The term “rights issue” has become synonymous with activity at the Nairobi Securities Exchange in recent months owing to the rights issue by Kenya Airways in April which netted the airline 14.487 billion shillings from a target of 20.68 billion shillings.
A rights issue is when a company offers more of its shares for sale on the stock market giving existing shareholders the rights to buy a specific number of the new shares at a specific price that is often at a discount (Investopedia). For example, a company might offer existing shareholders the rights to buy 1 new discount share for every 5 that they already own. Shareholders who do not wish to take up their rights can sell the newly offered shares to other company shareholders or to new shareholders on the stock market. A company will raise money when the new shares are bought on the market.
Typically, rights issues are undertaken to raise money for strategic expansions, to acquire new assets, pay debts owed or conduct takeovers (SharesInvestment). For example, Kenya Airways conducted its highly publicized rights issue to raise funds to acquire a fleet of Boeing 787-800 aircraft. Diamond Trust Bank, another local company that is in the process of carrying out a rights issue, will use the funds raised to facilitate a strategic expansion while Standard Chartered bank shareholders have approved a rights issue targeted to raise 3.2 billion shillings.
Other past rights issues in Kenya have been by Housing Finance Company in 2008 which raised 2.369 billion shillings and Kenya Power & Lighting Company which raised a total of Ksh 9.830 billion shillings. Both of these rights issues were oversubscribed by 103 percent pointing to the appetite for new shares at the Nairobi Securities Exchange.