At a reception, a coworker mentioned she received a notice about a pending rights issue of shares. You asked her what her plans were. “I don’t know”, she said, “what is a rights issue of shares?” You finish the last of your wedding cake and this is what you told her.

What is a Rights Issue of Shares?

A rights issue of shares is an offer to a company’s existing shareholders to purchase additional shares at a discount to the current trading price. The shareholders purchase the shares directly from the company prior to them being offered to the public in the secondary market. The shares available to each shareholder are in proportion to their existing holdings.

What is a rights issue of shares? A rights issue of shares is a shareholder opportunity to invest in additional discounted stock in a company whose shares they already own. The firm extending the offer raises capital to be used for growth initiatives, strategic expansion, or debt reduction. Here are the details of a rights issue:

First Right of Refusal – The opportunity to purchase the additional shares is first offered to existing shareholders. Participation in the offering helps shareholders maintain their proportional ownership.

Discounted Price – The shares are offered at less than their market value, coupled with attractive subscription terms and conditions adds to the enticement of shareholder participation.

Non-Dilutive and Dilution – Shareholders participating in the rights issue prevent dilution of their company ownership due to the proportional share increase. However, shareholders who elect not to purchase rights issue shares experience ownership dilution because, once offered on the open market, the total number of outstanding shares increases and their fractional ownership decreases.

Trading Rights – Based on the terms of the rights issue, the right to purchase the discounted share can be traded on the open market. Though a shareholder receives compensation for her forfeited right-of-purchase, this transaction does not prevent the eventual dilution of her existing shares.

What is a rights issue of shares? It is a capital raising vehicle for the issuing company and based on the effective allocation of those funds, a rights issue of shares can be an appreciating investment for shareholders.

A Rights Issue by the Numbers

1.  Rights Issue Announcement – The firm announces a pending rights issue which details price, number of shares to be offered, shareholder registration deadline, and any additional subscription conditions.

2.  Shareholders of Record – The announcement states a date by which one must be a shareholder to be entitled to receive the rights offering.

3.  Tradable Rights Period – For those rights that are tradable, the announcement specifies a certain period when shareholders can buy and sell their rights.

4.  Subscription Period – Shareholders can purchase the discounted shares during the stated subscription period.

5.  Issuance – Shareholders who have exercised their purchase rights are allotted the new shares which are then issued and listed on the secondary market for public trading.

What is a rights issue of shares? A rights issue of shares is a common way for companies to raise additional funds while allowing existing shareholders to retain their proportional ownership and profit from the firm’s efficient allocation of shareholder capital.

Read next: What Happens After Rights Issue?

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