A rights issue is a corporate action in which a listed company offers its existing shareholders the opportunity to purchase additional shares, usually at a price below the current market price. In Singapore, rights issues are a common method for companies to raise capital without going through a public offering to new investors. For retail investors, understanding the mechanics, timelines, and potential implications of a rights issue is essential to making informed decisions.
This article provides a detailed, evidence-based explanation of rights issues in the Singapore context. It covers the definition, the process, key dates, pricing, advantages and disadvantages, and how to evaluate a rights issue announcement. The information is drawn from widely known practices on the Singapore Exchange (SGX) and from standard regulatory requirements under the Singapore Code of Take-overs and Mergers and the SGX Listing Rules.
What Is a Rights Issue?
A rights issue is an invitation to existing shareholders to buy new shares in proportion to their current holdings. For example, a company may offer one new share for every two existing shares held. This is commonly described as a “1-for-2” rights issue. The offer price is typically set at a discount to the prevailing market price, providing an incentive for shareholders to participate.
Rights issues are used by companies to raise funds for various purposes, including expansion, debt repayment, working capital, or acquisitions. In Singapore, rights issues are governed by the SGX Listing Rules and the Securities and Futures Act. Companies must issue a circular to shareholders containing detailed information about the rights issue, including the purpose, the number of shares offered, the subscription price, and the timetable.
Unlike a bonus issue (which is a distribution of additional shares to existing shareholders without additional payment), a rights issue requires shareholders to pay for the new shares. If a shareholder does not take up the rights, their ownership percentage in the company will be diluted.
How a Rights Issue Works: Step by Step
The process of a rights issue in Singapore follows a standard sequence of events. Understanding these steps helps retail investors know what to expect and when to act.
1. Announcement
The company announces the rights issue through an SGX announcement. This announcement includes the key terms: the ratio (e.g., 1-for-2), the subscription price, the record date, and the timetable. The announcement is price-sensitive and must be released before or at the same time as the market opens. You can learn more about the types of announcements in our guide on Types of SGX Announcements.
2. Record Date
The company sets a record date to determine which shareholders are entitled to the rights. Only shareholders on the company’s register as of the record date will receive the rights. The record date is usually set a few days after the announcement. The share price may adjust downwards on the ex-rights date, reflecting the dilutive effect of the new shares.
3. Rights Trading Period
After the record date, the rights themselves become tradable on the SGX for a limited period, typically 10 to 15 trading days. During this period, shareholders who do not wish to subscribe can sell their rights on the open market. The rights trade under a separate stock code and are quoted in cents. The price of the rights fluctuates based on the underlying share price and the subscription price.
4. Subscription Period
Shareholders who wish to take up the rights must submit a subscription form and pay the subscription price within the subscription period, which usually starts immediately after the record date and runs for about two to three weeks. Payment must be made in full. If a shareholder holds rights but does not subscribe or sell them, the rights will lapse and become worthless.
5. Excess Rights Application
In many rights issues, shareholders can apply for excess rights, additional shares beyond their entitlement, if other shareholders do not take up their full allocation. This is done on a pro-rata basis. The company will allocate excess rights at its discretion, often giving preference to shareholders who applied for the largest number of excess shares.
6. Allotment and Listing
After the subscription period closes, the company allots the new shares. The new shares are credited to shareholders’ CDP (Central Depository) accounts and listed on the SGX. Trading in the new shares begins on a date specified in the announcement.
Key Terms and Dates in a Rights Issue
To navigate a rights issue, investors must understand the following terms:
- Rights Issue Ratio: The proportion of new shares offered for each existing share. For example, 1-for-2 means one new share for every two shares held.
- Subscription Price: The price at which the new shares are offered. This is usually at a discount to the market price.
- Theoretical Ex-Rights Price (TERP): The estimated market price of a share after the rights issue, assuming the rights are fully taken up. It is calculated as (Market cap before rights + Proceeds from rights) / (Total shares after rights).
- Ex-Rights Date: The date on which the share price adjusts to reflect the rights issue. Shares bought on or after this date do not come with rights.
- Record Date: The date on which shareholders must be on the register to receive rights.
- Rights Trading Period: The window during which the rights can be traded on the SGX.
- Subscription Period: The period during which shareholders can subscribe for the new shares.
These dates are critical. Missing the record date means you do not get the rights. Missing the subscription period means you lose the opportunity to subscribe. For a detailed timeline of SGX announcements, see our article on SGX Announcement Timeline.
Why Do Companies Issue Rights?
Companies in Singapore undertake rights issues for several reasons, all of which should be disclosed in the announcement. Common reasons include:
- Raising capital for expansion: For example, a property developer may need funds to acquire land or finance construction. A real-life example is the rights issue by UOL Group Limited in 2020 to raise approximately S$400 million for general corporate purposes and working capital.
