Written by Sonali Sharma 06 August 2024 | 4 min readIn this blog, we are beginning with the basics—what is a right issue exactly?—and moving on to common types, eligibility, and the application procedure. In order to complete the meal and assist you in making better decisions, we will also go over the pros and cons of rights issue before offering some helpful advice.
Ever felt like your favorite company is throwing a sale, but just for VIPs? Well, this is sort of how it goes with a rights issue. It's a way in which the enterprise gathering more cash gives first priority to current shareholders to buy more shares often at a discount. Hold on a moment! Before you invest your savings, there's more to this story.
The rights issue of shares allows the company to raise additional funds, which can be channeled into growth, debt reduction, or other financial needs. It enables existing shareholders to preserve their proportional ownership and potentially capitalize on the company’s future success.
Rights Issues represent an important aspect of corporate finance and offer a win-win opportunity for both the company and its investors.
So I hope you get a quick idea about what we are talking about so now let's get started and make your money work for you!
A company needs finances to manage, especially if it’s trying to find quicker ways to raise funds for expansion. Maybe it’s working on a new project where obtaining debt is difficult. Alternatively, the company may seek ways to improve cash flow, which could strengthen its financial position. A rights issue can be a strategic move for companies aiming to strengthen their balance sheet and improve their debt-to-equity ratio by raising equity capital.
To help them get more money when they are low in cash, businesses have been advised to adopt rights issues because they are quicker and cheaper.
Under this approach, the management offers existing shareholders the chance to acquire additional shares at a price that is lower than or at a discount relative to the current market value.
But there are occasions in which rights issues can be oversubscribed at a premium price above the prevailing market rate.
It shows that the company believes it will gain from future prospects and significant price rise. Although there are many alluring features of a rights issue which attract a lot of attention from shareholders, it is still very important that you perform your analysis before jumping onboard on the issue.
Let’s consider if a corporation announces rights issues at a rate of 1:4. The shareholders should have to be able to buy one new share with their four current shares. Now suppose the rights issue is priced at ₹1,000 per share while the current market price for the same company is ₹1,280 per share.
You are eligible for this rights issue on an approximately four-to-one basis if you have about 2,000 shares in your possession today. Here's how it would work.
Number of Shares you are entitled to = 500 shares (2000÷4)
The amount that has to be paid by you = ₹5 lakh (500 X ₹1000 per share)
Total number of shares you will have after exercising your right offer = 2,500 shares
Now that you know how they work let’s look at a few categories of the right issues of shares!
Moving forward, we will move to the varieties of shares available in today’s market.
Shareholders must pay the full issue amount upfront when the shares are allotted. Easy peasy, right? No, messing around here - it's all about getting that money in the bank from the get-go. Straight to the point, no fuss, just pay up and you're good to go!
On the other hand, shareholders only have to make partial payments upon application. The balance will be paid in subsequent periods in accordance with the policy of the company. The dividends are distributed to the shareholders after the final call is paid.
In India,” Renounceable rights are a way of raising capital by offering existing shareholders the ability to buy additional shares in the company.”
Shareholders can either subscribe to the new shares or transfer their subscription rights to another person or entity, typically through secondary market trading. Rights are a big deal, they can be sold if they don't want to invest or need the funds for other purposes.
On the other side, “Shareholders rights cannot be transferred or sold to individuals or entities outside of the company.” Companies undertake this practice to ensure that their existing shareholders have the chance to expand their ownership in the company without the hassle of trading in secondary markets.
I believe this has clarified various rights issue options available in today’s market. building on what we've discussed, let's see how the rights issue of sharing works!
The rights issue can work wonders for a business and the knowledgeable investor, making it one of the most powerful tools for growth. There are steps available for applying the right issues of shares, So buckle up with your figurative helmet, go through the rollercoaster of the right issues wisely, and possibly spice up your investment trips!
Please go through the steps involved in the rights issue of shares
| Steps | Explanation |
| Board Approval | The Board of Directors must first approve issuing the right issue of shares. |
| Public announcement and public offer | The company must publicly announce its intention to issue the right issue of shares and must make a public offer to all shareholders to purchase the shares at a specified price. The proposal must be open for a specified time. |
| Allocation of shares | If the number of shares offered exceeds those available, the shares must be allocated proportionally to shareholders based on their existing holdings |
| Payment of subscription money | Shareholders must pay the subscription money for the shares they wish to subscribe to. |
| Issuance of share certificates | Once the subscription money has been received, the Company Secretaries or Compliance officers of the company will issue a certificate of allotment to the shareholders who have subscribed and paid for their shares. |
| Listing on bourses | The shares issued through the right issue must be listed on the stock exchanges for trading. |
| Use of proceeds | The company must use the proceeds raised from the right issue for the purpose for which it was issued and must provide a report to the shareholders. |
Now we are familiar with the procedure of rights issue of shares, let’s move on to understand the pros and cons associated with the rights issue of shares.
Basically, when a company is facing some financial challenges, they reach out to their existing shareholders and offers them a chance to buy more shares at a discounted price. This helps the company get the cash it needs, and the shareholders get a sweet deal on the shares. Pretty neat, right?
We'll dive into the pros and cons of this whole right issue thing, so you can see why it's such a popular option for companies looking to boost their coffers.
| Pros | Cons |
| Increased ownership: Rights issues allow shareholders to increase their ownership in the company. | Dilution of Ownership: When new shares are issued, current shareholders who do not participate in the rights issue see their ownership % in the company diminish due to the increased total number of shares. This is referred to as “dilution of ownership.” |
| Discounted Share Price Rights issues often come with a discounted offering price, providing an attractive entry point for investors. | Market Price Fluctuations The market price of the existing shares may be affected by the news of a rights issue, leading to short-term price fluctuations. |
| Maintaining Equal Ownership Permits current investors to keep their proportionate share of the business. | Oversubscription Risk If the rights issue is oversubscribed, investors may not receive their desired allotment of shares |
| Supports Company’s Growth Funds raised can contribute to the company’s growth initiatives, initially, impacting share prices | Market Perception Market perception may be negative potentially increasing shareholder value in the long run. |
| Speedy Process: Because rights offerings can be carried out in a very short amount of time, businesses can react rapidly to sudden demands for more money or chances for expansion. | Market Reaction: If the subscription price is much lower than the current market price, this may result in a temporary decrease in the value of the company’s stock while investors react to the increased supply of shares. |
Hope you have found your answers helpful for your investment journey!
In a nutshell, the Exercising rights issue offers a way of raising funds from existing shareholders. As an investor, you need to understand the above nuances. It would help if you always based your investment decisions on your goals and investment budget.
If you have already invested in a robust company’s stock and it is offering you a rights issue, then you should go ahead and buy more of the stock, especially in a large-cap company with a long-term investment view in mind. Provided you have the funds to spare, it is a good idea to invest in a rights issue with such considerations.
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