Nil paid rights

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Woodford glossary

In a rights issue, shareholders initially receive rights to participate in the fundraising by buying new shares. The shareholder does not immediately pay for these rights, hence they are called nil-paid rights. Typically, the new shares will be offered at a discount to the prevailing market price in order to make the rights issue attractive enough for shareholders to want to participate.

Shareholders then have the option to exercise their rights and buy the new shares at the price at which the rights issue is taking place. If they do so, the nil-paid rights become fully-paid rights when the rights issue completes. Otherwise, shareholders can either ignore their nil-paid rights or trade them on the market.

Generally speaking, the value of the nil-paid rights will relate to the difference between the prevailing market price and the rights issue price. As such, the price at which the nil-paid rights are trading can be seen as a barometer for the likely success or otherwise of the rights issue that the company is pursuing. For example, if the prevailing share price falls below the rights issue price, it is highly unlikely that any shareholder will participate in the rights issue because they could buy shares in the market at an even lower price – in this scenario, the rights issue, in all likelihood, would fail and the nil-paid rights would expire worthless.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address: 27 Old Gloucester Street, London, WC1N 3AX.

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