Definition§
A rights issue is a method by which publicly-listed companies raise new capital. In a rights issue, the company offers new shares to its existing shareholders proportionally to their current holdings. This process is grounded in the principle of pre-emption rights, whereby existing shareholders have the right to purchase additional shares before the company offers them to the public. New shares in a rights issue are typically issued at a discount to the market price, providing an incentive for current shareholders to participate.
Examples§
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1 for 4 Rights Issue: If a company issues a 1 for 4 rights issue, it means that shareholders can purchase one new share for every four shares they already own. If an investor holds 400 shares, they would be eligible to buy 100 new shares at the discounted price.
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Discounted Price: Assume a company’s current share price is $20, and it announces a rights issue with a 20% discount. The new shares may be offered at $16. Existing shareholders can either purchase these shares or sell their rights in the open market if they choose not to participate.
Frequently Asked Questions (FAQ)§
Q1: What are pre-emption rights? A1: Pre-emption rights are rights that give existing shareholders the first opportunity to buy new shares issued by the company, in proportion to their current holdings.
Q2: Why do companies issue rights? A2: Companies issue rights to raise capital for various purposes such as paying off debt, funding new projects, or expanding operations.
Q3: Can shareholders sell their rights? A3: Yes, shareholders can sell their rights in the open market if they choose not to purchase the additional shares.
Q4: How is the issue price of new shares determined in a rights issue? A4: The issue price is usually set at a discount to the current market price to make it attractive for existing shareholders.
Q5: What happens if shareholders do not take up their rights? A5: Unused rights may be sold in the market or become void, and the company might offer the shares to new investors.
Related Terms§
- Bought Deal: A method where an underwriter buys an entire issue of stock from the company and sells it to investors.
- Vendor Placing: A method in which shares are sold directly to selected investors rather than through a public offering.
- Scrip Issue: An issue of additional shares to existing shareholders without any capital raising, often in lieu of dividends.
Online Resources§
- Investopedia Article on Rights Issue
- The Motley Fool Guide to Rights Issues
- Nasdaq Explanation of Rights Issues
Suggested Books for Further Studies§
- “The Intelligent Investor” by Benjamin Graham – A classic book on investing that touches on various aspects of stock market operations.
- “Security Analysis” by Benjamin Graham and David Dodd – Delves deeper into the evaluation of securities and the functioning of markets.
- “Corporate Finance” by Jonathan Berk and Peter DeMarzo – Covers a broad range of corporate finance topics, including different methods of raising capital.
Accounting Basics: “Rights Issue” Fundamentals Quiz§
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