The Journal of Nepalese Business Studies

Topics: Stock market, Stock, Public company Pages: 32 (3463 words) Published: February 27, 2014
JBFSIR

Volume 1, Issue 4 (July, 2011)

ISSN 2231-4288

The Journal of Sri Krishna Research & Educational Consortium

JOURNAL ON BANKING
FINANCIAL SERVICES &
INSURANCE RESEARCH
Internationally Indexed & Listed Referred e-Journal

IMPACT OF RIGHT ISSUE ON MPS AND EPS
REKHA RAHEJA
Assistant Professor (Deptt. Of Commerce),
Hindu College, Sonepat

RAJESH BHADWAJ
Research scholar (Deptt. Of Commerce),
MDU, Rohtak

PRIYANKA
Assistant Professor (Deptt. Of Business Administration),
Hindu College, Sonepat

ABSTRACT:
This study scrutinize the impact of right issue on earning per share and market price per share during 2009-10 of 10 public limited companies listed on Bombay Stock Exchange. Right shares are those shares which are issued to existing shareholders. According to section 81 of Indian company act 1956, “Company can issue right shares only after the two years of creation of company or one year of first issue of shares whichever is earlier." The result divulges that EPS of 2 companies out of 10 companies descent but not in that proportion in which right share has been allotted while other 8 companies demonstrate increasing trend in EPS. MPS of 7 companies out of 10 companies decayed as a result of right issue but not in that proportion in which right share has been issued. . Correlation between EPS and right issue is 0.11 and between MPS and right

issue is -0.80. Thus MPS is much negatively correlated than EPS with right issue.

KEY WORDS: Right issue, EPS, MPS

Sri Krishna International Research & Educational Consortium
http://www.skirec.com

- 77 -

JBFSIR

Volume 1, Issue 4 (July, 2011)

ISSN 2231-4288

INTRODUCTION:
A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing and market capitalization. In case of a rights issue, since additional equity is raised, the issuing company's equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market. In theory, every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalization remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalization. If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse. IMPACT OF RIGHT ISSUE ON MPS:

The issues of right shares affect the financial policy of an enterprise in the following manner:
1) Right shares are issued at a price much lower than the market price of the existing shares. The market price is expected to fall by the issue of right shares, to a considerable extent.
2) If the existing shareholders decline the offer, the shares are offered to other persons at the same price. The customers are tempted to purchase such shares at lower price even though, a decline in market price is obvious if the company has a good record of payment of dividend, because they expect an increase in the market price of shares after a short spell and if it is so; the goodwill of the company also goes up. 3) Right issue has another adverse effect on the market due to lower payment of dividend. It is but natural that due to increase in the number of shares the dividend per share will be lower. It is, of course, on the presumption that additional amount realized through the issue of rights will not be put to profit immediately and it will take time in increasing the profits.

4) Another factor that needs consideration is the capacity to purchase shares of the existing shareholders....

References: White R.W.and Lusztig P.A., “The Price Effects of Right Offering: Journal of Financial and
Quantitative Analysis”( 1980) .
Kalle Rinne and Matti J. Suominen, “A Behavioral Theory of Public and Rights Offerings”:
Empirical Evidence from Europe (Feb 28,2007), http://ssrn.com/abstract=966156
Raste, Deepak R.Chari and Vijaylaxmi, “Regulatory impact: a case study of right issues in
emerging capital market of India” (17 Jan, 2010)
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