Rights issue

DEFINITION of Rights issue

The rights issue is the term for when a company offers more of its shares to current shareholders, usually to raise extra capital.

WHAT IT IS IN ESSENCE

It is different from other extra shares offerings, where shares are available for any investor.

The shares in a rights issue are not taken from the currently outstanding shares of the company. But they are not taken directly from the company itself. 

The company wants to avoid to make weaker its stock too much. And it will try to do it by offering the new shares to existing shareholders exclusively.

Rights issue offer shares at a price lower than the current market price. With one condition. The rights must be taken within a certain time period.

Sometimes the shareholders are able to sell the additional shares on to the general market.

In simple terms, when a company taps into the existing shareholders for additional capital. And issues shares at a discount, particularly for these existing shareholders. We can call it rights issue shares. The idea is to get the additional capital from the existing shareholders without trying any external methods.

This is particularly useful for the companies that are deeply in debt.

HOW TO USE

Why does a company do that?

The basic idea is to raise fresh capital. This is not a common practice that a corporate organization resorts to.

Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. However, companies also use it to prevent themselves from being conked out. Of course, at the same time.

A rights issue results in higher equity base for the organization. It also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.

A rights issue affects two important elements of a company equity capital and market capitalization. 

In case of a rights issue, with additional equity raises, the issuing company’s equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market.