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Monday, September 17, 2007

Rights Offers - How they work

Dexter , a reader, said...

Sorry CT for being a pain. One more question, there's somewhere on OCHL website which says that, the 28th of Sept. '07 at 3.00pm is the last day and time for acceptance and payment of new shares. What does this mean? Dexter - not at all. I am happy to help. Others are asking similar questions since many brokers are clueless esp regarding Rights that were purchased. #s 10 & 11 are relevant to you.

What the Rights process involves for investors

1 - Board decides/agrees the Firm wants to raise cash. They could take on debt but that might not be possible or desirable so they choose to issue Rights which allows existing shareholders to apply for additional shares at a (normally) discount to the market price. Most Rights are exercised for cash or cash equivalents.
Uchumi suppliers could apply their outstanding invoices to exercise the Rights instead of cash. This is a "cash equivalent".

2 - An announcement that the Firm plans to issue Rights is made but details are not always released. Some firms may indicate how many Rights they plan to offer at this stage.

3 - An application is made to the CMA. The application also includes a pro-forma Information Memorandum. Many firms announce the number of shares they plan to issue/offer. Some may announce/set the price at this stage as well.

4 - Firms announce the price for the Rights. This information is also submitted to the CMA. The price is often based on past trading of the shares. It may be 3-6 months' average price. The process is dynamic i.e. steps 2 & 3 may run concurrently. NIC has announced the price of 70/- but have not issued a timetable.

5- If the CMA approves the Rights Offer, a timetable is published that informs the investing public of the crtitical dates.

6 - An Information Memorandum is produced which has to be approved by the CMA. This is distributed to the shareholders who also receive their Provisional Letter of Allotment (PAL). The CMA does not "guarantee" the Rights Offer nor do they perform an in-depth due diligence.
The CMA was unfairly blamed for Uchumi being allowed to raise cash from the public but unless there was fraud - the bulk of which happened before the Rights - it is the Buyers who need to be aware of what they are/were buying.

7 - The shares officially trade Cum Rights. Buyers of these shares are entitled to the Rights issued through a PAL. DTBK & NIC are in this stage of the process.

8 - The Rights start trading on the NSE for a pre-determined period. The shares trade Ex-Rights. The OCHL Rights traded for 2 weeks from 3-14 Sep 2007.

9 - After the Rights cease trading there is a "break" to allow reconciliation of the Rights so the buyers are assigned the Rights from the sellers.

10 - The Rights need to be exercised i.e. payment for the shares needs to be made. The Rights lose all value if not exercised. OCHL's rights "expire" at 3 PM on 28 Sep 2007 .

11 - The payments are made through a broker or directly to the Receiving Bank using a Banker's cheque. The cheque should be for the exact amount (Rights' Exercise Price x Number of Rights) and the PALs usually have the amount payable filled in. Because of the time limit, do not delay & since most Offers close on Fridays, play safe and do it early.
I prefer submitting the form directly to the Registrar or Receiving Bank who will check for errors on the form. They will only accept a Banker's cheque.
An additional benefit accrues, there is no commission payable to the broker by the Firm. The Firm is YOUR Firm so any expenses paid by the Firm are paid by you, the investor.
Always insist on a receipt from the Registrar, Bank or Broker. OCHL's Registrar is CRS located in Bruce House. KCB's shares office is located in Kencom House.
If your broker does not know what they are doing, go see Faida, Standard or Tsavo who were involved in the Offer as advisers.

12 - The Rights + Payments are "converted" into shares. The shares are credited to those who exercise the Rights. An announcement is made regarding the level of subscription. If over-subscribed then the allocation methodology is announced. Unlike an IPO or OFS, buyers are guaranteed as many shares as the Rights they exercised.

13 - Refunds, if any, are dispatched. The CDS accounts are updated while others may receive certificates.

14 - There is a pre-determined date when the "new" shares can begin trading. The original shares can continue trading throughout this process.


Dexter said...

Thanks CT for being so helpful. I now understand what I'm supposed to do. Many thanks.

Ssembonge said...

They sound like restricted otions. Am I right?

G said...


no-spin said...

CT, Thanks for this post. I don't know why the brokers can't explain this in such simple terms... or perhaps, they don't clearly understand it either. Thanks again.