Rights Issue: A Method of Raising Capital by Listed Companies

A Rights Issue is a method utilized by listed companies on a stock exchange to raise new capital by offering new shares to their existing shareholders, typically at a discount to the market price. This process leverages the principle of pre-emption rights, ensuring that current shareholders have the first opportunity to purchase additional shares in proportion to their current holdings.

Types

• Fully Underwritten Rights Issue: An investment bank guarantees the sale of all new shares.
• Partially Underwritten Rights Issue: Only a portion of the new shares is guaranteed by an underwriter.
• Non-Underwritten Rights Issue: The company does not secure an underwriter, bearing the risk of not raising the desired amount of capital.

Detailed Explanation

A rights issue involves offering new shares to existing shareholders, often at a price lower than the market value. For example, in a 1 for 4 rights issue, shareholders are given the option to buy one new share for every four shares they already own.

Mathematical Example

Consider a company with the following details:

• Current share price: $50
• Number of existing shares: 1,000,000
• Rights issue ratio: 1 for 4
• Issue price: $40 per new share

Number of new shares to be issued:

Funds raised:

Importance

Rights issues are vital for companies needing to raise capital without incurring debt. They provide existing shareholders with the opportunity to maintain their proportional ownership in the company, potentially benefiting from the discounted share price.

Related Terms

• Pre-emption Rights: The right of existing shareholders to purchase new shares before they are offered to the public.
• Underwriter: A party that guarantees the sale of all new shares in a rights issue.
• Dilution: The reduction in existing shareholders’ ownership percentage due to the issuance of additional shares.

FAQs

• What happens if I do not take up my rights?

  • If you do not take up your rights, they may be sold on your behalf, or they might lapse without value.

• Why are rights issues often priced at a discount?

  • The discount incentivizes shareholders to buy the new shares and ensures the success of the capital-raising effort.

• Can I sell my rights if I do not want to buy new shares?

  • Yes, rights are typically tradeable, allowing shareholders to sell them in the market.