
acquisition for the 200 shares to $300 per share ((40,000+20,000)/200=300). Although the price
on the stock markets should reflect a new price of $300 (see below), the investor is actually not
making any profit nor any loss. In many cases, the stock purchase right (which acts as an option)
can be traded at an exchange. In this example, the price of the right would adjust itself to $100
(ideally).

The company: Company X has 100 million outstanding shares. The share price currently quoted
on the stock exchanges is $400 thus the market capitalization of the stock would be $40 billion
(outstanding shares times share price).

If all the shareholders of the company choose to exercise their stock option, the company's
outstanding shares would increase by 100 million. The market capitalization of the stock would
increase to $60 billion (previous market capitalization + cash received from owners of rights
converting their rights to shares), implying a share price of $300 ($60 billion / 200 million
shares). If the company were to do nothing with the raised money, its Earnings per share (EPS)
would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to
acquire another company), the EPS may be impacted depending upon the outcome of the
reinvestment.

NEW DELHI: State Bank of India, country's the premier lender, may again approach the market
to raise funds through rights issue of share. SBI chairman O P Bhatt said that the bank may be
raising Rs 20,000 crore through rights share. Bhatt also disclosed that the bank is in talks with
Bharti Airtel on the funding to acquire the African assets of Kuwaiti firm Zain.

He said that SBI needs to raise around Rs 40,000 crore in the next five-years to meet its lending
requirements. Half of this amount, he added, would be raised through rights issue of shares.

"In the next five-years, we need to raise somewhere around Rs 40,000 crore. This is in addition
to Tier II capital and in addition to retail earnings which account for Tier I capital," Bhatt said.

Tier II capitals are money raised through bonds which has got fixed tenure and rate. "We need to
raise some equity and we will do it in the next financial year. It will be a rights issue. In the next
financial year, we are looking at a ceiling of around Rs 20,000 crore it could be anywhere
between Rs 10,000 and Rs 20,000 crore," he said.

The amount to be raised, he said would, however, keep changing depending upon requirements,
especially of the bank's subsidiaries.

Though the bank was fairly well-capitalised at more than 14% capital adequacy ratio, the raising
of funds is required to meet its long term requirements, Bhatt said. The bank kept updating its
capital requirement for the next five-years every quarter or six-months, he added.

The bank would raise funds at an opportune time depending upon market conditions, the
government's pricing and requirement of its subsidiaries, especially its insurance arm, which is
unlisted, the SBI chairman said.

If SBI plans to raise funds through rights share, government in the forthcoming Budget for 2009-
10 will have to provide for the sum required to subscribe its portion of shares. At present, the
market price of the share is Rs 1,920. If the bank plans to raise Rs 20,000 crore, it will have to
issue larger number of shares than it issued last time.

 friend of mine owns the shares of Bata India [ Get Quote ].

When the company came out with a rights issue, she did not have a clue as to whether to opt for
it or not. 

In fact, she wondered why they offered her the shares when
she could buy it from the market whenever she wanted to.

Here's to demystifying what a rights issue is all about and how

it affects you.

 5 rules when buying stocks

The company needs money!

A company needs money to grow and expand -- to

purchase new machinery, employ more people, buy more land, open new offices or even repay its loans.

To do that, an option to consider is to ask the public for money. There are three ways it can do so.
1. IPO

When a company comes out with an Initial Public Offering, it offers shares to the public. The public buys
the shares and the company gets money. These shares are then listed on the stock exchange for the
public to buy and sell. The investors will then get rewarded as the company does well and the value of
their shares increases.

2. New issue

If a company that is already listed (has its shares listed on a stock exchange for buying and selling) is
coming out with a fresh tranche of shares, it is called the new issue.

3. Rights issue

Sometimes, a company may come out with a fresh batch of shares but may choose not go to the public
(as in a new
issue). It may just approach only the current shareholders (people who own the shares of that company).

This is called a rights issue.

What it means is that only the current shareholders have a right to buy these shares.

Simply put, rights issues are shares issued by a company only to its existing shareholders.

 3 stock market mistakes to avoid

What's not great about a rights issue

The shares do not come free of cost.

Bonus shares are offered free of cost. They are a gift. A bonus.

