This article is educational content describing how rights issues generally work as a market mechanism. It is not investment advice and does not describe any specific current event, company, or security.
A company announces a rights issue at a price 30% below where its shares last traded. To an outside observer, that can look like a straightforward discount, a gift to loyal shareholders. But the number on the announcement is not chosen the way a retailer marks down a jacket. It is calculated backward from a formula that accounts for how many new shares will exist once the deal closes, and understanding that formula explains why the “discount” is often smaller in economic terms than the headline percentage suggests.
What a rights issue actually does
A rights issue is a way for a listed company to raise new capital by offering existing shareholders the right, but not the obligation, to buy additional shares in proportion to what they already hold. A common structure might be “1 for 4,” meaning a shareholder with four shares can subscribe to one new share. Because these new shares are typically priced below the prevailing market price, the offer gives existing holders an incentive to participate rather than see their proportional ownership diluted.
The subscription price itself is set by the company’s board, usually with input from the investment banks underwriting the deal, and it has to sit low enough to make the offer attractive even if the market price drifts down before the subscription period closes. That safety margin is one reason discounts in rights issues are often deeper than in other forms of share issuance: the price needs to hold up over the weeks between announcement and completion, not just on the announcement date.
The theoretical ex-rights price, and why it matters more than the headline discount
The key concept that connects the subscription price to the “real” cost to shareholders is the theoretical ex-rights price, commonly abbreviated TERP. Because a rights issue adds new shares to the market at a price below the old market price, the average, or blended, value of all shares outstanding after the issue mathematically falls somewhere between the two. TERP is that blended value.
The calculation is a weighted average: take the number of existing shares multiplied by the pre-issue market price, add the number of new shares multiplied by the subscription price, and divide the total by the combined share count after the issue. For example, in a 1-for-4 issue where existing shares trade at a given price and new shares are offered at a discount, TERP will land closer to the old price than to the subscription price, because there are four old shares for every one new share diluting the pool.
This is the figure analysts and exchanges actually watch, because it represents where the stock should theoretically trade once the new shares begin trading alongside the old ones, all else being equal. A subscription price that looks like a 30% discount to the pre-announcement market price might translate to a much smaller gap, sometimes in the single digits, between the subscription price and TERP. That smaller gap is the more meaningful measure of how “cheap” the new shares really are, because TERP, not the old market price, becomes the new reference point once trading adjusts.
Why the headline discount can be misleading
Because the percentage discount is calculated against the pre-announcement share price rather than against TERP, two rights issues with identical headline discounts can offer very different economics depending on how large the issue is relative to the existing share count. A small issue, say 1 new share for every 10 existing ones, will pull TERP only modestly below the old market price, even with a steep discount on the new shares. A large issue, such as 1 for 1, will pull TERP much closer to the subscription price itself, because the new shares make up half the enlarged share count.
This is also why the value of the “right” itself, the tradeable entitlement that shareholders who do not wish to subscribe can sell instead, is derived from the gap between TERP and the subscription price rather than from the headline discount. Exchanges, clearing houses, and financial data providers typically publish TERP and the associated rights value alongside the offer terms precisely so that market participants are comparing the economically relevant figures rather than the more attention-grabbing, but less precise, percentage discount off the last traded price. Regulatory bodies overseeing capital markets, such as national securities commissions and stock exchanges, generally require this information to be disclosed in the offer documentation for exactly this reason: to give shareholders a clearer basis for deciding whether, and how, to exercise their rights.
