Hi @3nadh , apologies for the delayed response.
Let’s take UPL as an example.
There’s a potential for arbitrage if one can buy the rights to these new shares at a price lower than the expected stock price after the rights issue.
When a company announces a rights issue, it offers existing shareholders new shares at a discount. This leads to share dilution, which causes the stock price to drop. Because when new shares are issued at a discount, the total number of shares increases while the company’s value remains the same, pushing the price down on the ex-date.
For this, you must first understand the Theoretical Ex-rights Price (TERP). Explained here:
In the UPL example:
- Closing price on pre-ex date: 568
- Rights issue price: 360
- Ratio: 1:8 (1 new share for every 8 existing shares)
Now, applying the formula:
TERP = ( Rights share * Offer price + Existing shares * Market price) / Total number of shares
| Theoretical Ex-rights Price (TERP) = | (1 x 360) + (8 x 568) / (1+8) |
|---|---|
| (360+4544) / 9 | |
| 544.89 |
TERP : 544.89
Now, the acquisition cost:
Assuming you bought at 191 (the open price of the RE) and the issue price is 360, the total cost would be 551.
Acquisition cost: 551
Btw, the scrip’s historical price is on the exchange website here.
Lastly, compare with TERP (544.89): 551 − 544.89 = 6.11 (Loss).
This means there was no arbitrage opportunity because the RE price was too high. The adjusted price (544.89) was lower than the cost to acquire rights shares (551).
This information is given solely for educational purposes and is in no way advice.