What Is A Rights Share Issue & How To Invest In A Rights Share Issue?by Nirav Singhaniya Financial Advisor
Raising capital through equity shares is one of the ways for companies to raise funds for their business. However, once these equity shares are issued and listed on the stock exchange, if the company wants to raise further capital, it can do so through a rights share issue.
What is a rights share issue?
A rights issue is an issue that a company makes to its existing shareholders to raise funds. In a rights issue, if you are an existing shareholder, you can buy the new shares at a discounted price. If the company’s share price is doing well in the share market, a rights issue becomes a good way for the shareholder to pick up additional shares at a discount to the market price.
However, a rights issue is always given in proportion to the shares that the shareholder owns. For example, if rights are given for 10:1, it means the company is offering 1 discounted share for every 10 shares that the shareholder owns.
A rights issue becomes an inexpensive way for the company to raise funds since no further regulatory approvals have to be taken for the same.
As a shareholder, you have right but not an obligation to invest in the rights issue. This means a rights issue is like an option for you. If you do not want to invest in the rights issue, you can transfer the rights or let the rights lapse without any effect on the existing shareholding.
What can a shareholder do in a rights issue?
Invest in the rights issue:
If you are a shareholder and you are interested in rights issue, you can invest based on the price that the company is offering. This can be done by replying to the rights issue communication issued by the company. The communication is sent to your mailing address and has to be replied within the time specified in the communication.
Let the rights lapse:
If you’re not interested in subscribing to the rights issue, you can let it lapse. This will not affect the existing shares, except for the dilution in share price because the company will issue extra shares. This dilution will impact the share price accordingly.
Transfer the rights:
It is possible to transfer the rights to an external party who is interested in investing in the rights issue. This can be done at a mutually agreed price. If the company issues fully paid up and partly paid up rights shares, you can subscribe to one and transfer one type of rights as well.
How to buy shares in a rights issue:
If you’re an existing shareholder, you can respond to the rights application and invest in the rights issue at the price stated in the application. The application will be submitted to the company, and once the shares are issued, the amount will be debited from your bank account.
If you’re not an existing shareholder and want to know how to buy shares in a rights issue, you have two choices:
- Buy shares in the open market before the rights issue is announced
- Purchase rights from an existing shareholder
These two options will give you a chance to invest in a rights issue. However, before investing in a rights issue, you need to make sure you have a demat account and trading account. You can open these accounts with a reputed stock broker like IndiaNivesh who can help you with your needs.
Created on Jul 25th 2019 02:39. Viewed 51 times.