A rights issue, also known as a rights offering, is a type of corporate fundraising method in which a company offers its existing shareholders the right to purchase additional shares in proportion to their current shareholding. The new shares are typically offered at a discounted price compared to the market price.
The purpose of a rights issue is to raise capital from existing shareholders to fund various corporate activities, such as expansion plans, debt reduction, or acquisitions. By offering the shares to existing shareholders first, the company aims to give them the opportunity to maintain their ownership percentage in the company and avoid dilution of their stake.
During a rights issue, the company issues rights entitlements to its existing shareholders based on their shareholding. Each entitlement represents the right to purchase a specified number of new shares at a predetermined price, called the subscription price. Shareholders can exercise their rights by subscribing to the new shares within a specified subscription period.
In Corporate Finance, this is viewed as a combination of fresh issue and bonus shares depending on the extent of discount
Shareholders who do not wish to subscribe to the new shares can choose to sell their rights entitlements in the market, where they can be traded separately from the company’s shares. This allows shareholders who do not wish to participate in the rights issue to still benefit from the value of the entitlements.
Effect:
No of shares increases, share capital and premium increase (if issued at premium) If offering price = share price then, no change in price
If offering price < share price then, decrease in share price
If offering price > share price then, increase in share price
