What is Nil-Paid?

Nil-paid refers to a right to a security that was originally issued at no cost to the seller, but is tradeable. These tradable rights are known as ‘renounceable rights’ and once they have been traded, they are referred to as ‘Nil-paid’ rights.

The term “nil-paid” is often associated with an issue of rights that allows a shareholder or gives them particular rights to buy new shares that a company is selling. Since the shareholder isn’t paying for these shares immediately, these rights are referred to as nil-paid.

To make these rights more attractive to prospective buyers and traders, they are usually offered at a discounted rate as compared to the market price. These rights are referred to as fully paid rights when the shareholders choose to exercise the rights and buy them at the price they were offered since this is the conclusion of the rights issue.

If the shareholders are not interested in buying the shares, then they may choose to let the rights expire or trade them on the market. When a shareholder decides to do nothing with their nil-paid rights and lets them expire, they are referred to as ‘lazy shareholders’

In simpler terms, at the time when a rights issue is announced, existing shareholders have the right but not, particularly the obligation to participate in it. Rights issues are typically offered at a discounted price as compared to the prevailing market prices so allotment letters have a market value and may be traded as 'nil paid rights' before payment for the new shares is due. Investors who decide to take up a rights issue cannot sell their nil paid rights.

Understanding ‘Nil-Paid’ rights

The association of the term nil-paid along with these rights might initially provoke the thought that they allow shareholders to acquire new shares for absolutely no cost. On the contrary, Nil-paid rights only provide shareholders with the right to purchase shares at the current or a discounted trading price at the time of a new issue.

The organizations or corporation issuing these rights does not issue them at any cost and hence, does not receive any form of payment for the issue of these rights. However, if shareholders choose to exercise these rights then they must pay for the securities they are given a right to buy as per the discounted price specified in their nil-paid rights.

In most cases, rights can be traded and in this condition, they are referred to as “renounceable rights”. In fact, in most cases rights provide you with the option to buy the shares or trade to the underwriter or other investors. Though in some cases rights are non-transferable and these rights are known as “non-renounceable rights”.

Why do companies offer Nil-Paid rights?

The most common reason for a company raising a nil-paid rights offering is to attain more capital to meet its current financial needs and obligations. This is also very commonly seen with companies facing financial turmoil where they immediately need to raise funds but are unable to borrow any more money.

However, this isn’t always the case as even financially strong and clean companies may raise a nil-paid right offering to use the excess funds to expand the business by increasing factories or sales outlets or even in the form of an acquisition. If the reason for raising a nil-paid rights offering is related to expansion instead of debt repayment, the future financial upside to the shareholder may be greater than the current downside of dilution of the outstanding shares.