Banking Terms - Set 4 (SWIFT, DRIP, Bankruptcy, Rights Issue, Rights Redemption)

Rights Redemption

It is an opportunity that is given to the shareholders to redeem the rights they hold and receive cash in place of that. Usually, the redeemable shares [rights] have a nominal value which will be paid/given to the shareholder when it is redeemed. Moreover, for some stocks there will be a set date as when it can be redeemed whereas others will be redeemed at the company's discretion.

For example: Shareholders of the company A who own rights issued by the company can redeem the rights at the rate (Say 10$ per right) announced by the firm once a rights redemption event is announced by the firm. The holders have to take part in the action as this would be a mandatory action.

Rights Issue

A rights issue is a kind of corporate action in which the company offers its current shareholders the right to buy new shares in the company at a discount to the market price. Companies use rights issues as a way of raising funds. (i.e.) Distribution of a security or privilege that gives the shareholder an entitlement or right to take part in a future event.

For example: Company A has announced a rights issue where it says like for every four shares that a shareholder has as of now will be offered one more share at some discounted price to the market value.

The rights themselves can be traded in the market, they are known as nil paid shares (or nil paid rights). Any sale or purchase of nil paid shares in the market will be subject to the usual commission charges. If a person decides to take up the right to buy new shares then the nil paid shares can be converted into ordinary shares at the take up price.

Bankruptcy

A legal status of an organization that cannot repay the debts it owes to creditors. In most jurisdictions, it involves a formal court ruling, often initiated by the debtor and securities may become valueless.

E.g. Company A being in a position not to pay its debts in any way, has announced bankruptcy and the 100,000 shares of the company which the public holds goes valueless, there by all the shareholders of the company sharing the loss. Real time example being the bankruptcy announcement of Lehman Brothers of USA [Largest of its kind in US].

DRIP [Dividend Re-Investment Plan]

A Dividend payment kind of corporate action, in which, holders will have their dividend amount reinvested as additional shares of the issuing company in the market, by the issuer itself [usually, with no brokerage fees and sometimes at a slight discount].

E.g. Market Value of a Company A is Rs. 200 and it has announced a dividend of Rs. 2 per share for a dividend re-investment opportunity/plan, in which the investor is allowed to re-invest[buy] the same in Company A's shares at a discounted price of Rs. 180 [a 10% discount to the present market value].Hence, a person holding 10000 shares of Company A will be receiving 111 shares, instead of a dividend amount of Rs. 20000.

Society for Worldwide Interbank Financial Telecommunication (SWIFT)

A cooperative organization created and owned by banks that operates a network which facilitates the exchange of payment and other financial messages between financial institutions (including broker-dealers and securities companies) throughout the world. A SWIFT payment message is an instruction to transfer funds; the exchange of funds (settlement) subsequently takes place over a payment system or through correspondent banking relationships.