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Definition: Right Shares
Right shares are the shares that are issued by a company for its existing shareholders. The existing shareholders have their right to subscribe to these shares unless some special rights reserve them for some other persons.
Right shares can only be issued after two years of the formation of the country or after one year of the first issue of the shares whichever is earlier, as per the Section 81 of Indian Companies Act. The right shares are usually issued in the ratio of the equity shares held by the existing shareholders. The Right shares are normally issued with 15 days’ notice and cannot be opened more than 60 days as per the SEBI guidelines.
The benefits of right shares are listed below
• Greater control on the existing shareholders
• Increase in the value of shares and hence no loss of existing shareholders
• Increases company goodwill and brand perception
• There is no cost involved with the issuance of the shares
• Company has easy access to any capital required at any point of time
• The distribution technique involved with right shares is more scientific
The disadvantages of the right shares include
• The dilution of the value of the shares due to increased number of shares
• It offers only a temporary solution to any management problem but not a permanent solution to it
Sometimes in the issuance of right shares, companies work with underwriters (financial institutions, major shareholders etc.) who promise that if the existing shareholders do not buy the share offered to them, they will buy them.