A rights issue will need you to buy the shares. They do not come free. 

 Why bonus shares are great for you

What's great about a rights issue

The good news is that the shares will be cheaper than the current market rate.

When a company offers new shares via a rights issue, it is usually at a discount to the current market
rate.

What this means is that if the market price of the share is Rs 100, the company may offer the shares for
Rs 90. So you get more shares at a cheaper rate than what you would get if you buy it from the market.

Let's take the example of the Bata India stock.

The price of the shares was moving between Rs 80 to Rs 90 when the rights issue was first announced in
February. The price of each share in this rights issue was only Rs 54.  
However, after the announcement of the rights issue, the share price fluctuated widely between Rs 75
and Rs 100.

Generally, the price will go up because investors now want to buy the shares so that they can avail of the
rights issue.

 Understanding a stock split

Can I pick up however many shares I want?

No. that will not be possible. A rights issue is offered in proportion to your existing holding.

The company may come out with a 2 for 1 rights issue.

This will give the shareholder who has 1 share, the chance to buy 2 additional shares.

So, if you own 100 shares, you will get the chance to buy 200 additional shares.

 5 things you must know before buying shares

Who gets the rights issue?

The company will make an announcement that it is offering the rights issue to all shareholders (those who
own the shares of the company) on a particular date. This date is called the record date.

After the rights announcement but before the record date, the shares are known as cum-rights. Even if
you do not currently own the shares but if you buy them at that time, you will get the rights issue. On the
record date, they become ex-rights. If you buy them after this day, you do not get the rights issue.

For instance, ING Vysya Bank [ Get Quote ] offered its shareholders three rights shares for every share
held by them. On February 21, 2005, the rights issue was offered at Rs 45 per share.
 
The cum rights price of the shares (shares offered for sale with the associated rights) was Rs 597. If you
bought these, the rights issue would have been applicable for you.
 
The ex-rights price adjusted to Rs 183. These shares are offered for sale without the rights. 

 Why mid-caps are hot

What if I don't want the shares?

In a bonus issue, you are just given the shares and do not have a chance to say no (why would you say
no
if they are free?).

In the case of a rights issue, you are given the option to decline (since you are paying for it).

You may refuse to subscribe to the rights issue and just let your "right" lapse. In which case you get
nothing.

Or you can renounce your shares in favour of another person for a price.
In such a case, you can give anyone the rights free or sell it to him for whatever amount you agree on---all
you have to do
is to sign the rights renunciation form.

 10 things you must know about ESOPs

Summing up

In a bonus issue, the company will use its cash reserves to issue more shares. So the number of shares
of the company increases but the cash reserves decrease.

In the case of a rights issue, the company will be asking the shareholders for money. So the number of
shares will increase here too but the money will be added to its kitty. 

Subscribe for a rights issue only if you really believe in the company.

Don't do it just because you are getting it cheaper.

Also, find out why the company is coming out with a rights issue. If it is to raise money for a sound
business plan that will eventually increase the profits and share price, then it is a good bet.

State Bank of India on Monday fixed the price for its forthcoming rights issue at Rs. 1,590 per
share (that is, face value of Rs. 10 each and a premium of Rs. 1,580 per share), to raise an
aggregate amount of Rs. 16,736.31 crore.The ratio of the rights issue also fixed by the SBI board
as one share for every five shares of the bank held by the shareholder. SBI has informed the
Bombay Stock Exchange that the central board of the bank at its meeting held on January 14 has
decided as under: To increase the issued capital of bank from Rs. 526.30 crore to Rs. 650 crore,
in terms of Sec. 5 (2) of the SBI Act; and to raise an aggregate amount of Rs. 16,736.31 crore
(including premium) by way of rights issue offer to the Central Government and to other eligible
existing shareholders including GDR holders. The bank would also issue shares to employees
under the Employees Stock Purchase Scheme in the same ratio and price.

Government to invest

The Union Government is expected to invest around Rs. 10,000 crore in the rights issue to
maintain its stake at over 59 per cent, for which it would issue bonds to SBI.

“We have decided to subscribe to the rights issue. We intend to issue bonds of Rs. 10,000 crore
for the purpose,” Finance Minister P Chidambaram had said after the Cabinet meeting, which
approved the rights issue.

