Rights Issue

Intermediate

A rights issue is a way for a company to raise new money by offering its existing shareholders the right to buy additional shares, usually at a discount to the current market price, in proportion to their current holdings.

In a rights issue, shareholders receive rights to buy new shares before they are offered to anyone else. This lets existing owners maintain their percentage ownership if they wish.

For example, in a 1-for-4 rights issue priced at 8 when the market price is 10, a shareholder with 400 shares can buy 100 new shares at 8 each, paying 800.

Shareholders have three options. They can take up their rights and buy the new shares. They can sell their rights to other investors, if the rights are tradable. Or they can do nothing, in which case their percentage ownership will be diluted, and in some markets the unused rights may be sold on their behalf.

Because the new shares are sold at a discount, the share price usually falls after the rights issue to reflect the larger number of shares. Shareholders who take up their rights do not lose value overall, but those who ignore them can.

Companies use rights issues to raise money for investment, acquisitions or to strengthen their balance sheet. A large rights issue to repay debt can signal financial stress.

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