What is the Rights Issue?
A rights issue is a way for a company to raise capital by giving existing shareholders the right to purchase additional shares—usually at a discounted price and in proportion to their existing holdings.
🔑 Key Features of a Rights Issue:
Offered only to existing shareholders.
Shares are typically sold at a discount to the current market price.
Shareholders receive “rights,” which can:
Be exercised (used to buy new shares),
Be traded on the market (in a renounceable rights issue),
Or expire unused (if not exercised in time).
📊 Example:
If you own 100 shares and the company announces a 1-for-5 rights issue, you can buy 20 more shares (100 ÷ 5).
Let’s say the current share price is $10.
The rights issue price is $7.
You can buy 20 shares at $7 = $140 total.
If you don’t want to buy, and it's renounceable, you can sell the rights on the market.
Why Companies Do a Rights Issue:
Reason | Explanation |
Raise capital | For expansion, debt repayment, or acquisitions. |
Strengthen balance sheet | By reducing debt-to-equity ratio. |
Avoid external borrowing | A cheaper, equity-based alternative. |
⚠️ Risks & Considerations for Shareholders:
Dilution: If you don’t take part, your ownership percentage decreases.
Stock price impact: Prices may fall temporarily due to perceived dilution or market skepticism.
Short-term pressure: Investors may sell shares to fund rights purchases.
📘 Types of Rights Issues:
Type | Description |
Renounceable | Rights can be traded or sold. |
Non-renounceable | Rights can’t be transferred—use them or lose them. |
Fully underwritten | An underwriter agrees to buy any unsubscribed shares. |
Partially underwritten | Only some of the issues are guaranteed to be sold. |
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