What is Rights Issue? Explained for Beginners
When a company needs additional capital for expansion, paying off debt, or meeting financial needs, it can raise money in many ways — such as IPO, FPO, or loans. One of the most common methods used by listed companies is a Rights Issue. But what exactly does it mean? Let’s break it down in a simple way for beginners.
What is a Rights Issue?
A Rights Issue is when a company offers its existing shareholders the right to buy additional shares directly from the company, usually at a discounted price, within a specific time period.
In simple words, if you already own shares of a company, you get a special opportunity to buy more shares — before the company offers them to outsiders.
Key Features of a Rights Issue
- Exclusive for existing shareholders: Only people who already own shares in the company are eligible.
- Discounted price: The new shares are usually offered at a lower price compared to the current market price.
- Fixed ratio: The company sets a ratio like 1:5, meaning for every 5 shares you own, you get the right to buy 1 extra share.
- Optional: Shareholders are not forced to buy. They can ignore or sell their rights to others (in case of a renounceable rights issue).
- Purpose: The company raises money for growth, reducing debt, or funding new projects.
Example of Rights Issue
Suppose you own 100 shares of a company. The company announces a rights issue in the ratio of 1:5 at ₹80 per share, while the current market price is ₹100.
- You get the right to buy 20 additional shares (100 ÷ 5).
- If you buy, you pay ₹1,600 (20 × ₹80).
- You benefit because you are buying shares at a discount compared to the market price.
Types of Rights Issue
- Renounceable Rights Issue: Shareholders can sell their rights in the open market if they don’t want to use them.
- Non-Renounceable Rights Issue: Rights cannot be sold and must either be used or ignored.
Advantages of Rights Issue
- Allows companies to raise funds without taking loans.
- Gives existing shareholders priority over outsiders.
- Shares are offered at a discount, benefiting loyal shareholders.
- Helps the company strengthen its financial position.
Disadvantages of Rights Issue
- If shareholders don’t buy, their ownership percentage may reduce (dilution).
- If the company keeps raising money through rights issues, it may signal financial weakness.
- Shareholders need to arrange funds quickly to participate.
Difference Between Rights Issue and FPO
| Aspect | Rights Issue | FPO |
|---|---|---|
| Who can apply? | Only existing shareholders | Anyone in the market |
| Price | Usually discounted | Closer to market price |
| Objective | Reward existing shareholders & raise funds | Raise additional capital from the market |
Conclusion
A Rights Issue is a simple yet powerful way for companies to raise money while rewarding existing shareholders. If you already own shares in a company that announces a rights issue, it’s worth considering because of the discounted price advantage. However, always evaluate the company’s financial health and purpose of raising funds before investing.
Frequently Asked Questions (FAQs)
1. Who is eligible for a rights issue?
Only existing shareholders on the record date are eligible.
2. Is participation in a rights issue compulsory?
No, it is completely optional.
3. Can I sell my rights?
Yes, but only if it is a renounceable rights issue.
4. Why do companies prefer rights issues?
Because it’s cheaper and faster compared to an IPO or FPO, and it rewards existing shareholders.
5. Do rights issues always benefit investors?
Not always. If the company is financially weak, buying more shares may not be a good idea.
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