Special Situations: Tale of Two Rights Issues

Disclosure: I have made an almost no profit-no loss in the two rights issue transactions (on a net-net basis) over the past one month. This blogpost is just to document my experience and learnings rather than any profit making opportunity. I spelt out the disclosure upfront so that there are no expectations on any profit-generating opportunity blogpost.

There were two interesting Rights Issues over the past one month. The record dates of these two rights issues were in fact only differed by a day. At the end of it, I gained valuable experience in how to invest (or not invest) in these issues and eked out a small profit.

The first Rights Issue was that of Arihant Superstructures.

Arihant Superstructures (ASL) offered rights to buy one share of ASL at Rs. 12/- for every two shares of ASL held as on record date (which was 02-May-2012). The price of ASL before the record date was announced was around Rs. 65/- and by the time I saw the announcement and bought 100 shares on 27-Apr-12, the price quote was around Rs. 79/-. It went on to hit Rs. 85/- subsequently before it hit Rs. 52/- on the record date (and I was able to sell my 100 shares at around Rs. 50/-). I applied for 1000 shares (although I was eligible only for 50 shares – that’s one of the main advantages of a rights issue).

Then struggle started. I did not get the Rights Offer letter till 21-May-12 and the closing date was 25-May-12. I was more than a little worried and after a few twitter interactions with good samaritans Prashanth and Viral, I contacted my broker (Sharekhan) who very obligingly (20 min call) told me that they can apply on my behalf.

Last week, I came to know that I was allocated 66 shares, a 30% allocation over and above my limit, but far below my greed level of 1000 shares.

So my profit/loss amounted to –

Lessons Learnt:

a) May 01st is a public holiday and the markets don’t work on that day. I had to realise that if the record date was 02-May, the ex-rights date should have been 30-Apr. Next time, look out for public holidays, Saturdays and Sundays for calculating the ex-rights date.

b) My share buying date was 27-Apr-12. Due to T+2 settlement date, or for some strange reason, the registrar didn’t have my name on the ‘Eligible for Rights Offer’ record. This resulted in me scrambling around, asking for help and being in a very long conversation with my broker. Next time, try to buy the rights issue atleast a week before the record date so that no such hullabaloo happens.

c) Rights issue, in the current scenario may not be as profitable as it was 5 years back. There are just too many investors (and investment funds) waiting for such an opportunity. Maybe 1 out of 5 rights issue may give you a great return. Expecting every rights issue to give a great return is foolishness and will lead to disappointment.

The second Rights Issue was that of EPC Industries (EPC Irrigation).

EPC Industries offered rights to buy three shares of EPC at Rs. 40/- for every five shares of ASL held as on record date (which was 03-May-2012). The price of EPC before the record date was announced was around Rs. 150/- and by the time I saw the announcement and bought 50 shares on 27-Apr-12, the price quote was around Rs. 159/-. It went on to hit Rs. 165/- subsequently before it hit Rs. 110/- on the record date (and I didn’t sell my 50 shares in this case). I applied for 1000 shares (although I was eligible only for 30 shares).

This time I did receive the Rights Offer letter and there was no running around. The offer ended 31-May-2012, but they extended to 01-Jun-2012 due to nationwide bandh. I went to ICICI Bank (which was the Banker for this issue) on 28-May itself (thanks to Neeraj for urging me on) and submitted a cheque along with the letter of offer and that was that.

Today, I called up the Registrar of the Issue and the Registrar did inform me that I was allocated 65 shares, a full 100% over and above my eligible allotment but yet again below my greed of 1000 shares.

Let’s look at the profit/loss in this case (CMP: Rs. 103/-)

Lessons Learnt:

1) I have a Citibank account (and no other bank account). However, if I need to enable ASBA during this rights issue (and thereby not lose interest component for these 15-20 days), I needed to have 1 of the 7 banks that are approved by SEBI (also called Self Certified Syndicate Banks) (list here) and the list doesn’t include Citibank (which I found out a day before I applied for the offer). Therefore, I had to give a cheque and thereby lose the interest component for 15-20 days. I am in the process of opening another Bank account just for this purpose so that next time I won’t repeat this mistake.

2) Keep a lookout for external events like Bandhs/Bank holidays and ensure you submit the completed rights offer letter much before the end date. I didn’t commit this mistake now, but I had to jot it down not to miss this risk the next time.

3) Yet again, don’t dream that every rights offer will get you awesome returns. In fact, for this rights issue, I had calculated that I would buy a smartphone from the profit proceeds 🙂 Didn’t happen (darn!) 🙂

As I stated earlier, net-net, I hardly made a profit or a loss. However, since these two applications were my first foray into rights issues, I am totally ok with the result but a ton of learning. (I was in one country or the other traveling on work whenever any rights issue happened since I came to know about this special situation about 1.5 years ago).

Let me know if you have any questions/queries/inputs. The only question I have is – Is there any way in which you can know if you can get more than a 100% allocation to your eligible allotment or not? If there is, do let me know.