Nil paid rights
Capital MarketsThe tradeable entitlement to subscribe for new shares in a rights issue, before the subscription price has been paid.
Also written: nil paid, nil-paid rights, nil paid right
In a rights issue the entitlement is itself a security. It trades separately from the shares for a defined period and is quoted nil paid, meaning the buyer pays the market price for the right and then pays the subscription price to the company to convert it into a share.
This is what makes a rights issue fair to a holder who does not want to invest more. Selling the rights converts the entitlement into cash, and in theory the proceeds offset the fall from the pre issue price to the theoretical ex rights price almost exactly.
The right is geared. If the theoretical ex rights price is €8.00 against a €4.00 subscription price, the right is worth €4.00, so a 10% move in the share price moves the right by roughly 20%. That is why nil paid trading is volatile and why holders who intend to sell rarely leave it to the last day.
Doing nothing is the outcome to avoid. UK practice softens it, because underwriters normally place unexercised rights once the offer closes and pass any excess over the subscription price back to those holders, but that protection is not uniform across Europe and the holder controls neither the timing nor the price achieved.
Worked example
Shares stand at €10.00 and a 1 for 2 rights issue is priced at €4.00, giving a theoretical ex rights price of €8.00.
A holder of 400 shares receives rights over 200 new shares. Each right is worth about €4.00, so selling them raises roughly €800.
Their 400 shares fall from €4,000 to €3,200 on the ex rights date. The €800 from the rights covers the €800 fall, which is precisely the point of making them tradeable.