Rights issue
A rights issue is an offer by a company to its existing shareholders to buy new shares, in proportion to what they already hold, usually at a price below the market price. It is a way for the company to raise money from the people who already own it.
How a rights issue works
The company announces a ratio, such as 1 new share for every 5 held, a price per new share, and a window during which you may apply. You must hold the shares by the record date to be eligible. The new shares are offered to existing shareholders first, which is where the name comes from.
Your options
You can take up the offer and pay for the new shares. You can sell your right to buy, which is called renouncing the entitlement, where the entitlement can be traded. Or you can do nothing, and the offer lapses. If you do nothing while others take up their share, your stake in the company becomes a smaller slice of a bigger company.
Why companies do it
A rights issue raises fresh money, often to repay debt or fund growth, without bringing in new outside owners. It is different from a bonus issue, where shares are given free from reserves, and from a split, which only divides existing shares. A rights issue brings money into the company, and it costs you money if you take it up.
What happens to the price
New shares at a discount add shares to the total, so the share price usually adjusts down by a small amount when the rights go ex. That is not a loss if you take up the rights, because you hold more shares for the extra money you put in.
A 1-for-5 rights issue (hypothetical numbers)
Suppose you hold 100 shares priced at ₹100, a holding worth ₹10,000. The company offers 1 new share for every 5 held at ₹80. You are entitled to 20 new shares, costing 20 x ₹80 = ₹1,600. If you take them up, you hold 120 shares and have put in ₹11,600 in all, and the price would adjust to about ₹96.67, so your holding is still worth about ₹11,600. You have a bigger stake for the extra money you paid in.
Common questions
- What is a rights issue in simple words?
- An offer to existing shareholders to buy new shares at a set price, in proportion to their holding.
- Do I have to apply for a rights issue?
- No. You can apply, sell your entitlement if it is tradable, or let it lapse.
- What happens if I ignore it?
- The offer lapses, and your stake becomes a smaller share of a larger company.
- What is the difference between a rights issue and a bonus issue?
- A rights issue asks you to pay for new shares. A bonus issue gives extra shares free, from the company's reserves.