All about REIT - Rights Issue Part 2: What happens during a Rights Issue

Previously I have covered some important terms and definition with regards to Rights Issue in All about REIT - Rights Issue Part 1: Terms and Definition. In this article I shall touch on things that happen during a rights issue. The information here is primarily based on the rights issues that took place for the REITs in 2009.

Entitlement to the Rights
Following the announcement of rights issue of a REIT there will be a period of time in which the REIT units will be trading CR (Cum Rights). Unit holders who hold on to the units till the last day of CR will be entitled to the rights. The units will enter the XR (Ex Rights) period after the last day of CR. You are still entitled to the rights if you sell your units from the first day of XR.

Issue of Rights
If you are entitled to the rights, the rights will be credited to your CDP account, usually a few days after the end of CR. The number of rights issued will be based on the ratio of rights issued per unit. A 1 for 1 rights issue means you will get one right per share, and a 1 for 2 rights issue means you will get 1 right for every 2 shares you have. The best way to check whether your entitled rights have been credited into your CDP account will be through the online CDP access. The name of the rights will normally be the name of the parent unit followed by a "R".
Example:
Starhill Global R for rights of Starhill Global Reit.

Rights Issue Circular and Application Form
Now even if you do not actively follow the SGX announcements, you should still get to know that you are entitled to the rights for the units you owned when CDP send you the Circular about the Rights Issue and Application Form to subscribe to the new units. In the application form, the number of rights you have been issued will be stated. You should take note of the important dates mentioned in the circular, especially the dead line to subscribe to the new units, and trading period for the rights.

Decide what to do with the rights
You should make careful decision on what to do with the rights. If you want to subscribe to the new units, you should take note of the deadline for you to do so and try not to miss it. If you want to sell the rights you should take note of the trading period for the rights. Of course you can also sell some of the rights and subscribe to the new units using the remaining rights. Now it will be unwise to totally do nothing about the rights. You will lose out in having your existing units diluted in terms of yield and other per unit financial figures such as NAV per unit.

Trading of Rights
As mentioned above, you should take note of the trading period of the rights if you intend to sell the rights fully or partially. During the trading period, a temporary counter will be created in SGX, and the rights can be sold or bought just like normal shares through your brokerage trading account.The counter name should be the same as the name of the rights in your CDP account.

Sometimes there may be additional counters for trading of odd lots of the rights, which is possible based on certain combination of rights to units ratio. Example, for a 1 for 2 rights issue, every board lot of 1000 units will be issued with 500 rights. So there will normally be an additional counter for trading of rights in board lot of 500 rights. The counter name will usually be the name of the parent unit followed by a "R", and the number of rights per board lot.
Example:
Starhill Global R500 for rights of Starhill Global Reit in board lot of 500 rights.

Subscribing to the New Units
There are 2 possible ways to subscribe to the new units, by application form or by ATM.

As mentioned above, the application form is mailed to the rights owner along with the rights issue circular. To subscribe via the application form, you need to indicate in the form how many new units you wish to subscribe to based on the number of rights you have. If you wish to subscribe to additional new units based on the excess rights, you should also indicate this in the form. For payment you need to use a Cashier's Order or Bank Draft, the amount of which should be the total cost of the new units you are subscribing to, inclusive of the cost of additional units based on excess rights. Note that payment by cheque is not allowed.

Personally I find that subscribing using the application form is highly inconvenient, especially when you have to visit the bank to purchase the Cashier's Order. You must also make sure you mail back the form and Cashier's Order early so as not to miss the dead line. Application by ATM is much more convenient. Similar to the application form, you need to indicate the number of new units you wish to subscribe to and any additional units via excess rights. The cost to subscribe to the new units will be deducted from your bank account, and you will get a receipt indicating the details of the subscription. Note that you should check the circular for the participating banks for subscription via ATM. Although most of the time the 3 local banks (DBS, UOB, OCBC) are included, you should not assume this to be true all the time. I was caught by surprise once when DBS was not included as a participating bank for the rights issue exercise of a company (not a REIT), and it was very near the deadline when I realized it.

Balloting Process for Over Subscription
One or two days after the deadline to subscribe to the new units, the REIT will usually make an announcement in SGX about how many valid subscriptions have been received, as well as the number of subscriptions via excess rights. There will be over subscription when the number of subscriptions via excess rights exceed the actual number of excess rights available. This will bring about a balloting process to allocate the new units subscribed via the excess rights. Those with odd lots of the new units will have priority during the balloting to top it up to full lots. For example, for a 1 for 2 rights issue, someone originally with 1000 units will end up with 500 new units. If this person apply for 500 additional new units via excess rights, the chances of getting it will be higher.

Results of Rights Issue
For new units you have subscribed to based on your rights entitlement, these new units will definitely be allocated to you. For those applied via the excess rights, you will also definitely get them if there is no oversubscription. If there is oversubscription, whether you will get the new units will depend on the balloting process mentioned above. Normally the Rights Issue Circular will indicate the date in which the new units will be credited into the CDP account. You should be able to check whether the new units have been credited into your CDP account online via www.cdp.com.sg one day later.

Refunding for Unsuccessful Subscription
If you have unsuccessfully subscribed for additional new units via excess rights, the amount you have paid for the application will be refunded to your bank account one day to a few days later.

Related Posts

• All about REIT - Rights Issue Part 1: Terms and Definition
• Other articles from All about REIT