Editor’s note: This is general educational material on how a market mechanism works. It is not investment advice and it does not evaluate any company or security. It is based on the Kenyan regulations and the two Nairobi Securities Exchange offer documents listed at the end.
A rights issue hands every existing shareholder a decision and a deadline. Take up the new shares, sell the entitlement, pass it to someone else, or do nothing. Only the last of those has a hidden consequence, because rights that nobody exercises do not simply vanish. Kenyan offer documents set out where they go, and the two published examples below show the same rule producing very different outcomes.
What the rules require an issuer to say
The Capital Markets (Public Offers, Listings and Disclosures) Regulations, 2023 define a rights issue as an offer of specified securities by a listed issuer to the shareholders of the issuer as on the records date fixed for that purpose. The starting point sits in company law: subject to Part XIV of the Companies Act, 2015, an issuer proposing to issue shares for cash may first offer them to existing shareholders in proportion to their holdings, and only to the extent that the securities are not taken up by such persons under the offer may they then be issued for cash to others or otherwise than in proportion to existing holdings.
That leftover pool is what the disclosure rules are built around. Where an issuer publishes particulars for a rights or open offer, it must state how shares not taken up will be dealt with and the time in which the offer may be accepted, whether the documents of title are renounceable, and details of the letters of allocation covering acceptance, renunciation, splitting and mode of payment. The regulations also require an issuer to establish and disclose a fair and equitable allocation policy in the information memorandum. So the answer to what happens to unused rights is never left to custom. It is a term of the offer, written down before the offer opens.
Four things a shareholder can do
The Longhorn Publishers rights issue information memorandum sets out the choices in the order they arise. Eligible shareholders may take up their entitlement in full, accept in part, transfer the rights privately to a named renouncee, or sell them on the Nairobi Securities Exchange. The rights are renounceable, which the document explains as meaning that shareholders who do not wish to take up all or part of their new shares may abandon, sell or transfer them to a third party.
Doing nothing is also a choice, and the memorandum is explicit about it. Shareholders who wish to decline their rights need not do anything, and any rights not taken up by them form the untaken rights. Partial acceptance carries its own floor: it is not permitted for less than 100 new shares. Applications and money not received by the stated dates are deemed not to have been duly subscribed for, and the rights attached lapse. The latest time for acceptance and payment in that offer was 3.00 p.m. on 6th May 2016, on an entitlement of nought point eight six new shares for every 1 ordinary share held on Thursday 14th April, 2016.
Where the untaken rights actually go
The pool has a queue. Shareholders who take up their entitlement in full may apply for additional shares on the same allotment letter, and those applications are satisfied only to the extent of the untaken rights. The untaken rights are then allocated on a pro rata basis among those applicants. If any allocation would trigger regulatory restrictions it is cut back, and any untaken rights not allotted at the end of that process lapse. Money paid for additional shares that are not allocated is refunded free of interest, and there are no changes once the basis of allocation has been announced. If the subscription result makes the disclosed policy impractical, the policy can be amended only with the approval of the Capital Markets Authority, and the amendment must be announced within twenty four hours of that approval.
Two features of the Longhorn document decide how much of the pool is likely to remain. The rights issue was not underwritten, so nothing guaranteed the unsubscribed portion would be taken. And the board’s residual power is the last stop rather than the first: rights that survive both the entitlement and the additional shares queue revert to the directors to allot in line with the allotment procedure, and lapse if they are not allotted.
The NIC Bank rights issue of 2014 shows the same architecture from the shareholder resolution end. The extraordinary general meeting on Wednesday 6th August, 2014 empowered the directors to dispose of the shares not taken up by any shareholders, and the shares not issued by reason of fractions of a share being disregarded, as they may consider expedient. The offer itself was 42,663,040 new shares at Shs 49.25 per share, raising approximately Shs 2,101,154,720 before expenses, on the basis of one new ordinary share for every fourteen ordinary shares held at the record date of 3.00 pm on Thursday, October 2nd, 2014.
Analysis: the part of the timetable that decides the answer
The two documents differ in one respect that matters more than the allocation wording. The NIC timetable created a real trading window for the rights themselves. Trading in rights on the exchange commenced on Thursday, October 23rd, 2014, immobilisation closed on Friday, October 31st, and both private renunciation and trading in rights ended on Friday, November 07th, 2014, a week before the closing date of Friday, November 14th. A shareholder who did not want to subscribe had roughly a fortnight to convert the entitlement into cash rather than let it fall into the untaken pool.
That window is what separates a rights issue from a dilution event for the passive holder. Where it exists and is used, the entitlement has a market price and the shareholder captures it. Where it is short, illiquid, or never used, the same entitlement is transferred without payment to whichever shareholders applied for additional shares, which is a transfer of value from the inattentive to the attentive that the rules permit and disclose rather than prevent.
The rest of the NIC timetable shows the other cost. The record date was Thursday, October 02nd, 2014, results were announced on Thursday, December 11th, 2014, CDS accounts were credited on Wednesday, December 17th, and listing and commencement of trading followed on Thursday, December 18th, 2014. That is more than two months between the date that fixed the register and the day the new shares could be sold, with the application money committed and, in the case of unallocated additional shares, refunded without interest.
What neither document establishes is how much of the pool actually lapsed. The offer documents describe the mechanism; only the results announcement carries the subscription rate, the number of additional share applications and the final basis of allocation. A reader working through a Kenyan rights issue would look for three specific disclosures about the entitlement: whether the issue is underwritten, whether and for how long the rights themselves will trade on the exchange, and the exact wording of the allocation policy for untaken rights, since that clause, not the headline discount, determines who ends up with the shares nobody claimed.
