[2007-09-12]  Uganda Clays in First Rights Issue
Uganda Clays Limited (UCL), a blue chip company at the local bourse has pulled another trade first.

UCL is considering a Rights Issue, an unprecedented move on the Uganda Securities Exchange (USE), to essentially generate money to fund construction of a new plant.

The board announcement last week, advising UCL shareholders that the company is considering a Rights Issue to partially fund the new Kamonkoli tiles and bricks factory in eastern Uganda.

A rights issue is a sale-call of a new batch of shares for cash to existing shareholders in proportion to their existing holdings.

A rights issue is, therefore, a way of raising new and more cash from shareholders and it is an important source of new equity funding for publicly quoted companies.

"This means that the existing shareholders will be invited to buy more shares in proportion to the shares they have," said a statement authorised by the board of UCL and posted by MBEA brokerages services.

A rights issue has a two-fold benefit - the company raises capital, so does the investor by avoiding of dilution in shareholding. The corporate action also now adds to the existing investable options to investors at the exchange. Ms. Harriet Kiwanuka, the USE director for research and market development explained to East African Business Week last week that legally, a rights issue must be made before a new issue to the public. This is because existing shareholders have the "right of first refusal" (otherwise known as a "preemption right") on the new shares.

This means that by taking these preemption rights up, existing shareholders can maintain their existing percentage holding in the company.

However, shareholders can, and often do, waive these rights, by selling them to others.

Shareholders can also vote to rescind their preemption rights.

"The price at which the new shares are issued is generally much less than the prevailing market price for the shares. A discount of up to 20-30% is fairly common," said Kiwanuka.

The main reason is to make the offer relatively attractive to shareholders and encourage them either to take up their rights or sell them so the share issue is "fully subscribed".

The price discount also acts as a safeguard should the market price of the company's shares fall before the issue is completed.

If the market share price were to fall below the rights issue price, the issue would not have much chance of being a success - since shareholders could buy the shares cheaper in the market than by taking up their rights to buy through the new issue.

Kiwanuka said under a rights issue, existing shareholders however do not have to take up their rights to buy new shares.

Shareholders who do not wish to take up their rights may sell them on the stock market or via the firm making the rights issue, either to other existing shareholders or new shareholders.

The buyer then has the right to take up the shares on the same basis as the seller.

UCL was the first company last year to undertake a share split in the close to 10 year's history of the bourse.

The share split increased some liquidity on the previously slow moving UCL counter.

Rights issues are a relatively cheap way of raising capital for a quoted company since the costs of preparing a brochure, underwriting commission or press advertising involved in a new issue of shares are largely avoided.

However, it still costs money to complete a rights issue. Issue costs are often estimated at around 4% on equity funds. However, as many of the costs of the rights issue are fixed, for instance accountants and lawyers fees the percentage cost falls.

Information available also indicates that the unprecedented development may cause shareholders to react badly to firms continually making rights issues as they are forced either to take up their rights or sell them.

They may sell their shares in the company, driving down the market price.

Unless large numbers of existing shareholders sell their rights to new shareholders there should be little impact in terms of control of the business by existing shareholders.


Source: Copyright © 2007 East African Business Week.