We all know about the ongoing Kenya Airways (KQ) rights issue. KQ intends to raise Ksh 20.6 billion by issuing 1,477,169,549 (1.47 billion) new ordinary shares, each KQ shareholders will have the right to subscribe to 16 new ordinary shares for every 5 ordinary shares currently held.
A rights issue is an issue of additional shares by a company to raise additional capital. The current shareholders (prior to the rights issue) are given a chance to buy additional shares, proportionate to their shareholding in the company prior to the rights issue. The idea is to ensure that shareholders have the opportunity to maintain their exact same position in shareholding, so that no one buys the entire company at the expense of other shareholders.
It has been noted that the KQ share has been consistently trading below the rights issue price of Ksh 14 per share. It eventually closed at the same Ksh 14 per share yesterday after trading between Ksh 12.55 and Ksh 13.95 per share over the last two weeks.
A rational investor would then wonder why they should take up their rights yet one can buy as many shares (without the 16 new for every 5 held restriction)as they’d like at the market price which is equal to or slightly lower than the rights price.
Should I take up my rights?
This depends on what kind of an investor one is.
The airline is putting into the market 1.47 billion shares as opposed to the 462 million that are already trading. This means that it is highly unlikely that an investor will be able to buy a sizable proportion of shares and therefore be able to own a large stake of the company at the cheaper market price.
This means that although the 16 new for every 5 held restriction would not apply if one buys from the market, the number of shares that one can buy will be restricted by the number of shares available for purchase in the market on any given day. For example, since the rights issue commenced on March 19th only 4 million (out of the 462 million shares available) have been traded at the NSE, this is only 0.865% of KQ shares tradable.
Consequently, an investor may lose his position of shareholding or proportion of ownership in the company if he buys from the market rather than taking up his rights. An investor looking to maintain their stake in the airline would rather take up their rights while an investor looking to just acquire a small stake in the airline or just increase their shareholding by a small margin without much concern for their shareholding position should consider purchasing the extra shares from the market.