Rights issues: map entitlements, dilution and subscription cash
A rights issue creates an entitlement with a ratio, subscription price and deadline. Map the shares or units you may subscribe for, the required cash and the ownership outcome under different participation choices. An entitlement is not automatically a new paid-up security, and a discounted subscription price is not automatically a free economic gain.
Read the transaction’s actual terms
Identify the issuer, security class, record date, entitlement ratio, subscription price, dealing period for rights if applicable, acceptance deadline and expected allotment. Eligibility and operational choices can differ by holder and jurisdiction. The timetable in an announcement also needs to be reconciled with a broker’s earlier processing cutoff.
Link REIT’s historical rights issue guide illustrates transaction-specific entitlements and holder options. It is an issuer’s guide for that transaction, not a rulebook for every rights issue. The following numbers are invented and should not be confused with that historical offer.
A hypothetical one-for-four issue
Assume an issuer has 10 million shares and offers one new share for every four held, at a subscription price of 6. You own 400 shares out of the existing total. Full subscription gives you an entitlement to 100 new shares and requires 600 of subscription cash. If the issue is fully subscribed, total shares become 12.5 million.
| Choice in the simplified example | Shares after issue | Subscription cash | Ownership |
|---|---|---|---|
| Subscribe fully | 500 | 600 paid | 0.004% |
| Do not subscribe | 400 | None paid | 0.0032% |
| Sell tradable rights | 400 | Depends on sale proceeds and fees | 0.0032% |
Selling rights, if permitted and successfully executed, may recover some entitlement value but does not preserve your percentage ownership. Doing nothing can allow rights to lapse, depending on the actual terms. These outcomes require separate share and cash records rather than one ambiguous corporate-action entry.
Distinguish arithmetic from market value
If the pre-rights share price were 10, a simplified theoretical ex-rights price would be (4 × 10 + 6) / 5 = 9.2. This assumes no other value change, costs or market reaction. It is an arithmetic reference, not a forecast, guaranteed trading price or proof that subscribing produces a profit.
Real prices reflect business information, funding needs, dilution expectations, market conditions and execution constraints. The theoretical formula also does not tell you whether the company will earn an adequate return on the capital raised. Evaluate the use of proceeds and financing alternatives separately from the entitlement calculation.
Reconcile the operational record
Keep existing holdings, rights credited, rights sold or acquired, subscriptions submitted, subscriptions accepted and new securities allotted as separate states. Extra applications may not be accepted in full. Fractional entitlements and nominee arrangements can change the account-level quantity, so use the official terms and the broker’s confirmation rather than rounding silently.
Record cash reserved, cash paid, fees and refunds separately. An application submitted before the deadline does not prove allotment or settlement. If the security is temporarily represented by a rights instrument, preserve its identifier and do not merge it with the ordinary share before the conversion or allotment event.
Make the investment question explicit
The participation decision depends on valuation, financing capacity, eligibility and the business case for new capital. This worksheet checks quantities and evidence; it does not recommend a particular action. A rigorous memo can explain the dilution under nonparticipation while remaining uncertain about the attractiveness of subscribing.
FAQ
Does subscribing create a gain equal to the discount?
No. The share price and ownership denominator adjust, and market value can move for other reasons. A discount alone does not establish profit.
Does selling rights keep my ownership percentage unchanged?
No. In the simplified fully subscribed example, you still hold 400 shares out of a larger total. The rights sale is a separate cash outcome.