What are Nil Paid Rights/Shares?
A rights issue is when a 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.
Shareholders are usually offered the right to buy a set number of shares in proportion to the number they currently hold. For example you may be offered one new share for every four that you currently hold. Each share will be offered at a discounted price to the market. For example if the shares are trading at £1 per share in the market you may be offered the right to buy shares at 90p each.
The rights themselves can be traded in the market, they are known as nil paid shares (or nil paid rights). Any sale of nil paid shares in the market can be made online or by phone and will be subject to the usual commission charges.
If you decide to take up your right to buy new shares then the nil paid shares can be converted into ordinary shares at the take up price. In our above examples if you held 400 ordinary shares then on a basis of one new share for every four held you would be issued with 100 nil paid shares. If the option to take up these rights was 90p per share then it would cost £90 to convert the 100 nil paid shares into 100 ordinary shares. This would give you a new holding of 500 ordinary shares (your original holding of 400 shares plus your 100 new shares from the rights issue).
Shareholders also have the option to 'tail swallow' their rights. This involves selling a number of rights in the open market to generate enough proceeds to cover the cost of taking up the remaining rights. Using the above example, if you had 100 nil paid shares worth 25p each, you could sell 89 nil paid shares to generate £22.25, after our £11.95 online dealing commission charge you would be left with £10.30 which is enough to take up 11 Rights without investing any further cash.
If you do nothing then the offer will lapse on the deadline for elections. If the nil paid shares had a value when the right lapsed then you should receive a lapsed cash payment approximately equal to this value.