Posted in Finance, Accounting and Economics Terms, Total Reads: 2022
Definition: Rights Issue
Rights issue is said to be done when a company issues a right to its existing shareholders to buy additional shares in the company. Under this, the company offers the shareholders to buy a certain number of shares at a stated price. Generally the shares are given at a discounted price so as to encourage the shareholders to take up the offer. However, it is upto the shareholder to take the rights issue made by the company.
The objective of rights issue is to raise extra capital for the company. Since the cost of raising capital by issuing shares is cheaper than by issuing debt, many companies adopt this route of issuing additional shares to its existing shareholders. Some companies issue rights to increase its cash flow and to pay off its debts.
Eg: Company X has 10 lakh equity shares at a price of Rs. 50per share (therefore the equity value = Rs. 500 lakhs). Sam is an existing shareholder who has 1000 shares worth Rs. 50,000.
Now let’s assume that the company needs Rs. 200 lakhs for one of its projects. Under rights issue the company can issue 5 lakh new shares at a discounted price of Rs. 40 per share. This is called a 2 to 1 rights issue where for 10 lakh existing shares, 5 lakh additional new shares are issued
So Sam can now buy 500 shares at Rs. 40 per share (Value = Rs. 20,000)