This is part of a series of articles sponsored by NIC Bank. NIC is currently having a rights issue that will close on September 14^th.

NIC Bank is currently having a Rights Issue seeking to raise 2.07 billion shillings by issuing 98.7 million new shares.

How will issuing the new shares raise the targeted amount of money?

Companies (including banks) periodically need to raise money - known as capital - to expand their business. For instance, NIC needs the 2.07 billion to expand its East African operations further. There are two main options of raising capital.  One is to borrow the money from banks, individuals or other institutions by taking a loan or issuing a bond. Capital raised in this way is known as debt capital.

The other is to raise equity capital by offering company shares for sale. Read more on why a company would issue shares here. In return for providing capital for the business, buyers of company shares get part ownership and value through dividends, capital gains and other ways. Read here on the reasons you would buy company shares.

A Rights Issue is one form of raising equity capital where capital is raised from company shareholders in return for more shares in the company.

NIC Bank like many other companies has a maximum amount of equity capital that it can issue known as authorized share capital. Prior to the ongoing rights issue and following another in 2007 that raised 1.15 billion shillings, NIC had a fully paid equity capital of 1.97 billion shillings out of an allowed 4 billion shillings.

This left approximately 2 billion shillings more equity capital that NIC could raise and thus the reason the current rights issue is seeking to raise just this amount. By issuing the 98,724,391 new shares at a price of 21 shillings per share, NIC will raise the 2.07 billion shilling remainder of its authorized equity capital. (21 shillings/share * 98,724,391 new shares = 2,073,212,211 shillings).

But can’t one wealthy NIC shareholder just buy all the new shares and end up with larger ownership of NIC Bank?

To prevent against this, rights issues offer company shareholders an equal proportion of the new shares based on a ratio of the shares they already own in the company. In the case of NIC, each shareholder has the option or right to buy 1 of the 98.7 million new shares for every 4 already owned. This ensures that all NIC shareholders have an equal opportunity to buy the new shares and maintain their portion of the company as is. Below is an example using the 300 NIC Bank shares we own in through the PesaPortfolio:

We have chosen to take up our rights to buy 1 new NIC Bank share for every 4 we already own.

Here is the number new NIC shares we will receive:

300 ÷ 4 = 75 new shares

Shareholders in a company do not have to buy the new shares they are offered, and can instead choose to sell their opportunity (rights) to the buy the new shares to other interested investors on a stock market.

The rationale here is that even though their portion of ownership in the company will likely reduce, shareholders who choose to sell their rights could save money or even make more through the sale of the rights than they would in the long run from the new shares. They may also lack the money to buy the new shares offered to them.

Rights surrendered are made available to trade in a stock market at a market determined price - meaning what interested investors are willing to pay for them. NIC Bank Rights are currently trading at 11.15 shillings per right at the Kenyan stock market.

Each right represents the opportunity to buy one of the 98.7 million new NIC Bank shares at their discount price of 21 shillings per share compared to the 33.50 shilling current market price for NIC Bank shares.

The NIC rights will only trade until Friday September 7^th after which holders of NIC Rights will have to take them up by buying the new shares based on how many rights they hold. Going back to our example with the PesaPortfolio, here is how a typical transaction for taking up our new NIC shares will look:

Purchase transaction for our 75 new NIC shares:

75*21 shillings/share = 1,575 shillings

Adding the standard 2 percent stockbroker transaction costs will result in a total of 1,606.50 shillings we will pay for taking up our rights to the new NIC Bank shares.