Rights

Rights

It’s time to talk about rights. Don’t worry – you don’t need a civics textbook, a lawyer, or hours of explanations about what is inalienable or not, because in this case, rights are financial instruments. Moreover, they are temporary and issued only when a capital increase is carried out. And there are only two types: allocation rights and pre-emptive rights.

Is the company carrying out a capital increase? Then allocation rights come into play. These are issued either when the capital increase does not require any payment from shareholders, or after the successful completion of a capital increase operation that involved paying a price for new shares, while waiting for post-increase formalities to be finalized.

In the first case, they are received by all shareholders; in the second case, only by those who validly subscribed for shares during the capital increase. Allocation rights are traded at least on the exchange where the company’s shares are listed, and their price is identical to that of the shares they temporarily replace.

Is the company seeking to raise new capital? Then pre-emptive rights appear, granting you the right to buy a certain number of shares at a price set by the General Shareholders’ Meeting decision approving the capital increase.

If the company’s shares are traded on the exchange, pre-emptive rights may also be traded, depending on the GSM decision. Their purpose is to allow existing shareholders to exercise their pre-emptive rights, provided these rights have not been waived.

Additionally, if pre-emptive rights are tradable, they allow new investors who did not own shares on the record date of the capital increase to participate by subscribing. Trading these rights allows shareholders who cannot or do not wish to contribute additional capital to monetize their rights by selling them.

Because pre-emptive rights lose all value if not exercised during the subscription period, and exercising them requires additional payment, they trade at values much lower than the price of the shares they entitle the holder to subscribe.

Why do they exist?

Simple. Time is money. Between the start date of a capital increase operation and the date when the new shares are registered with the relevant trade registry, supervisory authority, exchange system, and central depository, weeks or even months may pass.

During this time, the shares may be suspended from trading. Time cannot be controlled, but financial markets are more flexible, so these temporary instruments are introduced to allow subscriptions and the distribution of resulting shares without long trading suspensions.

Moderate

Allocation rights carry the same level of risk as the shares they temporarily replace. Pre-emptive rights are similar, with the important caveat that they become worthless if not exercised during the subscription period.

As with all spot market instruments, it is important to remember that you cannot lose more than the amount invested. Individual shares are, on average, more volatile than bonds or some ETFs, but this is a broad generalization. For example, Transelectrica shares are considered less risky (in terms of issuer insolvency risk) than bonds issued by a random start-up.