Recently there have been several financial announcements from both listed and non-listed firms in the local dailies. Many companies have indicated posting impressive half and end year results depending on their fiscal policy. Many investors have been keen on knowing if these announcements were coupled by declaration of dividends. To their satisfaction, most firms announced a dividend pay out. While some companies like the East Africa Breweries Ltd and Mumias Sugar Company Ltd have gone further and announced bonus shares, others like Olympia Capital Holdings Ltd. and NIC bank have announced rights issues.

Apart from the capital gains investors get from trading in stocks, many investors count count on dividends to maximize on their gains. However, most of them do not consider factors such as bonuses, rights issues and share splits either because they do not know how to play them or they fail to follow up on these benefits. Generally, a share split does not affect the value of the share. It only increases the volume of shares issued by a firm and makes them affordable to the public.

Rights Issue

A listed company that needs funds to grow and expand may sell a fresh batch of shares to current shareholders (as opposed to the public) in what is called a rights issue. It is one way that a company can sell new shares in order to raise capital. The shares are offered to existing shareholders in proportion to their current shareholding at a discount price, hence giving them an incentive to buy the new shares.

Let’s take the example of the recently announced rights issues by Olympia Capital Holdings Co. Ltd. (OCHL).OCHL announced its  intention to do a 3:1 rights Issue to raise Ksh.420 million with a view of financing a new plant and acquisition. Each shareholder had the right to buy three shares for every one share held at a 30.8 percent discounted rate of Ksh.14, from the six months average. The increase in capital was passed at an AGM held in June 2007. Thereafter, an announcement was made on the number of shares to be offered in the rights issue. The shares traded Cum Rights {with the right to buy the new shares} through 17 August 2007 after which they went Ex-Rights {without the right to buy the new shares}.

Anyone who bought the OCHL shares on or before August 17, 2007 was entitled to the Rights. Each share had the Right to buy 3 more shares at 14/- each between 26^th June and 17^th August. The shareholders as of 17th August 2007 received a Memorandum of Information (MoI) that includes forms to apply/assign/transfer/sell these Rights. The Rights then traded separately from the underlying shares.

An investor who had 1,000 OCHL shares on 17^th August 2007 now has the option to trade in the rights issue between September 3 and September 14 2007, as per the timetable. In this case, he can exercise his right and buy the extra 3,000 OCHL shares. This will require him to have at least Ksh.43,000 including the broker’s fee.

Investor ought to contact their brokers before they  buy Rights. If an investor is not in a position to take up the shares, he can either ignore the right issue and let the rights expire or sell his rights to another investor. Ignoring the rights is not a good option because with new shares coming into the market, investors who do not take up their new shares dilute their shareholding. Selling one's rights {renounceable rights} to another investor is better as it creates a capital gain, although in some cases these rights are not transferable {non-renounceable rights}.

Many investors easily get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that one is getting a bargain. Besides knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue. A rights issue to correct a balance sheet deficit does not necessarily mean the underlying problems that lead to the deficit have been solved.