Rights Issue

Rights Issue or Rights Offering is a group of rights offered to existing shareholders to purchase additional stocks, at a specific price within a specific period. But it does not raise money from public like IPO (Initial Public Offering) or FPO (Follow on Public Offering). Instead, money is collected from existing shareholders who have invested in this company. They are a type of option as it gives the stockholders the rights, but not the obligation to buy. Rights are transferable allowing the holder to sell them in open market. Through this issue the company is giving the shareholders a chance to increase their exposure to the stock at a discounted rate than the market price. Through this, the value of the shares decreases (Equity Dilution). Though in some cases, rights issued cannot be transferred, they are known as non-renounceable rights.

Companies running short of money can turn to rights issue to raise money. There are two types of rights offerings:

• Direct rights offerings

• Insured/standby rights offerings

With this issue, more shares are issued to the market and the stock price is hence diluted and can go down.

Naturally, as soon as companies announce a rights issue, share prices tend to fall. The reason is that more shares will reach the market at a discounted rate. As the number of shares increases, the 'Earnings per Share' decreases. This money can be used for the development of the companies, to settle the debts and to acquire new companies.

The company will inform the investors how many right shares can be bought in proportion to the shares held by them. For example, if you have 10 shares, you can buy one right share. Then a person with 20 shares can buy 2 right shares. A person holding 15 shares can buy only one right share. But a person holding 9 shares cannot buy right shares under this condition. In this way, companies issue right shares in each ratio.