- Reducing debt: Companies with high leverage may use rights issue proceeds to repay loans, improving their balance sheet. For instance, in 2021, Singapore Airlines Limited completed a rights issue to raise about S$8.8 billion to strengthen its financial position amid the COVID-19 pandemic.
- Funding acquisitions: A company may issue rights to finance a major acquisition without taking on debt. For example, Keppel Corporation Limited in 2021 raised about S$1.5 billion through a rights issue to fund its acquisition of a majority stake in Keppel Infrastructure Trust.
- Working capital: Companies facing cash flow challenges may use rights issues to shore up working capital. A notable example is Ezra Holdings Limited, which conducted multiple rights issues before its eventual insolvency.
Investors should always read the announcement carefully to understand the stated purpose. Our guide on How to Read a Price-Sensitive Announcement provides useful tips for evaluating such disclosures.
Advantages and Disadvantages for Retail Investors
Rights issues have both benefits and drawbacks for existing shareholders. Understanding these can help you decide whether to participate.
Advantages
- Opportunity to buy shares at a discount: The subscription price is usually lower than the market price, offering an immediate paper gain if you subscribe and the share price remains stable.
- Maintain ownership percentage: By subscribing, you avoid dilution of your stake in the company. If you do not participate, your ownership percentage will decrease.
- Potential for excess rights: If you apply for excess rights and receive them, you can increase your stake beyond your pro-rata entitlement.
- Liquidity of rights: You can sell your rights on the SGX during the trading period, potentially recovering some value even if you do not wish to subscribe.
Disadvantages
- Dilution risk: If you do not subscribe or sell your rights, your ownership stake is diluted, and the share price may fall to reflect the increased number of shares.
- Cash outlay required: Subscribing requires you to pay the subscription price in full. For large rights issues, this may strain your cash reserves.
- Share price adjustment: The share price typically falls on the ex-rights date, reflecting the dilutive effect. Even if you subscribe, you may not gain if the market price declines further.
- Complexity: Rights issues involve multiple dates and forms. Missing a deadline can result in loss of value. For example, if you hold rights but do not sell or subscribe before the deadline, the rights become worthless.
- Signal of financial distress: A rights issue can sometimes indicate that the company is in financial difficulty, especially if it is a deeply discounted issue. However, not all rights issues are negative, many are strategic capital raises.
How to Evaluate a Rights Issue Announcement
When you receive a rights issue announcement, you should assess several factors before deciding. Here is a checklist:
1. Understand the Purpose
Read the announcement’s section on “Use of Proceeds.” Is the money for growth (e.g., expansion, acquisition) or for survival (e.g., debt repayment, working capital)? Growth-oriented rights issues are generally more positive. For example, Mapletree Logistics Trust conducted a rights issue in 2021 to fund acquisitions, which was viewed favorably by analysts.
2. Evaluate the Discount
Compare the subscription price to the current market price. A large discount (e.g., 30-40%) may attract arbitrageurs but could also signal that the company is desperate for cash. A moderate discount (e.g., 10-20%) is more typical. Check the TERP to see the theoretical post-issue price.
3. Assess the Dilution
Calculate the dilution if you do not participate. For a 1-for-2 rights issue, your ownership stake would be reduced by one-third if you do not subscribe. For a 1-for-1 rights issue, dilution is 50%. The larger the ratio, the more significant the dilution.
4. Check the Company’s Financial Health
Review the company’s balance sheet and income statement to understand why it needs capital. Look at debt levels, cash flow, and profitability. Our articles on Reading a Balance Sheet, Understanding Income Statements, and Cash Flow Statements Explained can help you interpret these documents.
5. Look for Red Flags
Be cautious if the company has a history of frequent rights issues, if the subscription price is at a very deep discount (e.g., more than 50%), or if the announcement lacks clarity on the use of proceeds. Also, watch for rights issues that are underwritten by major shareholders or third parties, this can be a positive sign that the issue will be fully subscribed. For more warning signs, refer to our article on Common Red Flags in Announcements.
6. Consider the Rights Trading Price
During the rights trading period, the price of the rights will fluctuate. You can sell your rights if you prefer not to subscribe. The rights price is typically calculated as (Market price - Subscription price). For example, if the market price is S$1.00 and the subscription price is S$0.80, the rights should trade around S$0.20. If the rights trade below this theoretical value, it may be an opportunity to buy additional rights.
Tax Implications of Rights Issues in Singapore
For individual investors in Singapore, rights issues have specific tax treatment:
- Subscription of rights: The cost of the new shares (subscription price) is added to the cost base of your total holding. There is no immediate tax event.
- Sale of rights: The proceeds from selling rights are treated as capital gains if you are not a trader. In Singapore, capital gains are not taxed for individuals. However, if you are a frequent trader, the IRAS may treat the gains as income.
- Lapsed rights: If you let the rights lapse, you incur no tax, but you suffer an economic loss due to dilution.
- Dividends on new shares: Dividends received on the new shares are subject to Singapore’s one-tier corporate tax system, meaning they are tax-exempt at the shareholder level.
