Depending on the number of shares they already hold in the company at a specific point in time, shareholders are given / issued a number of rights for free.
These rights are a special instrument created especially for a rights offer and are themselves tradeable on the stock exchange. They are also referred to as Nil Paid Letters (because of the fact they are issued for free).
A Nil paid letter represents the right to take up the shares of a certain company at a certain price on a certain date.
So once shareholders have been issued their rights, they have a fixed / limited time period during which they can decide to take 3 different actions as follows:
If you exercise your rights, it means you accept the invitation to buy more shares at the price offered. In order to do so you would need to notify EasyEquities that you wish to exercise your rights, and then ensure that you have the necessary funds available at the specified time.
So while this option will cost you money, you will end up with more shares in your portfolio.
Example: Let's say you own 100 Widget Group shares trading at R5.50 and the Widget Group invites you to buy more shares at the reduced price of R3 each.
The offer is a three for ten rights offer, meaning that for every 10 shares you own, Widget is offering you the right to buy another 3 shares at a 45% discount to the R5.50 they are trading at on the market.
Number of share you can buy = ( 100 shares owned / 10 ) x 3 = 30 shares
Cost to buy the new shares =30 shares x R3 each = R90
If you do not have the funds available to take up the rights offer, or simply don’t want to own more shares in the particular company, you can simply let your rights expire.
If you received the rights free of charge, this action will not cost you any money and you won’t receive any additional shares.
You will essentially be in the exact same position as you were before the Rights offer.
You may however experience a lowering in the value of your shares (called a dilution)
In most cases you can sell your rights on the market at the price they are trading for at the time of sale.
Sometimes rights cannot be sold to another individual. These rights are known as non-renounceable rights / non-transferable rights.
Once you sell the rights, you no longer have the option to exercise the rights to buy more shares at the discounted price. In selling the rights to someone else, the right to do so has passed on to the buyer.
The rights shares (nil paid letters) will trade at their own price, established by the market dynamics, on the exchange.
To understand how the buying of rights works, please consult our FAQ article How does the buying of Nil paid letters work?
Some very important facts to keep in mind
1. Cost - if a Company issues you rights (as a shareholder) to buy additional shares in the Company, you are given the rights free of charge but will have to pay for the additional new shares.
2. Exercising the rights - (ie. deciding to buy the additional shares) requires 2 actions as follows:
a.> Notifying EasyEquities of your intention to do so; and
b.> Having sufficient available funds in your account by the stipulated date.
a.> If you fail to notify EasyEquities of your intention to exercise your rights by the given date, your rights will lapse.b.> If you do notify EasyEquities that you’d like to exercise your rights, but have insufficient available funds in your account on the stipulated date, your rights will lapse.c.> If you receive the rights as a result of buying them on the market (rather than being issued them by the Company you were a shareholder in), you still need to notify EasyEquities of your intention to exercise the rights and have the money available when required. Again, failure to do so will result in the lapsing of those rights.