On the morning of July 30, 2013, Barclays saw its share price come down by 5%. The reason was a declaration by the bank that they will raise GBP 5.8bn via a rights offering. The move was mainly driven by the banking regulator’s new rule requiring banks to have more capital. Shareholders clearly did not like it.
In a similar fashion, National Grid, which is a power utility company in the UK and US, saw its share price come down by 7% on May 20, 2010 following an announcement to gather around GBP 3.2bn through a rights offer.
A rights offering is basically a form of raising capital. Companies in need of capital for various purposes can ask its existing shareholders to provide additional funds in exchange for newly issued shares. Stocks in developed markets typically can go either way when a rights offering is announced. For example in our Barclay’s example, the stock price came down on the announcement.
In Bangladesh, the direction mostly goes one way, which would be upwards. This phenomenon explains the title of this article.
For the typical retail (and even institutional investor) in Bangladesh “rights share” is a magical word full of promises, and the smell of it can cause stock prices of companies to skyrocket. Back in the golden era (pun intended) of 2009-2010, stock prices would easily double due to such rumours. This is clearly inefficient, because the price of the company’s shares, following an announcement for rights, should actually depend on what the company plans to do with it.
In layman terms, if the company can invest these newly-injected funds for highly profitable businesses with high Return on Investment (ROI), stock price should go up. If the historical ROI is low, then there is a very high chance that this marginal capital will also lead to suboptimal returns.There is absolutely no reason on earth for stock prices to jump upwards.
Even companies with high ROI have seen stock prices slump as they planned to do costly acquisitions with the money raised by the rights.
Just like any other investment, for rights shares also “the devil lies in the details.” Stock market is not a place for speculation; and unless careful analysis is done before making investment decisions, it is very easy to get burned.
Note: This writeup is also available at Dhaka Tribune.