Chapter 2 of 4
Rights issues: the subscription decision and dilution bridge
Calculate a theoretical ex-rights price and distinguish participating, selling eligible rights and doing nothing.
In this chapter
Calculate the theoretical ex-rights price #
TERP combines the old equity value and new subscription cash divided by post-issue shares, under simplified assumptions. It is a theoretical bridge, not a guaranteed future market price.
State the old/new ratio carefully. A one-for-four offer means one new share for each four eligible old shares. Read renunciation or trading terms rather than assuming all rights can be sold in every circumstance.
Separate percentage dilution from economic value #
If an owner does not subscribe while others do, ownership percentage can fall. Depending on the offer and ability to sell or renounce rights, some economic value may be recoverable through the entitlement.
Doing nothing can have different consequences from making an informed decision to sell eligible rights. Timing, liquidity and costs matter. This lesson explains the economics; it does not freeze current application procedures or dates.
Evaluate the use of the new money #
Capital raised to reduce expensive debt has a different risk path from capital raised to acquire a highly uncertain business. Forecast the return on incremental capital and the financing alternatives.
A theoretical adjustment explains ownership mathematics, not whether management will create value. Compare per-share outcomes under adverse and favourable operating cases.
Hypothetical worked example
A fictional one-for-four issue
Four old shares trade at ₹100 each. One new share is offered at ₹80. Simplified TERP is (4×100+80)/5 = ₹96. The theoretical value per old-share entitlement is ₹4, and the combined right to buy one new share is ₹16.
An owner of four shares contributes ₹80 to own five shares worth a theoretical ₹480. The pre-issue ₹400 holding plus ₹80 cash reconciles; no automatic ₹20 profit was created by the discount.
Common mistakes
- Ignoring new subscription cash in TERP.
- Confusing one-for-four with four-for-one.
- Assuming a discounted offer guarantees value creation.
What is simplified TERP for four ₹100 shares plus one new share at ₹80?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Model participation, non-participation and eligible-right sale under a fictional offer; separate ownership, cash and theoretical wealth.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- NSE: company integrated financial filings ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.