These bonds would be redeemed through the proposed Securities Redemption Fund, he said,
adding that the SRF would be funded through taxes and dividends received from SBI.

The annual cost of servicing these bonds would come at around Rs. 790 crore, Mr. Chidambaram
had said, adding the government is required to put at least this much amount to the redemption
fund. “We are subscribing to the rights issue, but we will pay to it on deferred basis,” he had
said.

“The bank has been exploring various options to mop up funds, but a rights issue would allow
the bank to raise capital without diluting the government shareholding. It is understood that the
government was not in favour of a follow-on public issue, where its stake would have been
diluted from the current over 59 per cent to 55 per cent, the minimum prescribed under the SBI
Act.

Earlier this fiscal, the government purchased 59.7 per cent stake of the RBI in SBI in a revenue-
neutral exercise.

SBI is the largest bank in the country, but ranks only 70th globally in terms of capitalisation.

Source : Hindu

Procedure for issue of Right Shares with letter of offer

Procedure for issue of shares on rights basis in case of an

unlisted company.

(1) Authorised share capital. Check that there is sufficient authorised share capital in the memorandum
of association to accommodate the increase in the subscribed share capital that will arise due to the
proposed rights issue. If the authorised share capital is inadequate, the memorandum of association
must be amended to increase it by a suitable amount. If the articles also contain the authorised share
capital, the articles also will have to be amended.

(2) Letter of Offer. Draft a Letter of Offer. As per section 81(1)(b), a 'notice' should make the offer of
rights shares. This notice is called 'Letter of Offer'. (give atleast 15 days time to shareholders for
exercising their option) It is a document sent to the shareholders of a company offering them shares in a
rights issue. No form has been prescribed of the Letter of Offer. It should contain the following
information:
(a) Brief history of the company;

(b) Nature of business carried on by the company;

(c) Highlights of the financial performance for 3 to 5 years;

(d) Management perception about the future prospects of the company;

(e) Particulars of directors, including managing and whole-time directors;

(f) Details of the proposed rights issue;

(g) The number of shares held by a shareholder and the number of rights shares;

(h) Terms and conditions of the present issue and mode of payment.

(3) Board's Approval. Convene a Board meeting and pass the following resolutions:

(a) To approve the proposal of issuing new shares on rights basis and decide the price, total number of
shares to be offered, proportion in which the rights shares will be offered, etc;

(b) To approve a draft Letter of Offer;

(c) To fix a date as a record date (or dates of closure of the Register of Members) for drawing up a list of
members eligible to receive the offer;
(d) To approve a draft application form (for subscribing to the rights shares, additional shares, splitting
the rights renunciation);

(e) To authorize Company Secretary or other officer to send the Letter of Offer to the members and to
do such acts, deeds and things as may be necessary to give effect to the Board's decision;

(f) To convene a general meeting for passing necessary resolutions, if any; to fix date, time and place of
the general meeting and to authorize the Company Secretary or other officer to issue notice of the
meeting.[73]

(4) General meeting. A general meeting will be convened to pass necessary ordinary/special resolution,
if the articles require a resolution. Ensure that the explanatory statement annexed to the notice of the
meeting fully explains the objects and reasons for the rights issue and justification therefore.

(5) Filing of resolution. The special resolution passed at the general meeting will be filed with the
Registrar of Companies. If a resolution for increasing the authorized share capital has been passed,
requisite registration fee will be paid at the Registrar's office.

(6) Record Date/Book Closure. Announce a record date/book closure as decided by the Board of
directors well in advance allowing at least 2 to 3 weeks for lodgement of share transfer forms so as to
exercise the right to take the rights shares. The closure of the Register of Members should be in
accordance with the provisions of section 154 of the Companies Act.

(7) Drawing up list of members. After the record date/book closure is over, draw up a list of members
to ascertain members eligible to subscribe to the rights shares.

(8) Despatching Letter of Offer. Despatch the Letter of Offer to the members eligible to subscribe to the
rights issue as per the list of members drawn up. The Letter of Offer should be accompanied by
application form for subscription, splitting, renunciation, etc. The Letter of Offer should be sent to the
shareholders in such a manner that they get at least 15 days time to apply.

