What is Rights Issue? Definition, Examples, Features, Reason
Rights Issue Definition
A rights issue in shares where a company offers its existing shareholders the opportunity to purchase additional shares directly from the company at a discounted price. Participating in a rights issue is optional for shareholders.
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What is the Purpose of a Right Issue?
This is done to help the company raise extra money for various reasons like:
- Paying debts
- Growing the business etc.
Generally, it’s done when the company believes that Big investors might not be interested in buying preferred shares.
How Does a Rights Issue Work?
During a rights issue, a company sets a rule saying how many new shares you can buy for each share you already have. For instance, “2 new shares for every 10 you own.” You can either buy these new shares at a lower price or sell your right to someone else. If you do nothing, you might lose out on the chance and money.
What impact does a rights issue have?
A rights issue affects the company and shareholders in various ways. When a rights issue is declared, introducing new shares can lower the value of each existing share because earnings per share (EPS) decreases. This might lead to a drop in the share price. Yet, if the company explains it will use the funds for growth, the share price could rise.
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Rights issue example
| Company | Som Distilleries and Breweries Ltd |
| Issuance | 35 lakh equity shares |
| Issue Price | INR 140 per share |
| Funds Raised | INR 49 crores |
| Eligibility | Existing equity shareholders on or before April 14, 2023 |
| Market Price | INR 160 per share |
| Rights Issue Price | INR 140 per share |
| Record Date | April 14, 2023 |
| Ratio | 10 rights shares for every 211 held |
Summary
Som Distilleries & Breweries Limited approved the issuance of 35 lakh equity shares at INR 140 per share, aiming to raise INR 49 crores. Existing shareholders on or before April 14, 2023, are eligible. Despite a market price of INR 160, the rights issue offers shares at a discounted INR 140. The ratio is 10 rights shares for every 211 held.
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