Nil-Paid

Nil-paid is a security that is tradeable but originally posed no cost to the seller. For example, a renounceable right being sold by the original owner to another investor is considered nil-paid. A right is an opportunity to purchase more shares, usually at discount, given to shareholders by a corporation. The shareholders receive these rights at no cost, and if the rights are renounceable, the shareholders can choose to sell them on the market.

Though the word "nil-paid" may suggest that nil-paid rights give shareholders the right to acquire new shares for no cost, this is not the case. Nil-paid rights are only the right to acquire more shares at the current share price or a discount. The corporation issuing the rights to its shareholders does not receive payment for the rights, but if the shareholders decide to exercise the rights, they must pay for the securities they are given the right to buy.

To determine how much one might gain by selling the rights to shares held in a position, you need to estimate a value on the nil-paid rights ahead of time. Again, a precise number is difficult, but you can get a rough value by taking the value of the ex-rights price and subtracting the rights issue price. So, at the adjusted ex-rights price of $4.92 less $3, your nil-paid rights are worth $1.92 per share. 

In some cases, rights are not transferable. These are known as "non-renounceable rights." But in most cases, rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or the underwriter. Rights that can be traded are called "renounceable rights," and after they have been traded, the rights are known as nil-paid rights.

Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its current financial obligations. Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money.

However, not all companies that pursue rights offerings are in financial trouble. Even companies with clean balance sheets may use rights issues to raise extra capital to fund expenditures designed to expand the company's business, such as acquisitions or opening new facilities for manufacturing or sales. If the company is using the extra capital to fund expansion, it can eventually lead to increased capital gains for shareholders despite the dilution of the outstanding shares as a result of the rights offering.