Always consult a tax professional for your specific situation.
Rights Issue vs. Other Capital Raising Methods
Rights issues are one of several ways a company can raise equity capital. Here is a comparison:
- Rights Issue: Shares offered to existing shareholders only. Pro-rata allocation. Discounted price. Shareholders can trade rights.
- Private Placement: Shares offered to a select group of institutional or accredited investors. No pro-rata rights for existing shareholders. Usually done at a small discount. Faster process. Example: Genting Singapore Limited in 2021 raised S$1.1 billion via a private placement.
- Public Offering: Shares offered to the general public, including new investors. Existing shareholders have no preferential treatment. Often used for IPOs or secondary listings.
- Bonus Issue: Free shares distributed to existing shareholders in proportion to their holdings. No cash outlay. Does not raise capital for the company. Example: DBS Group Holdings Ltd issued a 1-for-10 bonus issue in 2020.
- Rights Cum Warrants: A rights issue that includes detachable warrants, giving the holder the right to buy additional shares at a fixed price in the future. Example: Sembcorp Marine Ltd in 2020 issued rights cum warrants to raise about S$2.1 billion.
Each method has different implications for existing shareholders. Rights issues are generally considered the most equitable because they give all shareholders the chance to maintain their proportional ownership.
Real Examples of Rights Issues in Singapore
To illustrate, here are two notable rights issues on the SGX:
Singapore Airlines Limited (2020)
In March 2020, Singapore Airlines announced a rights issue to raise S$8.8 billion, one of the largest in Singapore’s history. The issue was on a 1-for-2 basis at a subscription price of S$3.00 per share, a discount of about 54% to the pre-announcement price of S$6.50. The proceeds were used to strengthen the airline’s balance sheet amid the COVID-19 pandemic. The issue was fully underwritten by Temasek Holdings, the majority shareholder. The rights were traded on the SGX, and the subscription period was three weeks. The issue was successful, and the new shares were listed in April 2020.
Mapletree Logistics Trust (2021)
In March 2021, Mapletree Logistics Trust announced a rights issue to raise approximately S$1.2 billion to fund acquisitions of logistics properties in Asia. The issue was on a 1-for-5 basis at a subscription price of S$1.79 per unit, a discount of about 8% to the pre-announcement price of S$1.95. The rights were not underwritten, but the manager and sponsor committed to take up their full entitlement. The rights trading period was 12 days. The issue was well-received, and the new units were listed in April 2021.
How to Participate in a Rights Issue as a Retail Investor
If you decide to subscribe, follow these steps:
- Check your CDP account: Ensure that your shares are held in your CDP account (or in a custodian account if your broker holds them).
- Receive the rights form: You will receive a subscription form (usually in the mail or via your broker) after the record date. It will include your entitlement and a unique reference number.
- Decide on your participation: You can choose to subscribe in full, subscribe partially, apply for excess rights, or sell your rights.
- Complete the form: Fill in the number of shares you wish to subscribe for, and indicate if you want excess rights. Sign the form.
- Make payment: Attach a cheque or bank draft for the subscription amount, payable to the company’s receiving bank. Alternatively, some issues allow electronic payment via ATMs or internet banking.
- Submit the form: Send the form and payment to the share registrar by the deadline. Common registrars in Singapore include Boardroom Limited and Tricor Singapore Pte Ltd.
- Monitor your account: After the allotment, the new shares will be credited to your CDP account. You can then trade them on the SGX.
If you hold shares through a custodian broker (e.g., DBS Vickers, OCBC Securities), the process may differ. Contact your broker for instructions.
Common Mistakes Retail Investors Make
- Missing the record date: If you buy shares after the ex-rights date, you do not get the rights. Always check the timetable.
- Ignoring the rights trading period: If you do not want to subscribe, sell your rights before they expire. Otherwise, you lose the value.
- Not applying for excess rights: If you believe in the company, applying for excess rights can increase your stake at a discount.
- Misunderstanding the subscription price: The subscription price is the price you pay for each new share. It is not the market price after the issue.
- Failing to read the announcement: The announcement contains critical information. Always read it thoroughly. Our guide on The Complete Guide to Investor Relations and Company Disclosure for Retail Investors in Singapore can help you navigate such documents.
Conclusion
A rights issue is a common corporate action that offers both opportunities and risks for retail investors. By understanding the process, evaluating the terms, and acting within the deadlines, you can make informed decisions that align with your investment strategy. Whether you choose to subscribe, sell your rights, or do nothing, the key is to be proactive. Always refer to the official SGX announcement and seek professional advice if needed.
For further reading, explore our related articles below.
Related Articles
- The Complete Guide to Investor Relations and Company Disclosure for Retail Investors in Singapore
- How to Read a Price-Sensitive Announcement
- Common Red Flags in Announcements
- Reading a Balance Sheet
- Understanding Income Statements
- Dividend Dates Explained