Rights Issue

Cash-strapped organisations might use rights issues to raise funds when they are in severe need. Companies allow shareholders the right, but not the responsibility, to acquire additional shares at a discount to the current market price in rights offers. 

What is Rights Issue?

A rights issue occurs when a firm grants current shareholders the ability to acquire new shares at a reduced price. It shall depend on their prior or existing holdings. The shareholder is not required to apply for this. Instead, they have the option of using the firm. Through a rights issue, current shareholders shall acquire an extra new stake in the business. They can use the rights to procure additional shares at a discount to the market rate at a specified future period. The corporation offers shareholders a discounted opportunity to enhance their exposure to the stakes. Shareholders might trade the rights on the marketplace as they might have regular shares until the new shares are available for purchase. The rights granted to a shareholder have monetary worth for compensating current shareholders. It is for potential erosion of the price of their shares outstanding. Because a rights issue spreads a firm’s profit over a more significant number of shares, dilution happens. As a result of the allocated earnings resulting in share dilution, the firm’s earnings per share declines.

What is the Purpose of Announcing a Rights Issue?

Companies often announce rights offerings to obtain more funds. They might also advertise it in acquisitions, mergers, and share price depreciation to boost participation. While the firm can raise funds directly from the public, it is more expensive than a rights issue. As a result, many businesses choose to raise funds from their current shareholders. On the other hand, rights issues are an excellent time to buy if the firm has been a solid dividend provider and the stock price is still high for you to invest. As a result, as a corporate investor, you have the option to market your ownership and profit.

Characteristics of a Rights Issue

• When a company needs money for various causes, they issue a rights issue. The procedure allows the business to raise funds without paying underwriting costs

• Current shareholders also can trade with other market players until the new shares are available for purchase. The rights are exchanged in the same way that regular equity shares are

• Existing shareholders are granted special privileges in a rights issue. However, they can get the choice (but not the duty) to acquire shares at a discounted price on or before a specific date

• The quantity of additional shares that owners can acquire usually is proportional to their current holdings

• Current shareholders might opt to reject the rights. But if they do not acquire extra shares, their current shareholding will be diminished after the additional shares are issued

Causes for a Rights Issue

• A lump sum of money is required when any firm plans to expand its activities. Instead of having debt, they may want to take on the stock to avoid making set interest payments. A rights offering may be a speedier approach to achieve the goal of raising equity money

• When debt/loan finance is not accessible, acceptable, or affordable, a firm would generally acquire capital through a rights issue

• Firms that want to enhance their debt-to-equity ratio or purchase a new firm can take the same path to get finance

• To fix their financial condition, struggling corporations could issue shares to pay debts

How to Apply for Rights Issue Online?

Every shareholder eligible to obtain the rights issue will get a form from the corporation. The procedure can be conducted online or offline. Investors who want to apply for rights issues online can use net banking or UPI. For example, a shareholder can apply for shares by visiting the Registrar & Transfer Agents website or logging onto their bank’s net banking website and going to the ASBA section. They can then acquire the rights in the same manner as an IPO. A Rights entitlement (RE) intimation, a temporary form of Demat securities, may be sent to investors through email. It enables an investor to determine whether they are eligible to apply for the rights’ issuance. If they would not want to register, they can trade their RE on the marketplace to other investors. The application form can be filed at a bank branch or online using net banking. The majority of significant banks have enabled net banking systems. It’s a lot like filling out an IPO application.

Why Should You Submit a Rights Issue Application?

Though the rights issue has its advantages, exercising caution when filing for such problems is essential. There might be several red flags. For example, the firm may not be financially sound enough to pursue a public offering. Alternatively, the corporation may be cash-strapped and need capital to pay off obligations. As appealing as it may appear, spending all of your hard-earned money without conducting thorough research is not a sensible move. A rights issue is a fantastic bargain for the investor, but it might be a sudden move to raise money if the firm’s financials are poor.

Conclusion

The potential of purchasing cheap shares through a rights issue may attract investors. However, it is not always guaranteed to receive a good deal. Before approving or rejecting a rights issue, you must understand the function of the extra money in addition to the ex-rights stock price. Look for a compelling reason why the rights issue and share dilution are mandatory for the firm’s action plan. A rights issue can provide a short cure for an unstable balance sheet, but it doesn’t guarantee that administration will address the underlying issues that caused the balance sheet to be weakened in the first place. Investors should proceed cautiously.