Contents
What is a Rights Issue?
A rights issue refers to the issue of new shares to existing shareholders in proportion to their existing shareholding before issuing to the public. It helps the company to raise fresh equity capital.
Why do companies bring Rights issue (RI)?
Listed companies in the stock exchange bring the rights issue to collect funds. It is not that all the companies that offer the RI are facing a financial crisis. Even a company with a good balance sheet can offer a RI; this could be due to its business expansion, company acquisition, or increasing manufacturing and sales growth. Apart from this, the company also offers a RI to be debt-free.
With the rights issue, the company gives its shareholders a chance to buy additional shares. The shareholders can buy additional shares only in a fixed ratio decided by the company. If the company has set a 1:4 ratio for the RI, the shareholders will get a chance to buy one additional share on every four shares they hold. The company announces the dates for the RI, and the shareholders can buy shares only during that period.
The shareholder’s meeting is not necessary for the rights issue. Only the approval of the Board of Directors is enough to bring the rights issue. Therefore, the turnaround time for raising funds is short.
How does the rights issue affect the stock?
The rights issue has a direct impact on the company’s total number of shares. After the RI, the company’s equity shares get increased, due to which the liquidity of the company’s share on the stock exchange increases. There is no change in the ownership of the company. The ownership rights of the company remain with those who were already the owners.
How is it different from IPO and FPO?
The method of the RI is entirely different from IPO and FPO. In this, companies already listed in the stock market give shares to its existing shareholders at a discounted price. In IPO and FPO, any investor can participate, but only the existing shareholders have the right to participate in the RI. There is no obligation on the shareholders to participate in the RI. It is up to them whether they can participate in the rights issue, reject and sell their rights.
Benefits of the Rights Issue
The existing shareholders get the shares at a discount price, i.e., lower than the current market price. If a company’s share price is trading at Rs 100 on the stock exchange and the company gives a 10% discount on the RI, you will have to pay Rs 90 per share.
Conclusion
Before investing in a RI, always keep these things in mind. The discounted price of the shares can easily attract investors. Investing in a RI cannot always prove to be a profitable deal. In addition to knowing the stock’s discounted price, investors should try to find out the reasons for additional funding by the company before accepting or rejecting the RI. Therefore, before investing in the RI, the shareholders must do detailed research.