What Is a Rights Issue?
A rights issue is a corporate action in which a listed company offers existing shareholders the right to buy new shares in proportion to their holdings. If you receive a rights issue notice, you have a time-limited decision to make. Understanding what a rights issue is — and what your options are — is essential for any registered shareholder.
Rights Issue. A rights issue is a corporate action in which a listed company offers its existing registered shareholders the right to purchase new shares at a specified price, in proportion to their current holdings, before those shares are offered to the general public.
Why companies issue rights
Companies raise capital through rights issues for many reasons: to fund expansion, reduce debt, finance an acquisition, or strengthen the balance sheet. Because existing shareholders get first access to the new shares at the offer price, it is also a way to reward shareholder loyalty. Rights issues must be approved by shareholders at a general meeting and registered with the SEC Nigeria before they can proceed.
How the offer works: the ratio and the price
A rights issue is offered on a defined ratio — for example, "1-for-4" means you can buy 1 new share for every 4 shares you currently hold. The offer price is typically set at a discount to the market price to make the rights attractive. If you hold 4,000 shares in a 1-for-4 rights issue, you are entitled to subscribe for 1,000 new shares at the offer price.
The three options for shareholders
When a rights issue is announced, registered shareholders have three choices: (1) Subscribe — pay the offer price for your entitlement of new shares; (2) Sell nil-paid rights — if the rights are traded on the NGX during the offer period, you can sell your entitlement to another investor; or (3) Let the rights lapse — take no action and allow your entitlement to expire unused.
Dilution: what happens if you do not participate
If you let your rights lapse, the company issues new shares to those who did subscribe. Your percentage ownership of the company decreases — this is dilution. The share price also adjusts downward (the theoretical ex-rights price, or TERP) to reflect the increased number of shares outstanding. The extent of dilution depends on the size of the rights issue relative to existing share capital.
Nil-paid rights
During the rights offer period, the entitlement to subscribe for new shares can itself be traded on the NGX as nil-paid rights. The value of a nil-paid right is approximately the difference between the current market price and the offer price (the "theoretical value"). Selling your nil-paid rights lets you monetise the entitlement without subscribing for new shares.
Questions
About rights issue
This page is for general information and educational purposes only. It does not constitute financial advice, investment advice, legal advice, or tax advice. The value of investments can fall as well as rise. Seek independent regulated financial advice before making any investment decision. Shares Saver does not provide financial advice.
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