Right shares play a significant role in Nepal’s capital market; in this post, we will explore the world of right shares, explaining what they are, why they are popular in Nepal, and how the issuance process works. We will also address potential challenges associated with the right shares and propose solutions.
Whether you’re a novice investor or seeking to expand your knowledge of the Nepalese capital market, this blog post will provide valuable insights into the world of right shares.
Table of Contents
What are the Right Shares?
Right shares, also known as right issues, grant existing shareholders the right to subscribe to a new issue of shares at a discounted price compared to the current market value. Companies can use these additional shares to raise funds for capital-intensive projects or meet regulatory capital requirements. It is important to note that while shareholders have the right to participate in the right share offerings, it is optional for them to do so.
Why are Right Shares Popular in Nepal?
Right shares are legally required to be issued at a par value of NPR 100 in Nepal’s capital market. When the market price of these shares exceeds their par value, the rights themselves hold value has led to the popularity of right shares in Nepal, where rumours of upcoming right issues are frequently circulated in the market, making it crucial for investors to understand the right share issuance process.
The Right Share Issuance Process in Nepal
A company must first obtain approval from its industry regulators to issue the right shares. This regulatory approval ensures that the rights offerings are conducted responsibly. Once approved, the company engages a capital merchant banker to assist with the rights issue process. The company then applies to the Securities Exchange Board of Nepal (SEBON), which reviews the application for compliance with regulations. Information about ongoing rights issues can be accessed on SEBON’s website or this page on our website.
After obtaining approval from SEBON, the company publishes a prospectus in leading newspapers, announcing the details of the right share issuance, such as the issue size, right share percentage, opening and closing dates, and book-close dates.
Shareholders holding the company’s shares on the book close date become eligible for the right shares. Eligible shareholders can apply for the right shares within the specified period, and any unclaimed right shares are auctioned off. The right shares are eventually listed on the Nepal Stock Exchange (NEPSE) at the adjusted price.
Calculating Adjusted Price After Right Share
Calculating the adjusted price after a right share issuance is a straightforward process. The adjusted price is determined using the following formula:
Adjusted Price = (Market Price + (Subscription Price per Unit x Right %)) / (1 + Right %)
For example, if ABC Agro is preparing to issue a 40% right issue, and its current market price at the book close is NPR350, the adjusted price after the right share will be NPR 278.57.
How to Apply for Right Shares
To apply for the right share, investors can utilize their Meroshare accounts. Eligibility to apply for the right shares is determined based on the percentage of the right issue and the number of shares the investor holds. The Centralized Application Supported by Blocked Amount (CASBA) system facilitates the application process, and eligible shareholders can view and apply for the right shares through their Meroshare account.
Challenges Associated with Right Shares
Despite the benefits, there are some challenges associated with the right shares.
Diversion of funds, where money that should have gone to the corporate coffers, is directed towards shareholders’ pockets, limiting the company’s ability to utilize those funds for operations or investments.
Dilution of ownership, as the issuance of more shares, spreads the company’s net profit over a larger number of shares, reducing existing shareholders’ proportionate claim on the company’s earnings.
Solutions to Address Right Share Challenges
Several solutions can be implemented to address the challenges related to the right shares.
Companies should focus on improved capital management by exploring alternative funding sources, such as retained earnings, debt, or bank loans, before resorting to rights issues to help avoid diverting funds.
Companies should strike a balance in discount pricing, ensuring that incentives are provided to shareholders without significantly benefiting them at the company’s expense.
Stringent regulations can be introduced to ensure responsible usage of rights offerings, and enhanced investor education can raise awareness about the implications of participating in rights offerings.
Right shares offer existing shareholders in Nepal the opportunity to purchase additional shares at a discounted price. By understanding the process and benefits of right shares, investors can make informed decisions and capitalize on potential investment opportunities. While challenges exist, solutions such as improved capital management, balanced discount pricing, stringent regulations, and enhanced investor education can contribute to responsible and beneficial right share offerings. By embracing these measures, companies can better manage their capital structure, protect shareholders’ interests, and ensure the transparent and efficient functioning of the Nepalese capital market.