A Rights Issue of shares offers a great opportunity for existing shareholders to boost their wealth. It allows existing shareholders of a company to buy additional shares at discounted prices lower than the current market value.
Rights Issue helps shareholders benefit from substantial capital gains as the company expands over the long term. Applying for a rights issue requires investors to understand its fundamentals, including key features, benefits, and how to apply for a rights issue.
This article will explore the rights issue meaning and their relation to shares in depth to provide useful insights and help you make informed decisions while you apply for upcoming right issues.
What is the Rights Issue Of Shares?
The rights issue of shares is a mechanism companies use to generate funds when faced with liquidity challenges by offering shares at discounted prices to their current shareholders. It allows companies to raise capital without incurring debts, and shareholders buy additional shares at a lower price from the company directly rather than the secondary market.
Key Features of Rights Issue
Proportionate Offering:
The issue of right shares is offered to company shareholders in proportion to the shares they are currently holding. Let’s simplify - if a shareholder owns 2% of shares, the company will offer them rights to buy 2% of new shares issued.
Discounted Rates/Prices:
Shareholders enjoy the benefit of buying additional shares at a lower price compared to the prevailing market rate.
Renounceable and Non-Renounceable:
- Renounceable Rights Issue: Shareholders can sell their rights to other investors if they do not wish to exercise them.
- Non-Renounceable Rights Issue: Shareholders cannot sell share rights to other investors. If they don’t take the offer, the rights will lapse.
Aim:
Companies undertaking rights issue aims to raise more capital funds for expansion projects, debt repayments, or working capital requirements.
Dilution:
If shareholders refuse to exercise their rights, it would lead to the dilution of their rights. It happens because new shares are issued, increasing the number of outstanding shares.
Reason for Right Issue of Shares
- Increase Capital Funds: Rights Issue can help companies raise capital for various purposes, including debt repayment, acquisitions, purchasing assets, etc.
- Avoid Debt: To evade interest charges, this strategy uses equity rather than debt. It can help companies avoid taking loans as it is an expensive option.
- Improve Debt-to-Equity Ratios: Rights Issuance can help troubled companies improve their debt-to-equity ratios, addressing shareholders’ concerns.
- Strategic Planning: Companies not in financial distress can also opt for a rights issue to achieve other financial goals, like opening new premises or acquisition-related strategic planning.
- Long-term Benefits: Rights issues can help shareholders profit substantial gains from the company’s increased capital over time.
- Strengthen Financial Base: Companies can also utilise rights issuance as a flexible tool to strengthen their financial bases and pursue growth prospects.
Difference Between A Right Issue And A Bonus Issue
Before we explore the differences between Right and Bonus Issues, let’s first understand what is Bonus Issues.
Bonus Issues refers to the shares given as a gift to existing shareholders by a company. The company decides the process of distributing free shares. Typically, shares are gifted to shareholders in proportion to their owned shares.
To simplify - if a company decides to issue a 5:1 bonus, one share would be given for every five shares owned.
Bonus issues vary from Rights Issues. Let’s take a look at the differences
| Factors | Rights Issue | Bonus Issue |
|---|---|---|
| Goal | Raise capital by selling additional shares to shareholders | Gift free shares to shareholders out of profits earned |
| Purpose | Leverage additional capital for the company to build a strong financial base | Enhance trading processes by increasing the number of existing shares |
| Pricing | Offered at a discounted price than the secondary market | Free. No additional cost to shareholders |
| Payment of Shares | Depending on the payment made by the shareholder (Full or partial payments) | Shares are fully paid up and given to shareholders free of cost |
| Transferability | Rights can be transferred fully or partially | A transfer is not applicable |
| Shareholder Base | Potential to broaden the shareholder base if current shareholders decline the rights issued | Allocated to shareholders specifically |
Conclusion
To conclude, rights issues can help improve the financial position and growth prospects of a company. Shareholders also leverage potential profit from the company’s growth. However, it is essential to analyse the factors affecting share prices, trading volume, and market conditions. It will help you make well-informed decisions based on your financial objectives and risk tolerance.
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