Make this your homepage
Business News
Home > Business News
A buyer should pay Rs 202-245 for RIL rights entitlement renunciation: Kotak
A buyer should pay Rs 202-245 for RIL rights entitlement renunciation: Kotak

New Delhi, May 17 (TIWN) In cases of rights entitlement renunciation in the upcoming issue of Reliance Industries Limited (RIL), a buyer should pay the seller a theoretical fair value range between Rs 202 to Rs 245 for a fully paid rights entitlement, according to an analysis by Kotak Investment Bank.

Rights entitlement (RE) renunciation gives the buyer the rights to buy the shares at the Rights Price (equivalent to a strike price) as

against TERP/CMP (Underlying Price) and is dilutive in nature. Additionally, all the future upside/downside of the stock is left with

the Rights holder.

Kotak has simulated the fair value of the renunciation through pricing of this warrant. Warrant pricing is based on a slightly modified call option pricing calculator factoring in the dilutive nature.

Assuming it was a fully paid rights issue, Rs 1,257 (Strike Price) has to be paid before issue close, while the renunciation can be

bought at issue open till 4 days from issue close. Hence the period for the calculation has been kept as 4 to 15 days. This will be

compared to fully paid CMP of Rs 1,459 (Underlying Price).

At various assumptions of volatility and the balance 75% of the Rights being called at the end of one year, the theoretical fair value

ranges between Rs 202 to Rs 245, according to Kotak Investment Banking.

In case of a partly paid rights entitlement (RE), Rs 314 is paid upfront and Rs 943 (Strike Price) assumed after one year. The strike

price, however, will be compared to proportionate CMP of Rs 1,049 (Underlying Price) which is 75% of CMP of Rs 1,459.

The value of the RE in a fully paid Rights issue would be the difference between TERP/CMP and Rights price. Hence in this case, fair

value would be Rs 202 (Rs 1,459-Rs 1,257). At this level the buyer and seller of RE would break even.

In the partly-paid dynamic, the buyer is only getting 25% of the value of the renunciation price (Rs 202) on listing. However, if he pays 25% of the value to the RE seller i.e. Rs 50, then a value of Rs 152 is forever lost to the seller.

To normalise the same, the buyer should pay Rs 150, discounted by one year at an appropriate rate. "If we assume a discounting rate to be in the range of 12% to 14%, the proportionate value of the 3/4th portion will be Rs 131 to Rs. 134", the analysis said.

Add your Comment
Comments (0)

Special Articles

Sanjay Majumder Sanjay Majumder
Anirban Mitra Anirban Mitra