Rudra Shares and Stock Brokers
Reliance Industries has come out with a rights issue in the ratio of 1:15 i.e equity shareholders holding 15 shares would be allotted one equity share of Rs 1,257 each. To subscribe to the issue, an upfront payment of 25 percent could be done and for the remaining amount payment to be done in tranches of 25 percent in May 2021 and balance 50 percent to be paid in November 2021.
Taking example of 1 share held, the shareholder needs to pay:
1) 25 percent upfront which is Rs 314.25
2) 25 percent in May 2021 - Rs 314.25
3) 50 percent in November 2021 - Rs 628.50
The entitlement is being credited to the demat account of the shareholder. Rights holders will be able to trade their entitlement on a separate window which is RIL-RE on exchanges till May 29 2020 where shareholders can sell and renounce their entitlement.
As only 25 percent of the payment being made upfront, buyer can be saved and avail the benefit of leverage by paying the installments after one year.
For instance, if an investor thinks that Reliance will appreciate by 20 percent in next 1 year then the difference of leverage is given below:-
Reliance Industries current market price is Rs 1,440
A) If one investor bought 1 share from stock exchange at Rs 1,440 and suppose it is appreciated by Rs 288 (20 percent) in next one year then the return on investment (RoI) will be 20 percent.
B) Another investor bought Reliance entitlement at Rs 232 and paid upfront payment of 25 percent which is Rs 314.25. On total, he paid Rs 546.25 whereas he is also getting the whole benefit of appreciation which is around Rs 288 (as stated above). In such case, his RoI is boosted to 52.72 percent which is almost thrice in comparison to the first case (A).
Trading of these Rights Entitlement (RE) will be allowed only till May 29, which is being monitored by SEBI.
Discovery of RE price
If we calculate the fair value of RE, which should be paid by the buyer to seller is around Rs 175.
For applying to the rights issue, investor should get the benefit of Rs 183 (difference between closing price of RIL as on May 21st & Rights issue price). At the time of the discovery price first we will take 25 percent of the difference which is around Rs 46 (because buyer has to pay 25 percent as upfront payment). But it is not true because seller will lose the remaining Rs 137 which he could gain by next year. Hence, we will value this Rs 137 by time value factor of 1 year, discounted at 6 percent (risk-free return).
The present value comes at around Rs 129 and the fair value of RE turns into Rs 175 (129+46).
Thus, the main reason of RE trading in premium from their discovery price is to get the leverage benefit by the investors.
What should you do?
In case you want to invest in RIL, so instead of investing in Reliance Industries share, one should go for RIL-RE as the immediate benefit of leverage can be availed and Reliance has so much of hidden value which could be seen in their share price in coming years.
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