Nepse to let rights renunciation

KATHMANDU:

Shareholders may soon be able to transfer their entitlement on rights shares to other interested parties.

Nepal Stock Exchange (Nepse) is planning to allow the shareholders facility to renounce their rights shares in favour of another person at certain price. At present, the shareholders can either subscribe for the entitled units of shares or simply refuse to subscribe for any unit of shares.

“Nepse is preparing a bylaw that will allow shareholders to renounce the rights shares to an interested party if the shareholders are not interested to subscribe,” informed general manager and CEO of Nepse Sitaram Thapaliya.

Rights shares are issued by a company to its existing shareholders, mostly at face value. The shareholders are entitled to get certain number of securities they are presently holding. For example, in the recent rights shares issue of Kabeli Bikas Bank, the development bank is offering four units of extra shares at the face value of Rs 100 for every 11 units of ordinary shares in the possession of a shareholder. The existing shareholders can get the shares— that are being traded at Rs 140 in the secondary market at present — at Rs 100.

However, not all shareholders are interested to subscribe for the rights issue and might just let the entitlement lapse. On the other hand, there are scores of investors interested to buy the shares at the price higher than face value but less than the trading price at stock exchange.

If any rights issue is under subscribed, the issuing company then auctions off the remaining shares at higher price.

“Once the bylaws are approved by the regulator, the interested parties can transfer their entitlement to rights issue,” pointed out Thapaliya.

Back in 2008 also, Nepse had submitted a Rights Shares Renounce Bylaws-2065 to Securities Board of Nepal (Sebon) for approval. However, the process did not take off. Thapaliya has re-started the process to bring rights renounce into legal ambit after he took office back in June 2013.

Moreover, the gray market for such rights renunciation exists even though it is legally forbidden.

“There are investors who are selling their rights shares at price higher than face value to the buyers, so if we allow it to take place through proper channel, along with investors getting the best price, the government will also earn revenue,” informed Nepse’s CEO.

In addition, the market for the rights renounce will become first of its kind derivative market in Nepal, since the price of rights renounce will be derived from the underlying value of company’s shares.

According to the proposed bylaw, company issuing rights shares can issue rights shares’ slip, which can be sold other parties, after three days of declaration. The slip can be bought and sold through brokers like ordinary shares. However, the buyer who buys the slip cannot sell it to others.

Once the rights renounce is made formal, it will also help prevent unsustainable inflating of stock price at the market in the hopes of rights shares entitlement as it happens at present.

Source: THT