Right Issue
What is Right Issue?
A Rights Issue is a way for a company to raise additional money by offering new shares to its existing shareholders. Therefore, it as a “special invitation” sent only to current shareholders.
How it works
If you already own shares of a company, you get the right to buy additional shares at a discounted price, usually lower than the current market price.
For example:
- You own 100 shares of a company.
- The company announces a 1:5 rights issue.
- This means you can buy 1 new share for every 5 shares you already own.
So, with 100 shares, you can buy:
- 100 ÷ 5 = 20 additional shares
Why companies issue rights shares?
Companies typically do this to:
- reduce debt
- fund expansion
- finance acquisitions
- improve working capital
- strengthen their balance sheet
Key features
- Offered only to existing shareholders
- Usually priced at a discount
- Participation is optional
- Shareholders can often sell their rights entitlement if they do not wish to subscribe
Simple Example
Suppose:
- Current market price = ₹500 per share
- Rights issue price = ₹400 per share
If you subscribe, you buy shares at a lower price than the market.
What are your options as a shareholder?
You can:
- Subscribe fully – buy all entitled shares
- Ignore the offer – let it lapse
- Sell your rights entitlement – if tradable on the stock exchange
- Partly subscribe and partly sell
Benefits
- Buy shares at a discount
- Maintain your ownership percentage
- Potential for gains if the stock performs well
Risks
- If you do not participate, your ownership gets diluted
- A rights issue can sometimes signal that the company needs cash urgently
- If the company is financially weak, the discounted price may not be attractive
Example in India
If a company announces:
- Rights ratio: 2:10
- Rights price: ₹150
- Current market price: ₹220
A shareholder owning 500 shares can buy:
- (500 × 2) ÷ 10 = 100 new shares at ₹150 each
Should you subscribe?
Consider:
- Why the company is raising funds
- Its financial health
- Future growth prospects
- Whether the rights price is attractive
A rights issue is like being offered a seat at a discount before tickets go on general sale. Sometimes it’s a bargain; sometimes it’s a warning sign wearing a discount sticker.
Current Right Issue
