RELIANCE RIGHT ISSUE

The basic buzz in the stock market these days, is the Reliance rights issue.

The date of announcement 3rd of may 2020. The last traded price rupees 1466.

So the right shares were offered at a price of Rupees 1257 at a face value rupees 10 which claims to be 14% profit. Is it so ? let's find out !

Ratio for right shares is 1:15 that means for every 15 shares held by you makes you entitled for that 1 rights share.

So that means if you hold,

15 shares -1 right share

30 shares -2 right shares

And so on therefore right shares are available in multiples of 15.

The record date is 20/05/2020 so if on 20th may you hold 15 shares of reliance industries you are entitled to that 1 right share.

So the term of payment for the right share is 25% on application and remaining as the company decide therefore 25% is ₹314.25.

Total amount of capital to be raised by right shares is 53,125 crores.

So, Now the point arise whether can we avail the benefits of right share (14%) here's an example,

So as per example let's assume that there are 3 category

1. New Investors

2. Existing Investors after the Facebook deal

3. Existing Investors before the Facebook deal

So as seen the new investor to get the benefits of right share has to buy those 15 shares to full fill the criteria therefore those 15 shares shall be bought at last trade price (LTP) .

That would give us a total of ₹21891 now after this, will have to buy the right share of ₹1257 so now, the total cost turns out to be ₹23148.

Therefore the cost per share after the right share is ₹23148/16 shares.

That turns out to be ₹1446.75 per share

So the percentage potential profit turns out to 0.86% .

Now for existing investors after the Facebook deal 

Lets assume they held 10 shares already at ₹1363 (price when the Facebook deal was made) so they will have to buy 5 extra share at the LTP ₹1459.40 so there total turnout to be ₹20927 i.e(13630+7297)

Plus cost of right shares ₹1257 now the total cost turns out to be ₹22184

Therefore cost of each share is ₹22184/16 shares = ₹1386.5 per share now the potential profit is 1.72% which is now where near 14% as claimed .

Now existing investors before the Facebook deal

Lets assume they to had 10 shares bought at a price ₹1237 so 5 extra shares at ₹1459.40 total cost turns to be ₹19667 plus cost of right share ₹1257 new total cost is ₹20924.

Now cost per share come to₹1307.75 i.e( ₹20924/16 shares)

So the percentage potential profit comes to 5.71% now for them its the real deal to avail the benefits of right share 

See existing investors before the Facebook deal are actually going to get benefited with the issue of right shares and if they subscribe right shares. 

Not everyone will be benefited like in case of new investor who were having 0 shares and had to buy those 15 shares to avail the benefits.

Whereas as we do know mostly after the right shares are issued and subscribed the share price falls down since earnings of the company shall now be divided by more number of share capital.

Eg:- net assets/no.of shareholders

So since the no. Of share holder increases earnings per shareholder decreases.

I hope you liked the Content do drop down your thoughts regarding whether the analysis was helpful or not this content is purely for educational purposes only