Rights Issue Explained

What is a Rights Issue?

A rights issue is a way for a public limited company to raise additional capital by offering new shares to its existing shareholders. These new shares are usually offered at a discount to the current market price, giving shareholders the right, but not the obligation, to purchase them.

Key Concepts

• Pre-emptive rights: Shareholders have a right to maintain their proportional ownership.
• Discounted price: New shares are offered below market value.
• Oversubscription: Shareholders can often apply for more shares than they are entitled to.

Deep Dive into the Process

When a company decides to conduct a rights issue, it announces the terms, including the ratio of new shares to existing shares (e.g., one new share for every five held), the subscription price, and the closing date. Shareholders receive ‘rights’ which can be exercised, sold, or allowed to lapse. Exercising means buying the new shares. Selling the rights allows the shareholder to profit from the discount without buying more shares. Letting them lapse means forfeiting the opportunity.

Applications and Benefits

Companies use rights issues to fund expansion, reduce debt, or finance acquisitions. For shareholders, it’s an opportunity to increase their stake in the company at a favorable price, potentially benefiting from future growth.

Challenges and Misconceptions

A rights issue can dilute the earnings per share if the capital raised doesn’t immediately increase profits proportionally. Some shareholders might see it as a sign of financial distress, though this isn’t always the case. It’s crucial for shareholders to understand the implications before deciding.

FAQs

Q: What happens if I don’t exercise my rights?
If you do not exercise or sell your rights before the expiry date, they will lapse, and you will not receive any new shares.

Q: Can I buy shares from other shareholders?
Yes, you can often buy rights from other shareholders on the stock market if they choose not to exercise theirs.