What is Nil-paid Rights

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  • 05 Dec 2023
What is Nil-paid Rights

Key Highlights

  • A nil-paid share means the company hasn't received any payment for the nominal value or any premium during issuance. So, it is a security for which the owner paid no money.
  • In order to attract new shareholders, the rights are typically sold at a discount to what they would cost on the market.
  • After the rights issues are resolved, the shareholders have the option to exercise their rights and purchase them at the offered price. In this case, the rights are known as fully-paid rights.
  • Shareholders may choose to swap their shares on the market or let them expire if they choose not to purchase the shares.

The term "nil-paid" suggests that investors didn’t pay for the shares. This typically happens when the firm issues shares as a rights issue. This gives shareholders an option to purchase additional shares at a lower price. The shareholder will still be responsible for any future dividends payable on the shares.

Renounceable cum rights, issued to original owners at no cost, are a typical example. However, shareholders may sell the rights after separating it from the stock. Therefore, even if a nil-paid has value, it didn't cost the original owner. It, therefore, yields 100% profit when sold.

To accept the offer, a holder of nil-paid rights must pay for the extra shares as per the conditions of the rights issue. The rights are called fully paid shares till these shears are allotted as “fully-paid”. A holder of nil-paid rights has two options if they choose not to subscribe for the shares. In this case, an investor is referred to as a lazy shareholder. or else they can sell the nil-paid rights.

Now that you know what nil-paid rights are, let’s explore how they work. The term "nil-paid" may imply that nil-paid rights grant investors the ability to get new shares at no expense. However, this is not entirely true. They are just the right to purchase additional shares at the present price or a discount. The company that grants its shareholders ownership does not get any funds for these shares. However, if shareholders use the rights, they will have to pay for the securities.

Rights are mostly tradable. They are known as "renounceable rights." On the other hand, non-renounceable rights are different. Non-renounceable refers to the inability of shareholders to transfer their rights to another party. They invite existing shareholders to buy more shares of the firm at a predetermined price. The price range is typically less than the current market price. Businesses usually use non-renounceable rights to raise money quickly without diluting the holdings of their existing shareholders.

Firms generally issue nil-paid rights offering to raise more funds to fulfil their existing financial requirements. Businesses going through financial difficulties need to obtain funds. However, they may not get new loans quickly. So, they issue nil-paid rights.

However, financially sound companies may also issue nil-paid rights. Trusted businesses may use the additional funds for company growth. It may include establishing more factories, opening retail outlets, or making acquisitions. Here, the purpose of the nil-paid rights sale is expansion rather than debt repayment. So, the potential profits in the future might outweigh the existing risk from the dilution of outstanding shares.

You must estimate the value of the non-paid rights in advance to calculate the profit from selling the rights to shares held in a position. Yet, it is difficult to find an exact figure. However, you may get an approximate value by subtracting the rights issue price from the ex-rights price.

For instance, for every five existing shares, a company may offer one new share at Rs.10. This is referred to as a "one for five" issue. Assume that the share price is Rs.25 at this time. Therefore, you would anticipate that the firm's shares will trade for about Rs.22 once the new share has been issued. So, 5 x Rs.22 = Rs.110. Further, Rs. (110 + Rs.10)/6 = Rs. 20. This is the ex-rights price.

In case a shareholder decides not to exercise his rights, he can transfer it. The difference between the issue price and the anticipated ex-rights price is known as the "nil-paid" price. In this case, Rs. 20 - Rs. 10= Rs. 10. An investor who was not invited to participate in the first rights sale might be willing to purchase nil-paid rights in its place.

Conclusion

The term "nil-paid" indicates that the amount for purchasing new shares is unpaid. This strategy allows companies to raise capital for debt repayment and business expansion. The rights issue would probably fail if the open market share price drops below the offer price. At that point, the nil-paid rights would lose all of their value. Moreover, they can be traded in the market. So, nil-paid rights can be quite helpful for investors in the world of the stock market.

FAQs on Nil-paid Rights

The nil-paid rights calculation is the difference between the investor's subscription fee and the theoretical ex-rights price.

Completely paid rights are defined as nil-paid rights when the shareholders decide to exercise the rights and purchase them at the requested price.

Yes, unpaid shares are refundable. You may cancel shares you hold but haven't paid for. It's referred to as "rescission."

Nil-paid shares are liquid because investors can trade them in the open market. However, they are not as liquid as fully paid shares.

Yes, nil-paid shares are recorded in the financial statements of a company. The companies have to mention the number of shares issued but not yet fully paid for.

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