Rights issue
Existing shareholders are offered new shares at a discount, in proportion to their holding. Dilutes you if you don't subscribe. Common Nigerian banks use it to raise capital.
A rights issue is a way for companies to gather more money by offering new shares to existing shareholders. Imagine you own shares in a popular local company like MTN or Globacom. The company decides it needs more funds to grow, so it offers you the chance to buy additional shares at a reduced price. This is usually done in a way that preserves your ownership percentage, meaning if you own 10% of the company, the new shares would make you own 10% of the expanded company. It’s a bit like if you and your friends decide to pool your money to buy more snacks for your street vendor business, and you all contribute equally to make sure the business grows without changing who gets what share of the profits.
In Nigeria, banks often use rights issues to raise capital. For example, if you have shares in Access Bank or Zenith Bank, they might offer you more shares to buy when they need more funds to expand their operations or to meet regulatory requirements. This is a way for the bank to avoid taking on debt or asking for loans. It’s similar to how a small business owner might ask loyal customers to invest a bit more money to help the business grow instead of getting a loan from the bank.
Participating in a rights issue can be beneficial if you believe in the company’s future. By buying more shares at a discount, you’re effectively lowering your cost per share. However, if you don’t participate, your ownership percentage in the company will decrease, which means you have less say in the company’s decisions. It’s a bit like if you and your friends decide to buy more supplies for your business, and those who don’t contribute get a smaller piece of the pie.
Investors should also be aware of the tax implications. Dividends from your shares might be subject to a 10% withholding tax, and any capital gains from selling your shares could be taxed at 10% as well. For instance, if you own shares in a company like Julius Berger and decide to sell them for a profit, you’ll need to pay taxes on that profit. It’s important to keep this in mind when deciding whether to participate in a rights issue.
Why it matters: Understanding rights issues can help you make informed decisions about your investments. Knowing how these work can help you decide whether participating in a rights issue will benefit your investment portfolio. It also helps you understand how companies raise capital and how your ownership and voting rights might change as a result. For a Nigerian retail investor, this knowledge is crucial in navigating the local market, whether you’re investing in the NGX or keeping an eye on the CBN MPR.