What Is Rights Issue Of Shares? – Definition, Pros, & Cons

rights issue of shares

What Is Rights Issue Of Shares?

Issuance Of Shares is another method on how a listed company can easily seek to raise additional capital from the public. This is similar to an FPO. However, there is a catch to it. It can only be accessed by the existing shareholders of the company. Reason being, a rights issue or rights offering provides the right platform, which does not obligate these existing shareholders to buy any additional shares directly from the company, which is proportionate to their existing holdings, within a specified time frame.

During a rights issue, the subscription or the buying price with which a company offers each share is normally done at a discounted rate more than the prevailing market price of that particular stock. Furthermore. These right of Issuance Of Shares are more often than not transferable. This in turn makes it easy for the holder to sell them on the open market faster.

Benefits Or Pros Of Rights Issue:

Normally when companies want to inject additional capital, this is the time that they normally offer rights. The benefit that comes with this type of issuance is that the company can easily circumvent any existing underwriting fees.

The main reason as to why companies release rights issue is for them to gain a considerable merit in terms of shareholder confidence. But in most cases, a particular company may employ this Issuance Of Shares rights issue strategy in raising funds if there are no other viable financing options at hand. This is a very common phenomenon, especially when the economy has slowed down or when financial institutions are unable to lend more cash to companies.

The main advantage of a rights issue to shareholders is it always comes at a discounted rate. On some occasions, the discount being offered can be very huge. However, it all depends on the amount that the company feels should be bought by the shareholders.

Disadvantage Or Cons Of Rights Issue:

In normal circumstances, when a rights issue takes place, it is assumed that the company is always struggling. At times, the market gets flooded with rights issue, which in the end lowers the company’s share capital. This can bring about dissatisfaction among Shareholders when shares become diluted. On the other hand, a rights issue can be used to minimize this concern, as only the existing shareholders are given first priority when buying shares.

What You Can Do With Rights Issue:

As a shareholder, essentially you could have three choices to act in impulse to the privileges issue. You can (i) sign up to the rights issue completely, (ii) disregard your rights or (iii) sell the rights to somebody else. Let’s take a look at on ways to act on each method and the workable results.

(I) Subscribe To The Privileges Issue To Order In Full:

Just to take full advantage of the rights issue, you will be required to pay the required amount in accordance to the amount of shares being purchased. Discounted shares means that the average share price would end up being lower than the estimated market share. Those buying and selling shares immediately will also make a profit. On the other hand, you need to reflect on that most of the  times, after rights issue the market price of the stock price normally plummets. Therefore, it is prudent for you to anticipate this before making the decision to buy.

(ii) Ignore The Rights Issue:

In case you do not have the required amount for purchasing the rights, or do not intend to buy the shares, then you can choose to ignore everything and wait for the offer to elapse. This is not recommended, as it will further dilute your shareholding capacity due to the extra shares floated by the company.

(iii) Sell Your Rights To Other Investors:

In some instances, theIssuance Of Shares rights bought can either make you choose whether to buy or sell your rights to other like-minded investors or the underwriter. These are known as “renounceable rights.” and soon after they have been traded, they then become “nil-paid rights.” However, in some cases, these rights cannot be traded or transferred. This kind of rights is called “non-renounceable rights. Now that you have become familiar with rights issue, it is important that you do some due diligence before making the decision to buy.

Should You Buy Rights Issue? – The Conclusion:

As an investor, you should go beyond the discounted rate. This is because a rights Issue is very much different from bonus issue. You will have to part with more cash for additional shares. Thus, before making any decision, you should buy only if have ascertained that the future performance of the company looks promising.

Furthermore, if the share prices have plummeted below the subscription rate, then you should not purchase. This is because you can still buy the share at a much lower rate in the open market.

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