All about rights issues!
What is a rights issue?
Rights issue is a primary market issue to raise additional capital from the existing shareholders of the company. The company offers shares to its existing shareholders in the proportion approved by its board of directors. The new shares are offered to the existing shareholders at a discount to the market price; thus, prompting its shareholders to buy more shares of the company. Shares in the rights issue can be issued only to the existing shareholders. The record date is announced by the listed company, which helps to determine the eligibility to the rights issue.
Rights issue is completely voluntary for the existing shareholders and they can choose to opt-out of it, if not interested. An interested shareholder can completely avoid it, apply partially, or in full, or even apply for additional rights.
Why do companies go for rights issues?
The primary reasons for a company to prefer rights issue over other public offerings is as follows:
- To reduce the debt-to-equity ratio of the company.
- Cash-strapped companies, which are in need of capital and are unwilling to increase the debt burden by taking any loans.
- For company expansion purposes, acquisition, takeovers, or other general corporate reasons.
- The rights issue is the quickest and easiest mode of raising capital for the company.
- It is a low-cost affair for the company as the company can save on the underwriters’ fees as well as advertisement expenses.
- The confidence of the existing shareholders is boosted by making the discounted offer to existing owners as payback for being part of the company.
Benefits for the shareholders
- Rights issues provide an opportunity for existing shareholders to increase their stake in the company at a lower price than the current market price.
- The rights issue retains the control of the company with existing shareholders when subscribed without renouncing their rights to outside investors.
Disadvantages of rights issue
- One of the reasons as to why the company looks to issue rights share is the need for cash on account of being cash-strapped, which may sometimes give a wrong signal to investors that a company is struggling that may impact the reputation as well as the share price of the company.
- The rights issue would result in an increase in the number of shares of a company; thus, spreading the profit n the increased number of shares impacting its earnings per share (EPS).