Right Issue is an offer of rights to shareholders of a company. For more information about right issues, you can find it in the article below! Before that, you can watch trading education videos on GIC's YouTube and get information about free trading classes on GIC's Instagram.

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What is a Rights Issue

A rights issue is an offer or invitation to existing shareholders of a company, providing them with an opportunity to purchase additional shares directly from the company, at a discounted price compared to the secondary market. The number of additional shares a shareholder can purchase depends on their existing rights as shareholders. A rights issue can be very useful for public companies compared to other, more dilutive financing options. Since equity issues are generally preferred over debt issues from the company's perspective, companies typically choose to issue rights to minimize dilution and maximize the tax loss benefits that can be offset. In a rights issue, there is no change in control, and the "no-sale theory" applies, meaning the company can better retain its carried-forward tax losses compared to through a secondary offering or other more dilutive financing methods. It is one of the ways of issuing securities, both in public and private companies. Rights issues are a popular fundraising method for Indian companies. Through a rights issue, a company offers its existing shareholders the opportunity to buy additional shares at a discounted price within a specified timeframe. Unlike an IPO, a rights issue is not offered to the general public but only to existing shareholders in proportion to their existing ownership. Eligible shareholders can choose to take up the rights issue in full or in part, or they can let the offer lapse by not exercising their right to buy additional shares, or they can transfer their rights to others.

How a Rights Issue Works

A rights issue is directly distributed as a tax-free dividend to all registered shareholders or through registered brokers, and it can be fully or partially realized. The subscription rights are transferable, allowing the holders of the subscription rights to sell them in the open market or elsewhere. The issuance of rights to shareholders is generally done as a tax-free dividend based on a ratio (for example, three subscription rights for every two common shares issued and outstanding). Since the company receives money from shareholders in exchange for shares, a rights issue is a source of capital.

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Why Do Companies Offer a Rights Issue?

A company will offer a rights issue to raise capital. If existing shareholders choose to purchase additional shares, the company can use the funds to pay off debt obligations, acquire assets, or facilitate expansion without having to take loans from banks

Reasons for Conducting a Rights Issue

The reason for conducting a rights issue is when a company plans to expand its operations and likely requires a significant amount of capital. Rather than opting for debt, they may prefer to seek equity to avoid the burden of fixed interest payments and to grow equity capital. A rights issue may be a more efficient way to achieve this goal. A project where debt financing or loans may not be suitable, available, or affordable often leads a company to raise funds through a rights issue. Companies that wish to improve their debt-to-equity ratio or acquire a new company can ensure financing through this method. Sometimes, companies in need may issue shares to pay off debt and improve their financial transparency.

Why Does a Company Conduct a Rights Issue?

A company will offer existing shareholders the right to purchase new shares in the company to raise capital. Many companies often conduct equity placements that dilute all shareholders, but a rights issue protects existing shareholders by allowing them to take up or sell their rights. This differs from a public offering where if shareholders do not take up their rights, they do not receive any cash returns.

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Features of a Rights Issue

A company conducts a rights issue when it needs cash for various purposes. This procedure allows the company to raise funds without incurring underwriting costs. A rights issue gives special treatment to existing shareholders, where they are granted the right (not the obligation) to purchase shares at a lower price on or before a specified date. Existing shareholders also have the right to trade these rights with other market participants until the date the new shares can be purchased. These rights are traded in the same way as common equity shares. The number of additional shares that can be purchased by shareholders is generally proportional to their existing holdings. Existing shareholders can also choose to disregard their rights, but if they do not purchase the additional shares, their current ownership will be diluted after the new shares are issued.

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How a Rights Issue Affects Stock Prices

A rights issue affects stock prices because new shares are issued, increasing the total number of shares in circulation. These new shares are sold at a price lower than the previous market price. The impact depends on the number of rights offered to existing shareholders. A rights issue is usually carried out when a company needs more capital. Therefore, it is seen as a sign that the company might be in trouble, which can negatively affect stock prices. It can also be a signal that the company’s profits are in difficulty.

 

Pros and Cons of a Rights Issue

A rights issue also has its pros and cons, or advantages and disadvantages. Here’s an understanding of both:

Advantages of a Rights Issue

A rights issue is an opportunity for current shareholders to increase their ownership in a company at a lower cost. By doing so, they increase their exposure to the company’s shares, which could be good or bad depending on the company’s profit and loss report. The number of new shares an investor can purchase depends on their current holdings, but typically, larger shareholders can buy more shares than smaller shareholders. A rights issue is also an opportunity for individuals to protect their investments from dilution that may occur when the company issues more shares. Dilution can happen if current shareholders sell their new shares to other traders, although this is not always guaranteed during a rights issue.

The Downside of Rights Issue

If the issued shares are sold in the open market, their value may become diluted due to the increase in market supply. A rights issue can also pose a risk because current shareholders may not want to buy more shares in a company if it experiences slower growth. The market may interpret a rights issue as a warning sign that the company might be struggling. This could even cause investors to sell their shares, which would lower the price. With the increased supply of shares available after a rights issue, this could be very bad news for the company's market value. Here’s an explanation of the Right Issue; you may want to start considering owning digital assets now. Don't forget to register for trading at GIC to begin owning digital assets.