Recently, the management of Sovereign Trust Insurance Plc notified The Nigeria Stock Exchange and the investing public that its “Rights Issue of Four Billion, One Hundred and Seventy Million, Four Hundred and Eleven Thousand, Six Hundred and Forty Eight (4,170,411,648) ordinary shares of N0.50 each at N0.50 per share on the basis of one (1) new ordinary share for every two (2) ordinary shares held as at 15 January 2019, has opened for subscription”. It has an acceptance listing opening date of June 24th, 2019 and closing date of July 31st, 2019.
The Preemptive Rights of Shareholders
By virtue of corporate law and regulations, existing shareholders have a preemptive right over any new issues of additional shares by the company. That preemptive right entails that existing shareholders should be given the right to subscribe to new shares, of course with the right of first refusal, before such is offered to non-existing shareholders. It is in pursuant to such right of first refusal that existing shareholders are entitled to the option to subscribe to right issues.
The Allure of Right Issues
One allure of right issues is that they are usually issued at a discount to existing shareholders, not only in compensation for being with the company but as an enticement to get them to subscribe to such shares. A right is issued at a discount if the offer price is less than the market price. It is at a premium if the rights offer price is higher than the market price.
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In almost all cases, rights have been issued at a discount, the world over. However, there are a few instances where rights were issued at a premium. A comparison of the current market price of Sovereign Trust Insurance Plc (which stood at N0.23 on June 28th, 2019), and the offer price of N0.50 for the rights, shows that the rights are being issued at a premium. What happened to the expected enticement of shareholders with a discount?
No Economic Benefit
A look at the 2018 financial statement of Sovereign Trust Insurance Plc shows that the company increased its profit by about 569% which got carried over to the earnings per share numbers. The earnings per share (EPS), a very important market multiple, increased by 569% from 0.3k in 2017 to 1.89k in 2017. That increase is nothing, though, when compared with the earnings per share of 5.82K recorded in 2015.
That increase should and must have been factored into the current market value of N0.23. Therefore, there is no likely economic justification to price the rights at more than twice the current market value.
The question that readily comes to mind is, why would a rational and prudent investor, who could buy a share of Sovereign Trust Insurance plc on the floors of The Exchange for N0.23, subscribe to an option that gives him or her the right to buy the same one share of Sovereign Trust Insurance plc at N0.5? Would that not amount to knowingly and willingly throwing away N0.27 of your hard-earned money?
Maintain Your Proportionate Ownership
The sad news about the right issues is that if a shareholder forgoes exercising the right, he stands to suffer the dilutive impact of the new shares resulting from the rights. Therefore, to maintain their proportionate shareholding post rights, shareholders who think and agree that this rights transaction lacks any economic benefit should buy additional shares from the market, as much as is required to maintain the proportionate ownership.
For example, as of December 2017, the total number of shares issued by the company was 8,340,823,296. If the rights issue is fully subscribed, additional 4,170,411,648 shares would be issued, representing in total post rights shares of 12,511,234,944.
To maintain your proportionate ownership, you should buy an additional 50% of your current holding, otherwise, your ownership percentage will be diluted. So, if you hold, 100,000 shares now, you need to buy additional 50,000 shares at N0.23, for N11,500. By so doing, you have maintained your proportionate ownership of the company without subscribing to the rights and you have, therefore, saved N13,500 because if you had subscribed to the rights at N0.5, you would have paid N25,000 for additional 50,000 shares which you got from the market at N11,500.
Nigerian shareholders deserve some respect and should be given what they deserve. It does appear that Nigerian companies are in the habit of issuing rights at premium. Shareholders deserve better.