(9) Collection and scrutiny of application forms. Within a week after the last date for making the
application, collect the application forms received and scrutinize them in all respects. Sort the valid
applications and defective applications. Prepare a statement of allottees with all relevant particulars.
(10) Allotment. Convene a meeting of the Board/Allotment Committee and pass a resolution for
allotment and file Return of Allotment with the Registrar of Companies.

(11) Allotment Letter/Share Certificates. Prepare and despatch Letters of Allotment. Alternatively,
prepare and despatch Share Certificates to the allottees. In any case, Share Certificates should be
despatched within 3 months from the date of allotment

(12) Regret Letters/Refund Orders. Simultaneously, prepare and despatch regret letters and refund
orders to the applicants to whom no shares have been allotted.

(13) Entry in the Register of Members. Immediately after the allotment, enter the particulars of the
allottees in the Register of Members.

SAMPLE LETTER OF OFFER

 

Date:

To

Mr……….

SUBJECT: RIGHT ISSUE OF ……… EQUITY SHARES OF RS.10/- EACH AGGREGATING TO RS. ………. ON RIGHT
BASIS

Keeping in view the expansion and growth, the Company intends to raise the required funds by way of
induction of the fresh Equity Share Capital of the Company. Henceforth, in view of the business plan and
regulatory compliance, Board of Directors passed a resolution at its meeting held on ….2008 and the
shareholders at the Extra-Ordinary General Meeting held on ……….. approving the aforesaid Right issue
of Rs. …./-

…… Equity Shares of Rs.10/- each at par are being offered for subscription to the Equity shareholders on
right basis in proportion to their present shareholding in existing paid up capital of the Company, subject
to rounding off. These shares are being offered to those shareholders whose name appears in Register
of Members of the Company on ……. being the Record Date fixed by the Board of Directors. The issue
shall remain open for a period on .. days commencing from …… to .., till the close of working hours.

As your name appears in the Register of Members on the aforesaid Record Date, you are therefore
entitled for ….. equity shares of Rs.10/- aggregating to an amount of Rs. ……../- under this right offer. You
may kindly accept and apply for the aforesaid equity shares hereby offered to you by filling the
application form and submitting the same along with full amount on or before the close of business
hours on……...

As per the provisions of Section 81(1) of the Companies Act, 1956, you have also right to renounce your
entitlement of the equity shares in part or full in favour of one or more person(s) as per your discretion.
You may also apply for additional equity shares over and above the number of equity shares to which
you are entitled to, provided allotment of additional equity shares will be considered for unsubscribed
portion, if any, as per discretion of the Board of Directors of the Company.

Further, unsubscribed portion of the above rights issue, if any or any fraction thereof shall be disposed
off as per discretion of the Board of Directors of the Company as deem fit in the best interest of the
Company.

Thanking You

For & on behalf of the Board

For …………………… Limited

…..
Director

Encl:
1. Share Application form
2. Letter of offer

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.

Advantages:
1. This type of issue gives existing shareholders securities called "rights", which give the shareholders
the right to purchase new shares at a discount to the market price on a stated future date. The company
is giving shareholders a chance to increase their exposure to the stock at a discount price.

2. Until the date at which the new shares can be purchased, shareholders may trade the rights on the
market the same way they would trade ordinary shares. The rights issued to a shareholder have a value.

3. Troubled companies typically use rights issues to pay down debt, especially when they are unable to
borrow more money.

4. Not all companies that pursue rights offerings are shaky. Some with clean balance sheets use them to
fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company will
usually, but not always, have its rights issue underwritten by an investment bank.

Disadvantages:
1. The value of each share will be diluted as a result of the increased number of shares issued.
2. It is awfully easy for investors to get tempted by the prospect of buying discounted shares with a
rights issue. But it is not always a certainty that you are getting a bargain. But besides knowing the ex-
rights share price, you need to know the purpose of the additional funding before accepting or rejecting
a rights issue.
3. A rights issue can offer a quick fix for a troubled balance sheet, but that doesn't necessarily mean
management will address the underlying problems that weakened the balance sheet in the first place.